Annual Report and Accounts 2017

15 million members building society, nationwide Contents

Strategic Report 2 2017 highlights We are owned by our Strategic Report 4 Chairman’s statement 6 Chief Executive’s review 15 million members 10 Strategic review 18 Financial review 27 Risk overview We help people save, 28 Social investment

buy homes and manage Governance 31 Board of directors

their daily finances 35 Board committee membership Governance 36 Executive Committee biographies 38 Directors’ report 43 Report of the directors on We support each other corporate governance 66 Report of the directors and our communities on remuneration

Business and Risk Report Business and Risk Report 81 Introduction We are building society, 82 Principal risks 82 Top and emerging risks 83 Lending risk nationwide 108 Financial risk 129 Operational risk 131 Conduct and compliance risk 132 Strategic risk 133 Managing risk

Financial Statements 137 Independent auditors’ report Financial Statements 146 Income statements 147 Statements of comprehensive income 148 Balance sheets 149 Statements of movements in members’ interests and equity 151 Cash flow statements 152 Notes to the accounts

Other Information

211 Annual business statement Information Other 214 Forward looking statements 215 Glossary 224 Index Strategic Report Governance Business and Risk Report Financial Statements Other Information Report

2017 highlights Chairman’s statement review Chief Executive’s review Strategic Financial review Risk overview Social investment on pages Report The Strategic 29 has been approved 1 to and of directors by the board signed on its behalf by Garner Joe Chief Executive 201722 May

2 4 6

10 18 27 28 Strategic Report Strategic

Annual Report and Accounts 2017 Accounts and Report Annual Strategic

Strategic Report Governance Business and Risk Report Financial Statements Other Information 1 2017 1,030 1,054 £5.8 billion Underlying cost Underlying cost ratio income 60.2% Member deposit growth balance 2016 £6.3 billion 2016 53.9% 2016 1,337 1,279 £33.7 billion UK leverage UK leverage ratio 4.4% gross Record lending mortgage 2016 £32.6 billion 2016 4.4% 2015 1,227 1,044 4 795,000 choice UK’s top provider Common Equity Equity Common Tier 1 (CET1) ratio 25.4% 2016 590,000 Record current current Record opened accounts 2016 23.2%

2014 952 677 3

Thriving Membership 2016 £397 million Member financial benefit £505 million value returned members to profit Statutory £1,054 million 2016 £1,279 million 2013 433 168 2

Building Building members our to value real Delivering Built to Last to Built dependable and sustainable secure, safe, Being 2

Building society, nationwide Building

Underlying profit Underlying profit (£ million) Statutory profit Statutory profit (£ million) 2016 7.4 million 2016 7.4 Record membership 15 million members of which million engaged 7.8 members £1,030 million 2016 £1,337 million Underlying profit

Nationwide’s purpose is to use the power of mutuality as a force for good for our for good for a force as mutuality of power the use to is purpose Nationwide’s nationwide. society, building as this describe we society; for and members, five around organised year, the during strategy our refreshed we us, guide To we how and do will we what for, we stand what define These cornerstones. our about Read performance. our on report to them use will we and it, do will review. Strategic the in included is information More below. highlights 2017

Annual Report and Accounts 2017 Accounts and Report Annual 2017 highlights 2017

Strategic Report Governance Business and Risk Report Financial Statements Other Information

branches £5 million channelled community into and charity support of employees getting involved or volunteering in fundraising, giving payroll 75% 421 Community Community involvement Investment in branches Nationwide NOW of the art (our state video technology) now installed in 2016 76% PRIDE Legendary Service In line with high performing organisations worldwide 72% Banking of Brand the Year 2017 Growth in Growth digital channel 73% increase in mobile log-ons Employee Employee enablement 2016 77%

Building Building thing right the doing culture, shared values, Shared Building a National Treasure Building a difference making and example by Leading Providing service that is heartfelt, easy, lifelong and personal and lifelong heartfelt, is service easy, that Providing Building Building 5 6

78% 5% above score average of high performing organisations worldwide Employee Employee engagement UK’s most trusted financial brand No.1 customer for satisfaction over high street peer group Customer Customer satisfaction 2016 80%

Source: Nationwide Brand and Advertising tracker – compiled by Independent Research Agency, based on responses from existing customers of each brand, 3 months of each brand, existing customers from based on responses Agency, by Independent Research – compiled tracker and Advertising Nationwide Brand Source: and Santander. TSB Lloyds, NatWest, Halifax, HSBC, First Direct, Bank, Co-operative included Nationwide, Barclays, Financial brands 2017. ending March Source: Nationwide Brand and Advertising tracker – compiled by Independent Research Agency. ‘Top choice’ is most considered i.e. ‘first choice’ or ‘seriously considered’ current current considered’ or ‘seriously i.e. ‘first choice’ is most considered choice’ ‘Top Agency. by Independent Research – compiled tracker and Advertising Nationwide Brand Source: included Nationwide, Barclays, Financial brands 2017. 3 months ending March of each brand, non-customers from based on responses amongst non-customers, provider account and Santander. TSB Lloyds, NatWest, Halifax, HSBC, First Direct, Bank, Co-operative of extremely/very/fairly of extremely/very minus proportion satisfied customers proportion Survey 2017, (FRS), 3 months ending 31 March Financial Research © GfK 2017, >6% share market account providers with main current defined as peer group High street and savings. mortgage account, current summed across dissatisfied customers and Santander). (inc C&G), NatWest Lloyds Bank Halifax, HSBC, (Barclays, Our underlying cost income ratio demonstrates how efficiently we are running Nationwide. A lower percentage indicates greater efficiency. efficiency. greater indicates how efficiently running Nationwide. A lower percentage we are demonstrates ratio income underlying cost Our than £5,000) or who hold their greater with us (with a balance account or savings defined as those who hold a mortgage Engaged members are with us. account main personal current review. found in the Financial about member financial benefit can be information More Annual Report and Accounts 2017 Accounts and Report Annual 6 4 5 1 2 3

Strategic Report Governance Business and Risk Report Financial Statements Other Information When I meet our people they tell me When I meet our people they tell work. to place Nationwide is a great it’s because they say And when I ask why, and they’re trusted they enjoy it, they’re because they well. Fundamentally treated do the right thing. to asked that they’re feel And 22,000 not perfect. we’re Of course, our ‘Big Conversation’ suggestions through lots of ideas on how we can generated have using these and we are do things better, members our service to improve to Garner, Joe our Chief Executive, from (more in this Report). on that later Ultimately the logic of our strategy is that, the logic of our strategy Ultimately Society a safe which has good we’re if with its people, who then deliver engagement service, then we will do a good job a great and success members. That breeds for into invest ever more allows Nationwide to which membership and also wider society, of becoming the aspiration us towards takes the This logic informs a ‘national treasure’. built the on which we have cornerstones about this in more can read You strategy. review. and the Strategic statement Joe’s

statement David Roberts David We’ve been around for over 130 years and over 130 for been around We’ve the next the Society for prepare to we aspire members to we make 130. The commitments young even have We decades. can last for this true to members joining who, if we stay be with us in the 22nd century. purpose, could So as your Chairman, my starting point is this last’: that the Society must be ‘built to that underpins the stone is the foundation of stability should be a beacon We strategy. what. for members, no matter and confidence in the relevant that is even more Perhaps we see today, of the uncertainty context closer to geopolitical risk or, whether from and Britain’s relationship home, with Brexit with the wider world high on the agenda. So the most important thing we can do is that, After run a stable, low-risk organisation. best serve to we need our members, in order invest in our people. develop and for, care to Because it’s our people that actually deliver we enormously proud you. I’m therefore to our Leamington Anne from people like have had served who, when I met her, Spa branch 42 years. for members there Chairman’s

Around for over for Around years 130 As a mutual, you are our owners and I our owners and As a mutual, you are be clear to a responsibility believe we have you about what we do and why we do it. to born with a social purpose, which were We as ‘building society, today we express we in the belief that rooted nationwide’, than we can alone. together achieve more that this means we think I am confident differently. and behave business with current Nationwide’s core help them buy members is to and future their homes, manage their daily finances their savings, for place a safe and provide the value that mutuality all while returning we deliver well and sure make To provides. our our purpose, we refreshed live up to by talking to informed last year, strategy members and employees. Dear fellow member fellow Dear Nationwide’s start thanking to by I want Chairman, your as well as As a member another was this them, to Thanks year. last us for did they what for people our and strength financial our maintained We Society. our for year successful grew both we And future. our in invest to continued We sheet. balance strong you. to value real returned and high, all-time an to membership our Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information We are For more information on our diversity information more For agenda, including employee gender report see the Directors’ information, and the Nomination and Governance report. Committee society, The Government is currently thinking through thinking through The Government is currently improve, should governance how corporate large As a companies. private especially for business, we believe member-owned private we can offer a useful perspective on how to get their to engage members and employees views, given the priority and we give this make to in place have the actions we already it happen. of our Diversity is an important attribute in reflect we strive to and something society, and our our people, the management team our gender improve to continued We Board. in the Society and minority representation the experience broadened also and we have two new by welcoming of the Board Kevin directors, independent non executive I am also Prashar. Usha Parry and Baroness that Gunn Waersted announce to delighted as non will shortly be joining our Board is still Although there director. executive as a that note do, I am pleased to to more of an open, meritocratic consequence almost 40% of our Board selection process, directors and over half of our non executive will now be women. me by thanking employees. Let I started end by thanking you, Nationwide’s members. power that makes It is your collective good. I very for much Nationwide a force meeting as many of you to look forward as possible this year. building nationwide

continued Our mutuality informs how we behave. We We how we behave. mutuality informs Our of corporate apply the highest standards adopting the standards governance, business. We a FTSE-listed applicable to pension scheme excellent an have choose to with our sense of because that is consistent employees. And we choose not to fairness to as much as our most senior executives pay they would get in businesses of comparable a for because that is appropriate size, member-based business. dealing with people in also approach We For example, financial difficulty differently. than 2,000 members helped more we have a situations through affected by life-limiting specialist support service, applying financial flexibility and human understanding. members in 2007, AGM Nationwide’s At each spend at least 1% of our profits to voted – year on social investment programmes the independent or through either directly, charity we established 20 years ago, the of our proud We’re Nationwide Foundation. homes better in helping people into success and we believe the social start saving, and to the impact of what we do is additive to of trust and our reputation. Society in terms As we embark on a new social investment looking at ways we are in 2017, programme including letting involve you more, to members decide what we support. serious about ‘building society, If we are engage then we also need to nationwide’, with some of the big issues of the day. social investment and do this through We as we employee volunteering, also through get involved. to know our people like the we have means Nationwide’s success try example, privilege to new things. For Glastonbury to branch a returned we recently in Somerset, meeting the call of a community had closed. whose bank branches can partner with the local community We create seek to not, to others may where a viable model. If it works, we will look at other locations.

Chairman’s statement statement Chairman’s Being a mutual is not a guarantee of success of success Being a mutual is not a guarantee a follow to do not have on its own. We pursuit agenda, and the singular shareholder but nor do to demand, tends this of profits so scrutiny, shareholder conventional we face an provides the Board ensure we need to and scrutiny to equivalent level of challenge the best of the combining the business. By of world in terms public company and ambition, and the alignment governance with members that exists within a mutual, a powerful and special proposition. we have rather maximise profit, So, our goal is not to Sufficient sufficient to profit. make we aim to the safety and stability that is in ensure building capital strength members’ interests, to invest in the Sufficient and resilience. and – the branches business infrastructure be more that allow us to technologies efficientto serve and – as better members and service. Then beyond well as products we can return that, any surplus we generate of improved our members in the form to rewards. and loyalty rates of part is a key interests these Balancing management and the subject of keen That balance oversight by your Board. changes depending on the needs of and the of the economy members, the state So in a view of what is coming. Board’s be it might challenging environment, the capital we put aside increase prudent to we the level of investment. Or or reduce support members a decision to might make rewards, value through and give back extra initiatives such as as we did last year through offer and by striving to a friend’, ‘recommend higher than our main rates savings quantified This year we have competitors. to members, and it is rewards the financial on this is over half a billion pounds. More included in the Financial review. Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information These increases to costs have led to a led to have costs to These increases income cost in our underlying deterioration 60.2% (2016: to 53.9%). In the coming ratio flat by broadly our costs we will keep year, implementing efficiency initiatives, such as reduce to our ‘right first time’ programme the business, and duplication across errors manual more automate and our plans to invest where to will continue We processes. of interests we believe it is in the long term our members. a stable and low-risk business model, have We which is fundamentally about looking after our members’ deposits and putting them to work funding other members’ mortgages. parts we identified several the year, During not a good fit with of the business that were exit begun to have We purpose. our core offering car will stop We these responsibly. 2017 June from new customers to insurance let them to customers and will be writing to know how their policy will be managed in also winding down our are We future. lending business, will exit the commercial deposit-taking Nationwide International business, and will no longer offer inheritance While we recognise tax planning advice. it is not in needs, we believe these customer provide of our Society to the interests our business. to not core services which are improved Nationwide’s financial strength, core our focus on and a tighter efficiency, to we can continue business will ensure good value pricing, invest in new products, and the service quality value. members review Executive’s Executive’s Financially strong and sustainable as shown and secure safe Nationwide remains sheet. capital position and balance by a strong the Society’s common improved have We (2016: 25.4% 23.2%), and to equity tier 1 ratio at 4.4%. robust remains ratio the UK leverage by reduced statutoryAs anticipated, profit a million, due to £1,054 to in the year 17.6% income Net interest number of factors. low interest the prevailing due to reduced in the competition environment, rate and the conscious market mortgage for rates protect to taken decisions we have while passing on the base rate savers has There borrowers. mortgage to decrease also been a growth in underlying costs, on ongoing expenditure mainly reflecting with growth investment, together strategic in business volumes. The impact of these has been partially offset by a gain of £100 million in the disposal of the Society’s stake from during the period. Visa Europe investment in the Society is greater Strategic commitment our reflecting than ever before, and better investing in new products to also members. We for service propositions our invest in strengthening to continue keep to environment and control resilience As a responsible our members’ money safe. our people by supported we have employer, pension contributions. increasing Chief Joe Garner Joe financial benefit

, delivered by loyal and committed and committed by loyal , delivered 1

505 million 505

of member

© GfK 2017, Financial Research Survey (FRS), 3 months ending 31 March 2017, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly of extremely/very minus proportion satisfied customers proportion Survey 2017, (FRS), 3 months ending 31 March Financial Research © GfK 2017, >6% share market account with main current providers defined as peer group high street and savings, mortgage account, current summed across dissatisfied customers and Santander). (inc C&G), NatWest Lloyds Bank Halifax, HSBC, (Barclays, £ Why being a building society mattersWhy a building being a social of born was Nationwide past. extraordinary an has society building Our alone. than together more achieve can people that belief the and purpose That speaks to an equally extraordinary future. are We unashamedly ambitious nationwide’. society, ‘building genuinely be to seen are we which in future a for that ever than convinced more I am Executive, Chief your as a year After were we when was it as today relevant as remains purpose mutual Nationwide’s founded 130 years ago. Nationwide’s strong trading and financial trading Nationwide’s strong in 2016/17performance puts us in a good high, position. Membership is at a record people choose Nationwide for as more accounts savings and current mortgages, be, for to proud are We before. than ever for top choice the first time, the UK’s accounts. current for reputation Nationwide has a strong we lead our high outstanding service, where satisfaction customer for peer group street by 5% Annual Report and Accounts 2017 Accounts and Report Annual Nationwide is in robust financial health, Nationwide is in robust of over for £1 billion achieved profits having As a mutual, profits year. consecutive the third of our success, not the only barometer are important because they allow us but they are to invest maintain our financial strength, to to you, return value to and with confidence, pricing and service. our members, through conscious took we therefore the year, During and incentives, fees rates, decisions on interest a financial benefit ofthat delivered £505 the high our members, alongside million to For known for. of service we are standards on see our Financial review. informati more people. As a result, membership grew to to membership grew people. As a result, over 15 million. 1

Strategic Report Governance Business and Risk Report Financial Statements Other Information over the nearest competitor competitor over the nearest 2 thanks to the culture of care I see everywhere of care the culture thanks to at Nationwide. As service expectations of our constantly rise, we are only to members tend serve to members even better. seeking ways a truly provide to working hard are We and mobile, branch seamless service across channels, so that members can telephone transact and how to choose when, where we with us. It is 20 years this year since bank – the first in the launched our internet digital UK – and we still combine In the last with a human touch. convenience by 73%,year mobile log-ons grew and we double the number of members who aim to active via mobile channels. are busy: remain the same branches time, our At still are accounts over half of all new current still see a vital role We opened in a branch. the continued network, despite the branch for of financial services providers withdrawal over the last two decades. high streets from branches ensure to exploring ways are We where financially viable in a future remain example, use them less. For members may our using Nationwide NOW, testing we’re connect to of the art video technology, state personal banking mortgage, to customers selected consultants in and financial using centres, as well as contact branches, efficiently. time more consultants’ our branch piloting a new community we’re Similarly, which opened in in Glastonbury, branch the viability of combining test April, to to personal service technology the latest and serve left without a bank. communities Great place to work to place Great on the foundations employees provide Our which our member service and propositions thrive, so we try make very to hard to place Society a great Nationwide Building in our very is reflected success work. Our at which, high employee engagement score of high score is above the average 78%, worldwide. In the organisations performing our employee year we improved previous our employer pension scheme by increasing that ensure helping to contributions, a living pension. employees will have No 1 for serviceNo 1 for one thing that sets us apart, it is is If there are of service. We Nationwide’s high standard satisfaction customer for number one ranked with peer group, amongst our high street a lead of 5% continued We are the UK’s third largest savings provider, provider, savings largest the UK’s third are We £1 for in everyaccounting £10 in of savings still at record rates Britain. With interest encouraging to committed lows, we remain average kept We saving. keep the nation to than higher third over a rates deposit interest leading in the last year, average the market £5.8 to growth billion balances. in member cut in the summer, the base rate Following ISA, Buy our Help to on we maintained rates Saver and Regular Saver Regular Flexclusive to desire As part of our overall accounts. over the last year our support savers, £380 million in from members benefited the market to compared additional interest signed up 1.7 million members have average. alert and text our email SavingsWatch, to products. changes and new service rate for 2017 Year the of Brand Banking Nationwide achieved a new milestone, current for choice the UK’s top becoming growth of strong A combination accounts. of share our market took and good retention and packaged current main standard 7.1% up from at February, 7.5% to accounts 795,000 Nationwide A record last year. opened over the year, were accounts current year. of 35% over the previous an increase new youth accounts, This included 147,000 in the youth market. of 14.3% share a market people chose FlexPlus, A further 169,000 strongly We account. our award-winning support financial inclusion by providing a full banking service to access customers also continue We account. with our FlexBasic through rates high switching benefit from to Service, Switch with Account the Current holders account some 165,000 current of Nationwide – an 18% share to switching are We market. personal switcher the total Which? become recently have to delighted 2017’. of the Year Brand ‘Banking of a full range provide to continued We personal banking services steady and saw issued, personal loans cards growth in credit and home insurance.

choice

15 million members than 2.2 million members hold mortgages More of 12.9% share a market with us, representing mortgage largest and, as the UK’s second helping to committed we remain lender, we people own their own home. In the year, or up the help people onto to lent more with total housing ladder than ever before, lending of £33.7 mortgage billion, up 3%. We their also helped 75,000 first-time buyers into 1 in 5 of all first-time representing first home, (2016: buyers in the UK and a new record we launched a new Family In March, 57,200). that allows homeowners to Deposit Mortgage help to their existing property funds from raise another family member buy a home and we the first applications. processing already are rented private also support the growing We let buy to our dedicated through sector (UK) plc. Works The Mortgage subsidiary, on lending to our criteria tightened have We can meet future our borrowers sure make with the This move, combined repayments. changes of lending which followed softening a in 2016, resulted in March Stamp Duty to billion, £4.6 to let lending planned fall in buy to a decline of 36%. Nationwide’s membership reached an reached Nationwide’s membership million members, all-time high, with over 15 million engaged 7.8 including a record with us. product members who hold a core Record membership as more as more membership Record people choose Nationwide Chief Executive’s review review Executive’s Chief Annual Report and Accounts 2017 Accounts and Report Annual 2

Strategic Report Governance Business and Risk Report Financial Statements Other Information

in 1884 in as when we were we when as founded This huge collaborative effort has led to a effort has led to This huge collaborative sense of Nationwide’s purpose, reinvigorated society, which we describe as ‘building the improve nationwide’ – helping people quality to of their lives. It has also helped which will allow strategy, shape a refreshed members in an deliver value for us to way. efficientcompelling and our strategy organised do this, we have To that define what cornerstones five around what we will do and how we we stand for, will do it: secure, Last – being safe, Built to sustainable and dependable values, shared Building PRIDE – shared doing the right thing culture, Building Legendary Service – providing and lifelong service easy, that is heartfelt, personal Building Thriving Membership – delivering our members value for real – leading Building a National Treasure by example and making a difference developed we have each cornerstone, For (KPIs). indicators performance a set of key tightly that we remain These will ensure purpose and also provide on our focused assess you, as members, with the ability to can find more You the Society’s performance. our new and detail about the cornerstones review. KPIs in the Strategic Mutuality is as relevanttoday continued A refreshed purpose A refreshed and strategy our of looking after business model Our fund members’ deposits and using them to is broadly other members’ mortgages, Our founded. we were unchanged since belief in the power of mutuality is a constant. us is changing like the world around But to a responsibility and we have never before, periodically to our Society’s strategy review these to respond able to we’re ensure reshaping is profoundly changes. Technology needs, expectations and customer shown have upheavals Political relationships. is not the system that many people feel the them. Economically, working for and rates of low interest era continued new creates competition increasing refreshing By to. respond us to challenges for prepared we have our Society’s strategy, and meet these challenges ourselves to the opportunities we see ahead. embrace good for has been a force Collaboration which is Nationwide’s history, throughout with a refresh our strategy why we started giving our people exercise, huge listening contribute to and our members the chance Almost all of our 18,000 our future. to contribute to had the chance colleagues Conversation’ last a five-week ‘Big through you, our to also listened We’ve summer. our events, through members, at TalkBack online Member Connect 5,000-strong our everyday and through community, the Society. across interactions As housing in Britain remains a challenge, As housing in Britain remains this our part in addressing play to we want with of housing issues a range by targeting programme. our new social investment This will be launched in 2017 will focus and that everyone on an aspiration has a place to call home. It will also include a new fit to solutions find local social ambition to will also support national housing issues. We by number of people who rent the growing and championing the rights of tenants landlords. for high standards in about our successes more can read You the ‘Social investment’ section of this report. stands for:

across more than

pride

oing the right thing in the right way ising to the challenge ising to utting our members and their money first xcelling at relationships xcelling nspiring trust E I D P R

700 locations We employ over 18,000 people Since our origins in the 19th century right Since our aim has been day, the present to through by helping people support communities to continue homes. We and live in better save to profits invest at least 1% of our pre-tax to support good causes, in line with our purpose. This funding supports both our own social and the Nationwide investment programme the independent charity we Foundation, decent, provide established 20 years ago to people in housing need. homes for affordable social five-year Living on your Side Our a close in April to drew investment programme achieved all its report, to and, I am proud objectives. Over five years, we helped 958,000 a home of their own, enabled people into saving, start over one million people to than £21and channelled more million into charity and support. community Leading by example and by example and Leading making a difference Chief Executive’s review review Executive’s Chief Our reputation as a good employer reflects as a good employer reflects reputation Our the very and ethos of special culture in our Nationwide, which is encapsulated PRIDE values: Annual Report and Accounts 2017 Accounts and Report Annual

9 Annual Report and Accounts 2017

Chief Executive’s review continued

Outlook Strategic Report Nationwide is a domestic, consumer-facing business, which means consumer confidence UK’s second matters to us. This is why, alongside our largest mortgage lender macro-economic analysis, we have asked consumers how they are feeling on an individual level. In the housing market, if the economy slows as we expect, there will be a cooling effect in the form of lower sales and house price growth – and in fact the first signs of this are £380 million already showing through in market data. However, the continued shortage of homes extra interest earned in the UK will support house prices, which

by members we expect to rise by 2% in 2017, with some Governance from our better pricing scope for a further softening in 2018 to 2019. In the medium-term, we expect house prices to rise broadly in line with earnings. Our research shows that confidence among It’s clear that consumers are alive to the consumers has held up well since last year’s economic uncertainties that lie ahead, as are referendum, thanks to the strong we. In this environment, we believe the performance of the UK economy. It also benefits of mutuality will become only clearer. showed that consumers are alert to the Last year, we protected our members through economic uncertainties ahead, with the enhanced pricing, putting an additional

Brexit negotiations, low interest rates and £505 million into members’ pockets. We Business and Risk Report inflation registering as concerns. However, anticipate that the financial benefit will vary households remain relatively optimistic from year to year depending on market about their own finances, and are going conditions, and expect it to reduce next year. about their daily lives as normal. However, Nationwide’s financial strength, stable and low risk business model, and Spending most commonly cited strong trading performance all mean we are by consumers as possible future concerns well placed to continue to support the UK are the food, utility and other household bills economy, and our members, in the uncertain that make up a good proportion of monthly times ahead. In the medium term, I believe outgoings, and we anticipate that a people will always want to save for their combination of rising inflation and modest future, manage their daily finances and have wage growth is likely to squeeze household a place to call home, so the fundamentals budgets. Unsurprisingly, consumers said that of Nationwide’s business remain as relevant if they needed to trim their spending in the Financial Statements as ever. future, they would cut back on leisure activities first, and see their mortgage and rent payments as most protected. Building society, nationwide Nationwide is your Society, and we are custodians of it. I hope this statement has given you a sense of what we achieved on your behalf last year and the strength of our Society to achieve its purpose of building society, nationwide. Other Information Other Strategic Report Governance Business and Risk Report Financial Statements Other Information differentiated pricing, member reduced fees fees reduced pricing, member differentiated put an additional £505and incentives million quantified have We members’ pockets. into our mutual pricing advantage, as we want understand the financial really members to as well as the non-financial benefits they is included on this More mutuality. gain from in our Financial review. have talented and dedicated people who and dedicated talented have first class service. Most of provide regularly therefore also members, and our people are a vested so they have owners of the Society, in serving other members as they interest be served to themselves. would like the highly also appreciate members Our products and mortgage savings competitive of being a result we can offer as a direct member-owned business. In 2016/17, our

. We are extremely fortunate to to fortunate extremely are . We

1 review

Nationwide does many of the things that the stand apart from banks do, but we structure ownership of our because banks our by owned are and social purpose. We to seeking members, individuals who are and their families. themselves for provide at our heart, a social purpose have And we of ordinary the lives improve which is to think people. Both these things mean we differently. and behave the perspective from profitability approach We that of our members. It is in their interests so that their financially strong, we remain the first thing we which is why money is safe, in maintaining do is invest some of our profits and a conservative capital ratios strong fulfil our social purpose, we To ratio. leverage existing members and attract must retain new ones, which is why another part of our and growing in developing is invested profits deliver we need to our business. Finally, who own us, the members tangible value to an element of our forgo so we choose to value investing this in better profitability, and services our members than for products bank. they might find in a shareholder-owned we know that our members As a Society, to approach value Nationwide’s rounded They value the serving their interests. our through leading service we provide phone and network, as well as our branch invest in to digital services, continue and we our people and our networks so that we our service lead over our high street retain peer group

Our mutual differenceOur mutual years, 130 over For organisation. a mutually-owned society, a building are We how informed and do we what defined are, we who shaped has mutuality more achieve can people ordinary that belief the on founded were We it. do we working help to was purpose first Our own. their on can they than together been has that a purpose It’s home. own their buy could they that so save people was it as today important as is and history, our throughout thread a golden 1884. in founded were we when Annual Report and Accounts 2017 Accounts and Report Annual © GfK 2017, Financial Research Survey (FRS), 3 months ending Financial Research © GfK 2017, of extremely/very 2017 2016, proportion 31 March vs 31 March of extremely/very/fairly minus proportion satisfied customers mortgage account, current summed across dissatisfied customers with main defined as providers peer group high street and savings, Lloyds Halifax, HSBC, >6% (Barclays, share market account current and Santander). (inc C&G), NatWest Bank

Strategic 1

Strategic Report Governance Business and Risk Report Financial Statements Other Information SOLD let investors let Funding existing commercial loans commercial Overdrafts, personal occupiers and buy to Mortgages for owner loans and credit cards are setare by our regulator Liquidity – cash we hold 67% Member deposits 25% Wholesale funding 6% Reserves 2% Other for liquidity. Minimum levels Minimum for liquidity. 2 In addition to our core products we offer a products our core In addition to to fulfil our of financial services range a competitive members’ needs, including personal loans, home cards, of credit range and financial products protection insurance, our strategic planning services. Following during 2016/17review that we concluded (CRE) business estate real our commercial and our members’ interests to not key was to continue new CRE lending. We stopped registered service existing CRE customers, finance and project social landlords also decision was A strategic customers. exit the Nationwide International made to deposit-taking business. 1 What we do with it comes from wholesale markets comes from members entrusting with us their We raise most of our from funding raise mostWe of personal savings. The rest primarily Where the money money the Where 3 How we How Other income Other generate income generate Net interestNet income Fees and charges from the fi nancial productsnancial we provide fi 5 The difference between interest and similar What we use our profi ts for our profi What we charges on mortgages and other and lending, the interest we pay on member deposits and other funding incur costs on 4 We are bound by laws requiring at least 75% requiring bound by laws are We on be loans secured of business assets to and at least 50% of our property residential members in the from come funding to total deposits. This requirement of retail form and minimises the Society’s risk exposure and members’ that our stakeholders’ ensures aligned. are interests largest Nationwide is the UK’s second largest and third of mortgages provider share with 12.9% market of savings, provider and 10.1% balances mortgage retail of total deposit balances. retail of total share market in accounts offer current beginning to Since and of main standard share our market 1987, to has grown accounts packaged current (2016: 7.1%). 7.5% Social investment our in member communities Investing in delivering improvedInvesting delivering in products and services our capital maintain to strengthRetaining and supporting our future growth Providing member t nancial benefi fi £ continued Credit losses and other provisions Systems and technology Property and operating costs Paying our people

Our business modelOur at a glance Our business model is straightforward: we business model is straightforward: Our grow members to home for a secure provide which in turn enables us to their savings, their own homes. buy offer to mortgages current this, we provide Complementing care take enabling our members to accounts have We banking needs. day to of their day risk and our business a prudent attitude to of retail on the provision model is focused financial services. manage their to able are members Our when they want, money how they want, our nationwide network of nearly through by phone, online and through 700 branches, believe in our mobile banking service. We of the latest offering people the choice with the personal touch together technology so many value in a digital age. Our business model Our business Strategicreview Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

members Delivering Leading by Being safe, a difference a and dependable real value to our secure, sustainable example and making Our strategy refresh will make sure we are we are sure will make refresh strategy Our delivering the services and customer in 2017 our members want and experience is ‘building purpose core beyond. Our defined five and we have nationwide’ society, which support cornerstones interconnected strategic Our our purpose and strategy. and reviewed been and KPIs have targets refresh. amended in line with our strategy Building Membership Thriving Building a Building National Treasure Service Building Legendary Built to Built Last This led us to look at what activities we should This led us to we can where engage in, starting with those With this in the power of mutuality. leverage on focus founding mind, we believe that our as relevant remains and savings mortgages in the founded when we were as it was today we believe that Additionally, 19th century. base account of our current the size increasing of our purpose a logical extension remains financial to day by fulfilling our members’ day our mutual needs and strengthening offer a broad to will continue We relationship. complements of financial services that range and savings of mortgage, products our core accounts. current Building PRIDE continued

easy, lifelong easy, and personal Providing a service that is genuinely different heartfelt, – Shared values, doing shared culture, the right thing

Strategic cornerstones Strategic Building society, nationwide Building society, Our refreshed strategy is founded upon is founded strategy refreshed Our and of our strengths re-evaluation a rigorous in which the our assessment of the way financial services industryin has evolved engaged our members have years. We recent suggestion schemes live ‘TalkBacks’, through online our 5,000 strong and through Most recently community. ‘Member Connect’ ‘Big the we engaged employees through all our an opportunity for Conversation’, their views on how the share people to Society is run.

During the year we undertook a strategic review and we are now embarking embarking now are we and review a strategic undertook we year the During of purpose core our around centred strategy, our of next evolution the upon building society, nationwide. Strategicreview

Annual Report and Accounts 2017 Accounts and Report Annual Our strategy

Strategic Report Governance Business and Risk Report Financial Statements Other Information 1 Leverage ratio of ratio Leverage at least 4% Strategic target Strategic Underlying profit: £0.9 billion – £1.3 billion per annum maintaining a prudent approach to risk management, operating at all times within Board risk appetite supporting member expectations of ‘always through on’ the resilience of our operations. • • Our financial performance will be supported will be supported performance financial Our We will on efficiency. focus by a renewed put our members and their to continue on how choices money first by making careful Whilst our resources. allocate best to a main was ratio income cost previously deliver to set a target now we have measure, by savings £300 million of sustainable cost of a range across 2022. This will be delivered initiatives, including ‘right first time’ member process reviews, partyservice, procurement third and digitised service as well delivery, automation activity. restructuring as targeted Our leverage ratio ended ratio leverage Our on a UK the year at 4.4% basis leverage Underlying profit for the for Underlying profit year of £1.0within billion is range our target 2017 4.4% 2017 1,030 2016 2016 4.4% 1,337 2015 2015 generating a level of profit sufficient to meet regulatory capital and future business investment requirements focusing on how we spend members’ money through driving a culture of efficiency 4.1%* 1,227 Members want us to keep their money money their keep to us want Members safe by being secure and dependable. They want us to be built to last by: • • We believe that generating underlying profit underlying profit believe that generating We £1.3 billion £0.9 billion to of approximately is per annum over the medium term This is based on our current appropriate. of the mortgage the size assumptions around of at ratio and maintaining a leverage market a profit from reduced target least 4%. Our £1.5 of £1.0 billion set in billion to range our expectation of a slightly 2016, reflecting years than in future market smaller mortgage a year ago. anticipated was 952 2014 2014 2014 2014 3.4%* continued 433 2013 2013 2.2%* CRR leverage ratio basis ratio CRR leverage * Performance Building Membership Thriving Building a Building National Treasure (%) 1 Service Building Legendary Built to Built Last

Building PRIDE

Underlying profit (£m) Underlying profit ratio UK leverage Measure

Nationwide has been granted permission to report a UK leverage ratio on the basis of measurement announced by the PRA in August 2016. Minimum leverage requirements requirements by the PRA 2016. Minimum leverage in August announced on the basis of measurement ratio a UK leverage report permission to Nationwide has been granted Act for the capital amount and the Delegated Tier 1 (CRR) definition of Regulation by the PRA using the Capital Requirements on this basis. It is calculated monitored are reserves. bank central reserves. on a CRR basis and include eligible bank reported Prior years central eligible are (2013-2015) excluding measure, definition of the exposure Built to Last to Built Measuring success performance developed a financial have We based on the fundamental framework principle of maintaining our capital at a leverage of regulatory prudent level in excess provides The framework requirements. ratio calibrate which will allow us to parameters we and help ensure performance future between distributing achieve the right balance members, investing in the business value to and maintaining financial strength.

Our strategic cornerstones Our strategic Strategicreview Annual Report and Accounts 2017 Accounts and Report Annual 1

Strategic Report Governance Business and Risk Report Financial Statements Other Information Excelling at Excelling relationships Strategic target Strategic Cross-industry High (HP) Performance benchmarks for engagement and enablement

inspiring them and invigorating our inspiring them and invigorating our PRIDE values. through culture • Doing the right thing in the right way We scored 78% for for 78% scored We employee engagement, which is above the HP benchmark Employee enablement, at 72%, is in line with the HP benchmark

72% 78% 2017 2017 Inspiring trust 2016 2016 77% 80%

developing our leaders and high a more enable talent to potential and agile workforce empowered the our capabilities across growing equip all of our people business to decisions in the interests make to of members 2015 2015 75% 79% We will equip our people by: We • • 2014 2014 2014 2014 77% 75% Rising to the Rising to challenge continued 2013 2013 68% 68% Engagement (HP benchmark 2017 = 73%) Enablement (HP benchmark 2017 = 72%) Performance Building Membership Thriving Building a Building

National Treasure

Service Building Legendary Built to Built Last

Putting our members and their money first

Building PRIDE

PRIDE PRIDE is the symbol of our culture and values. It guides us to serve ability the best of our support and It guides us to and values. our members to PRIDE is the symbol of our culture right thing. It means: our people in doing the Employee engagement & enablement

Measure Building PRIDE Building

Measuring success Strategicreview Annual Report and Accounts 2017 Accounts and Report Annual We are and intend to remain one of the UK’s best places to work, which is in keeping with our work, which is in keeping to one of the UK’s best places remain to and intend are We highly Having behind the service and is the backbone our members receive. mutual ethos of care have advantage as we strive to of competitive source engaged and enabled employees is a key engagement measure industry our business. We satisfaction and grow leading levels of customer the last for our annual employee survey conducted and enablement through called ViewPoint, Group). Hay Ferry (formerly Korn Group Hay firm eight years by global management consulting

Strategic Report Governance Business and Risk Report Financial Statements Other Information Strategic target Strategic 2017/18: (based upon peer group): revised 1st with a lead of 2% for (based on the average the financial year) deploying the people and technology to to technology deploying the people and with us interact enable our members to choose whenever and however they delivering on our members’ expectations by getting it right first time. 1 • • We ended the year with our We high lead over our nearest competitor peer group street standing at 5.0% 2017 5.0% 2016 7.7% presence investing in our high street experience the branch transform to the enhance to using technology both branches through experience and mobile 2015 4.5% Our ambition is for members to members to ambition is for Our our service easy, as heartfelt, experience have aim to and personal. We lifelong industry by: leading service levels • • 2014 2014 4.2% continued 2013 2.3% Performance Building Membership Thriving Building a Building National Treasure Service Building Legendary Built to Built Last

Building PRIDE

Service satisfaction (lead over peer group) peer (lead over Measure © GfK 2017, Financial Research Survey (FRS), 3 months ending 31 March 2017, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied of extremely/very minus proportion satisfied customers proportion Survey 2017, (FRS), 3 months ending 31 March Financial Research © GfK 2017, Halifax, >6% (Barclays, share market account with main current defined as providers peer group High street and savings. mortgage account, current summed across customers and C&G). TSB (including Lloyds Bank, Group as Lloyds TSB combined and TSB April 2015, Lloyds Bank and Santander). Prior to (inc C&G), NatWest Lloyds Bank HSBC,

Measuring success

Building Legendary Service Legendary Building Strategicreview Annual Report and Accounts 2017 Accounts and Report Annual Delivering leading levels of member satisfaction is a key point of differentiation to our peers to point of differentiation Delivering leading levels of member satisfaction is a key our service measure our membership. We grow and an important driver in helping to experts research using an independent survey by market satisfaction performance conducted banks with of high street against a peer group benchmarked is currently performance GfK. Our benchmark to will continue than 6%. We greater share market account a main current we are that group expanded the peer we have However, ourselves against this measure. share market account include those with a main current ourselves against to comparing from we face competition the increased recognise done this to have than 4%. We greater on our members’ focus to that we continue ensure and to challenger organisations, this recognised have nationwide. We satisfaction and further support us in building society, of 1st target 2017/18, for setting ourselves a strategic in our targets our peer group change to the financial year. for position with a lead of 2%, based on the average 1

Strategic Report Governance Business and Risk Report Financial Statements Other Information Strategic target Strategic 10 million engaged members by 2022 building our relationships with young building our relationships products enhanced families through and services of products building depth in our core accounts. and current savings mortgages, • • Engaged members grew Engaged members grew by 380,000 during the million, largely 7.8 year to driven by growth in current members account 7.8 2017 7.4 2016 delivering a membership proposition that delivering a membership proposition our most by rewarding loyalty recognises members committed 7.1 2015 The more members we have, the more the more have, members we The more their goals, can help them achieve we a home or saving whether that’s owning value real will deliver We the future. for our thriving membership by: to • 6.9 2014 2014 continued 6.7 2013 Performance Building Membership Thriving Building a Building National Treasure Service Building Legendary Built to Built Last

Building PRIDE

Engaged members (million) Measure

Measuring success

Building Thriving Membership Building Strategicreview Annual Report and Accounts 2017 Accounts and Report Annual Growing our base of engaged members allows us to bring the benefits of mutuality to a wider bring the benefits of mutuality our base of engaged members allows us to Growing our number of engaged members, defined through our performance measure population. We than £5,000) greater with us (with a balance account or savings as those who hold a mortgage with us. account or who hold their main personal current

Strategic Report Governance Business and Risk Report Financial Statements Other Information Strategic target Strategic 1st with a lead of 4% by 2022 2017/18: 1st with a lead of 3% 1 1 improving awareness of the Nationwide awareness improving and our mutual difference brand engaging with our members channels of their preferred through communication aligning our social investment agenda with our purpose of building a focus through nationwide, society, on housing initiatives. • • • We ended the year in We prompted position for 3rd consideration brand amongst all consumers We ended the year We trust in 1st position for amongst all consumers 2017 2017 -2.6% +1.3% Nationwide Nationwide 2016 2016 -1.9% -3.5%

2015 2015 -1.0% -6.9% leading by example, being the voice leading by example, being the voice of our members championing the interests and the acknowledged expert in our field Our ambition is to be considered a be considered ambition is to Our in in British society, ‘national treasure’ the our members and for particular for that believe trust us and to public to people’s to a difference Nationwide makes our position as will strengthen We lives. and respected one of the most trusted in the UK by: organisations • 2014 2014 2014 2014 -1.7% -6.3% 1st position/nearest peer 1st position/nearest 1st position peer continued 2013 2013 -1.3% -0.4% Performance Building Membership Thriving Building a Building National Treasure Service Building Legendary

Built to Built Last

Building PRIDE

Prompted brand brand Prompted consideration (all consumers) Measure Trust (all consumers) Trust Measuring success

Building a National Treasure a National Building Strategicreview Annual Report and Accounts 2017 Accounts and Report Annual Our brand is the sum of how our members and others perceive us. A strong brand, effective both brand, us. A strong is the sum of how our members and others perceive brand Our members as they work their way new attract media, is essential to in digital and traditional research an independent specialist market through our performance measure We life. through and trust, consideration brand prompted that survey, from drawn headline measures Two agency. a ‘national treasure’. being seen as towards a view of our progress provide Source: Independent research agency. agency. Independent research Source: 1

Strategic Report Governance Business and Risk Report Financial Statements Other Information before tax profit 1,030 million 1,030 underlying Capital levels have remained strong with with strong remained Capital levels have and UK Tier 1 (CET1) ratio Equity Common respectively and 4.4% of 25.4% ratios leverage The UK (2016: respectively). 23.2% and 4.4% unchanged as profits remains ratio leverage offset in the defined broadly the increase have growth sheet benefit pension deficit and balance balances. in mortgage driven by increases rate low interest expect the prolonged We in the and competition environment in the period continue to market mortgage ahead. Notwithstanding this, our positive and financial strength performance, trading we are sheet mean that high quality balance our value to deliver long term to well placed on focus to will also continue members. We cost reduce driving our efficiencyto agenda periods. growth in future £ review Impairment losses have increased following following increased Impairment losses have and unsecured of the secured a review that the evidence ensure to lending portfolios risks during the of impairment and latent adequately are environment rate low interest in the model assumptions, and represented held for are provisions that appropriate be may borrowers only loans where interest at maturity. capital balances repay unable to by £12.7 billion to grown assets have Total £222 due to largely billion as at 4 April 2017, mortgages. in residential a £9.1 billion increase prime mortgages to Of this, £8.0 billion relates performance trading a strong and reflects objective of increasing our strategic aligned to The of prime mortgages. share our market sheet growth is of the balance remainder in high quality liquid driven by an increase off-balance sheet Funding assets as we replace Scheme (FLS) liquidity with Lending for (TFS). Scheme Funding sheet Term on-balance Financial Mark Rennison

An advantage of being a building society is that an element forgo Nationwide can choose to value to deliver more in order of profitability our members, whilst ensuring we maintain to our members’ and safeguard financial strength a financial In 2016 we introduced money. which with parameters framework performance to performance future calibrate enable us to between distributingachieve the right balance members and maintaining financial value to in profitability, the reduction Despite strength. comfortably 2016/17remains underlying profit set by our financial range within the target framework. performance has ratio income underlying cost Our (2016: 60.2% to 53.9%) primarily deteriorated flat against broadly costs increased due to The rise in costs underlying income. total on strategic ongoing expenditure reflects and propositions enhance investment to staffservice our members, and increased for in a ‘Living including our investment costs, also have our employees. We for Pension’ one-off during the year relating incurred costs downs, and asset write restructuring to technology of change of the pace reflecting and changing member needs. These one-off initiatives along with other in-flight costs, deliver £300 million of to and our target by 2022, savings will result sustainable cost periods. growth in future in lower cost Financial performance for the year ended 4 April 2017 was in line with the the with line in was 2017 4 April ended year the for performance Financial results. financial 2015/16 our announcing when indicated expectations and million) £1,279 (2016: million was tax £1,054 before profit Statutory reflecting million), £1,337 (2016: million was £1,030 profit underlying service better and products our on value offering on focus continued our strength. capital maintaining whilst members, our for Overall performanceOverall Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information 39 39 £m £m (41) 247 247 (10) 1.52 985 (46) (73) (127) 1,337 1,279 3,372 3,333 3,333 (294) 3,086 3,086 Year to to Year Year to to Year (1,796) 203,623 4 April 2016 4 April 2016 - - 66 66 £m £m 757 325 325 (42) 1.33 (140) (136) 3,351 1,054 (297) 1,030 3,285 3,285 2,960 2,960 Year to to Year Year to to Year (1,979) 222,901 4 April 2017 4 April 2017 continued before tax

profit

transformation costs and bank levy are included within administrative expenses and bank levy included within administrative costs are transformation Financial Services Compensation Scheme (FSCS) costs are included within provisions for liabilities and charges for Financial Services included within provisions Scheme (FSCS) Compensation are costs gains from derivatives and hedge accounting are presented separately within total income. income. within total separately presented are derivatives and hedge accounting gains from 1,054 million 1,054

Underlying profit represents management’s view of underlying performance and is presented to aid comparability across reporting periods. across comparability to aid and is presented management’s view of underlying performance represents Underlying profit in the financial statements: presented Within the statutory results a. b. c. Although we only use derivatives to hedge market risks, income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge accounting ineffectiveness or because hedge accounting hedge accounting volatility can still arise due to statement risks, income hedge market Although we only use derivatives to reality of the the economic rules which do not fully reflect accounting attributable to achievable. This volatility is largely applied or is not currently is either not currently hedging strategy. statutory Net interest margin (NIM) % margin Net interest Profit after tax after Profit Gains from derivatives and hedge accounting Gains from statutory income Total assets total average Weighted Total underlying income Total Underlying administrative expenses Underlying administrative Impairment losses liabilities and charges for Underlying provisions Other income Total underlying income Total income Net interest Net other income Total income and margin income Total Net interest income Net interest Underlying and statutory results Taxation FSCS ii) (note ii and iii) (notes accounting derivatives and hedge Gains from tax before Statutory profit Transformation costs (note ii) (note costs Transformation levyBank ii) (note

Underlying profit before tax (note i) tax (note before Underlying profit

£ Notes: i. ii.

Income statement statement Income Financial review Annual Report and Accounts 2017 Accounts and Report Annual

iii.

Strategic Report Governance Business and Risk Report Financial Statements Other Information % 41 10 £m 735 325 736 53.9 54.8 1,847 1,796 Year to to Year 4 April 2016 - 42 % £m 793 790 396 60.2 60.3 2,021 1,979 Year to to Year 4 April 2017 by 32% to has increased Other income £325 million (2016: £247 million) primarily a one-offdue to gain of £100 million from the disposal of our investment in Visa Europe this gain, Excluding during the year. reduced, has underlying other income of £15 million a reduction primarily due to transactions, card credit from in income caps of regulatory the introduction following of £7 2015, and a decrease in December million mortgages. from received in other income accounts Whilst the number of active current income net fee the associated has increased, the to support continue flat as we is broadly by offering financial inclusion of customers which account, the benefits of our FlexBasic transactions. certain for has no fees Notwithstanding the fact that cost growth in Notwithstanding the fact that cost of conscious years is the result recent support the Society’s strategy decisions to members, we to and the service provided and efficiency, improve the need to recognise significantly ahead of increases that cost continuing not sustainable in the inflation are We we face. environment rate low interest on operational our focus will continue benefits of past and exploiting the efficiency, to ongoing investment while continuing prioritise the needs of our members. The longer-term impact on the UK economy impact on the UK economy The longer-term and, is uncertain vote of the EU referendum to continue to expected rates with interest a prolonged low levels for at historically remain broadly remain period, we expect NIM to the year ahead. stable for increased from resulting pressure Margin lending has new mortgage for competition fall across to continuing rates savings led to our mutual principles In line with the industry. an element of forgo chosen to we have resisting lowering savings through profitability possible and offering where rates products. competitive of the decision by the Bank Following 0.25%, we to cut the bank rate England to members who save protecting to committed buy a deposit to building or are regularly, products in several their own home, resulting decrease. the bank rate from being protected to all floor also applied a 0.10% rate have We variable products. Our cost trajectory reflects significant business reflects trajectory cost Our years. growth and investment over recent 18% over the grown have balances Mortgage main 42% more years and we have last three than in 2014. today accounts current 2016/17During by increased employee costs award £57 an annual pay million, reflecting 2.1% and higher full year costs averaging made in 2015/16 the enhancements to from scheme in line contribution pension defined a ‘Living provide to with our commitment employee numbers Average Pension’. build by 4% year on year to increased meet additional business capacity to greater and volumes, deliver our investment strategy functions. control further strengthen continued

cost income ratio 60.2%

Administrative expenses Administrative Employee costs expenses Other administrative amortisation and impairment Depreciation, expenses underlying administrative Total levyBank Transformation costs Transformation Total statutory administrative expenses statutory administrative Total – underlying basis ratio income Cost – statutory basis ratio income Cost

underlying Financial review Net interest income has reduced by £126 million has reduced income Net interest £2,960to million (2016:£3,086 million). ongoing is primarily due to This reduction and our market in the mortgage competition delivering long term on focus continued with the our members, combined value to run off ongoing natural of our residential balances. rate mortgage base and standard the across available rates The competitive members switching more led to have market billion (£17.0 products priced competitively to lower to switched of members’ balances and higher Nationwide mortgages) priced in back book This reduction redemptions. on new with lower margins together balances, in downward business pricing, has resulted our NIM on our NIM. As anticipated pressure lower than the 1.33% was the year of for year’s NIM of 1.52%. previous Annual Report and Accounts 2017 Accounts and Report Annual Underlying administrative expenses expenses Underlying administrative by 10% (£183 due to million) increased and strategic in employee costs increases and service for investment in propositions to costs members, as well as restructuring drive efficiencycosts of servicing and the higher business volumes. The underlying 60.2% to has increased ratio income cost (2016: a statutory 53.9%). At level, 9% by expenses increased administrative million). (£174

Strategic Report Governance Business and Risk Report Financial Statements Other Information 1 18 81 73 46 96 (8) 114 127 £m £m 173 (34) Year to to Year Year to to Year 4 April 2016 4 April 2016 - - 9 78 58 (5) £m £m 131 140 136 136 136 Year to to Year Year to to Year 4 April 2017 4 April 2017 tablets, and the roll out of further video links tablets, and the roll greater which allow members in branches with advisors to face speak face to flexibility in also invested have in another location. We with and ensuring compliance IT resilience requirements. UK and EU regulatory of amounts capitalised for a review Following of development, assets in use or in the course downs of £31asset write million (2016: in the year, £2 recognised million) were charge depreciation along with an increased asset to adjustments of £15 million due to of change of the pace lives, reflecting and changing member needs. technology of impairment assumptions to reflect latent latent reflect of impairment assumptions to rate low interest risks during the current this, the consumer Excluding environment. relatively has remained banking charge both stable arrears reflecting consistent, lending balances. and gross performance lending impairments relate Commercial in CRE lending, with no arrears to exclusively and project landlords social our registered The net impairment portfolios. finance of £5reversal million (2016: million) is a £34 improvements CRE market of continued result of both asset values and liquidity. in terms

focus on efficiencyfocus to achieve will enable us costs in 2017/18cost flat and lower broadly growth in future. of our interests the long term support To in invest to members, we continue During service and resilience. propositions, on focused the period, investment has members, both in for service improvements digital channels, and through branch point of saleincluding updating our savings time online account allow real to systems opening, delivery risk of in-house credit upgrades prime mortgages, assessments for smartphones and App for our Banking to period for arrears to arise from trigger events arise from to arrears period for with the ability of and the risks associated at the capital balances repay to borrowers only loans. Excluding maturity of interest these methodology changes, the underlying of £13 (2016: million impairment charge the stabilisation reflects £9 million release) compared at 0.45%, arrears of mortgage in the prior 0.45% to 0.49% with a fall from house from modest benefit and a more year, price inflation. price have charges banking impairment Consumer £78 by £18 million to decreased million (2016: £7 £96 million). Of this charge, million (2016: a reassessment £29 million) represents continued

Impairment losses on loans and advances Impairment losses on loans and advances Commercial lending Commercial Other lending FSCS levy liabilities and charges for statutory provisions Total Provisions for liabilities and charges for Provisions Retail lending Retail redress – Customer liabilities and charges for Underlying provisions Impairment losses/(reversals) lending Residential banking Consumer

Impairment losses/(reversals) on investment securities on investment Impairment losses/(reversals) Total Financial review We have launched an efficiency programme launched an efficiency have We programme £300 million of sustainable which targets by 2022. This be delivered to savings cost million in 2016/17includes investing £43 in including efficiency, longer term improving and digitised automation accelerating with associated service costs delivery, the announced simplification, organisational of of our Isle of Man and Republic closure from and our withdrawal operations, Ireland We (CRE) sector. estate real the commercial £100 million of approximately allocated have support years to spend over the next three our that and anticipate the programme, Annual Report and Accounts 2017 Accounts and Report Annual Impairment losses have increased by increased Impairment losses have million (2016: £140 million to £73£67 million) mortgage driven by additional residential to of enhancements impairments as a result methodology, loss provisioning our credit of net recoveries with lower levels combined in the CRE portfolio. of charges lending impairment Residential £58 million (2016: £18 million) include million (2016:£45 £27 million) as a result the provisioning to of enhancements ensure methodology and assumptions to appropriately reflect to continue provisions losses within each portfolio. the incurred the extended reflect These enhancements

Strategic Report Governance Business and Risk Report Financial Statements Other Information

The financial benefit measured has given our The financial benefit measured members an additional £505 (2016: million the year. for £397 million) in their pockets quantify our member chosen to have We to want members financial benefit, as we as well as the non- understand the financial mutuality. from gain financial benefits they in member financial benefit The increase with the prior year primarily reflects compared during the the discretionary actions we took in a declining rates savings protect year to Prudent environment. rate interest us to management of the Society requires retail cost of and our flows manage savings wider market of funding in the context and in particular demand for conditions, to the benefit we provide lending. Therefore members is dependent on a variety external of as well as factors, and competitive market we between profits maintaining a balance and member benefit we provide. retain , we compare the average member retail deposits and retail , both on a 12-month rolling basis. The differentials derived this in way 1 Taxation of £297 the year for The tax charge million (2016: an effective £294 million) represents of 28% (2016:tax rate 23%) which is higher tax rate than the statutory UK corporation of 20% (2016: 20%). The effective rate the banking surcharge due to is increased of 8% from at a rate which is payable £62 million 1 January 2016, equivalent to (2016: £22 million), and by the tax effect of bank levydisallowable redress customer and of £8 million and £19 million (2016:costs £8 million and £7 million) respectively. 11. in note is provided information Further Member financial benefit we know that our As a building society, savings members value the highly competitive we can offer as a products and mortgage of being a member-owned result direct our member financial measure business. We considering our differentiated benefit by and fees interest pricing, reduced rate industry to benchmarks. compared incentives, . These are also measured on a 12-month rolling average basis.

continued and personal loans

Our interest rate differential + member reduced fees + incentives fees + member reduced differential rate interest Our

Prime mortgages: the differential on incentives and fees for members compared to the market ‘Recommend a friend’: the amount paid to existing members, when they recommend a new current account member to the Society FlexPlus account: this current account considered is market leading against major banking competitors, with a high level of benefits for a relatively smaller fee. Thedifference between the monthly account fee of £10 and the market average of £16 included is the in member financial benefit measure. are then applied to member balances for mortgages and deposits. For unsecured lending, comparison a similar made. is The differential of Nationwide’s average new business lending rate against the Bank of England’s average new business lending rate applied is to the total interest bearing balances cardsof credit Member financial benefit Interest rate differential rate Interest measureWe how our average interest rates compare against the market. For our two largest member segments, mortgages prime Member financial benefit is delivered in the form of differentiated pricing and incentives, which we quantify as: quantify we which incentives, and pricing differentiated of form in the delivered is benefit financial Member interest rate for these portfolios against relevant industry benchmarks. A CACI benchmark used is for prime mortgages and Bank England of benchmark for retail deposits Member reduced fees and incentives Our member financial benefit measure also includes amounts in relation to reduced fees and incentives provided to members, and includes annual amounts provided for the following: • • • Adjusted to exclude Nationwide’s balances. Nationwide’s exclude to Adjusted 1

Financial review We hold provisions for customer redress to to redress customer for hold provisions We in and redress of remediation the costs cover and sales past financial products of to relation including compliance post sales administration, other legislation and credit with consumer the for The charge requirements. regulatory redress customer to year primarily relates of PPI and in respect recognised provisions of administering Plevin, including the cost these claims. When assessing the adequacy the considered we have of our PPI provision published by the implications of the guidance in its March (FCA) Authority Financial Conduct 2017 including (PS17/03), policy statement More case. Plevin impact of the the expected is included redress customer on information in 30. note in respect the year for is no net charge There of the Financial Services Compensation Scheme (FSCS) million charge). (2016: £46 of the repayment the substantial This reflects FSCS of to as a result HM Treasury loan from & Bingley plc the securitisation of Bradford of recoveries assets, and our £13 million share on information banks. More Icelandic from FSCS 30. is included in note Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information - 7 2 4 % % 91 81 55 3.2 100 0.47 0.45 142.6 20 £m 4 April 2016 (443) 2,350 3,869 13,197 27,782 162,164 179,250 178,807 208,939 - 7 2 4 % % 91 55 86 5.3 100 0.45 0.34 124.0 17 accounts, to 7.5% at February 2017 from 7.5% to accounts, This growth in member last year. 7.1% on focus renewed our deposits reflects our base of engaged members, growing bring the benefit of mutuality allowing us to wider population. a to £m 4 April 2017 (438) 3,949 3,068 31,231 12,580 187,371 171,263 221,670 187,809 Mortgage lending has been partially lending has Mortgage growth in strategic by strong supported deposits funding flows, with member retail by £5.8growing billion, and our market April 2017 of UK deposits at 10.1% at 4 share (2016: growth 10.2%). Of the in member £2.7balances, to billion is attributable as we have balances account current share our market increase to continued and packaged current of main standard continued

Average indexed loan to value of residential mortgage book (by value) mortgage value of residential loan to indexed Average Impairment provisions as a percentage of non-performing balances of non-performing as a percentage Impairment provisions balances of total loans as percentage Non-performing ii) off (note charged balances) (excluding Impairment provisions as a percentage of non-performing balances balances of non-performing as a percentage Impairment provisions ii) off (note (including charged balances) Proportion of residential mortgage accounts 3 months+ in arrears 3 months+ in arrears accounts mortgage of residential Proportion Other lending balance consists of deferred consideration relating to an investment in Visa Inc, collateral to support repurchase transactions and a residual portfolio portfolio and a residual transactions support repurchase to an investment in Visacollateral Inc, to relating consideration of deferred consists Other lending balance Ltd. CLO loan facility held by one of Nationwide’s subsidiaries, Cromarty commercial a European to loans relating of secured 36 months, depending period (up to an extended sheet for held on the balance and are transactions future to closed which are accounts to off relate Charged balances place. take procedures whilst recovery on the product)

Assets Residential mortgages Residential Commercial lending Commercial Consumer banking Consumer (note i) Other lending (note Loans and advances to customers to and advances Loans Impairment provisions Consumer banking: Consumer Other key ratios Other key on assets Return ratio Liquidity coverage Other financial assets assets Total Asset quality mortgages: Residential Other non-financial assets ii. Notes: i.

Balance sheet Balance year on year 6% increased have assets Total £222 reach to billion at 4 April 2017 (2016: £209 primarily reflects billion). This increase members pricing for on mortgage our focus of prime share our market and growing balances mortgage with prime mortgages, of by £8.0 billion. The remainder increasing £1.1 to sheet growth relates the balance specialist lending and a to billion in relation in other financial assets. billion increase £3.4 Financial review Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

Consumer banking Consumer personal loans banking comprises Consumer of £2.0 billion (2016: cards £1.9 billion), credit of £1.7 billion (2016: £1.7 billion) and current billion (2016: of £0.2 overdrafts account focused the year we have £0.2 billion). During on banking enhancing our consumer and cohesive a more create to proposition with our members. engaging relationship remains The asset quality of the portfolio risk proactive benefiting from strong, low and continued management practices rates. interest Other financial assets total Other£31.2 financial assets billion (2016: liquidity and billion) and comprise £27.8 investment assets held by our Treasury £25.4 billion (2016:function amounting to £23.1 billion), derivatives with positive fair values of £5.0 billion (2016: £3.9 billion) and fair value adjustments and other assets of £0.8 billion (2016: £0.8 billion). and rate interest comprise Derivatives largely out to derivatives, taken exchange foreign hedge financial risks inherent economically lending and funding activities. in our core sheet liquid assets have of on-balance Levels of the the replacement due to increased off-balance sheet FLS liquidity with on-balance in total The increase sheet TFS drawdowns. than offsetliquidity is more by higher liquidity in our Liquidity resulting requirements, 142.6% from reducing (LCR) Ratio Coverage in This increase 124.0%. as at 4 April 2016 to the inclusion of additional reflects requirements outflows in the derivative collateral stressed the finalisation of EU calculation following LCR and the impact of one-off rules during the year, would basis our LCR On a like-for-like items. with last year’s. consistent broadly remain in arrears 0.45% mortgage residential accounts 3 months+

The growth of the BTL portfolio has slowed portfolio The growth of the BTL 2016 to in May a decision taken following for ratio cover the minimum interest increase and reduce 145% 125% to new lending from 75%. 80% to from the maximum LTV impact of this decision the anticipated Despite were growth, these steps portfolio on BTL tax income forthcoming to in response taken affectchanges which will materially cash for some landlords. flow and affordability lending Commercial £12.6 are lending balances commercial Total billion (2016: of £13.2 billion) and, as a result years, in recent activity undertaken deleveraging weighted is increasingly portfolio our overall with social landlords registered towards billion (2016: of £7.5 balances billion). £7.6 and remains fully performing is This portfolio The its low risk nature. stable, reflecting also includes loans made portfolio commercial Finance under the Government’s Private £1.1 billion (2016:Initiative (PFI) amounting to £1.2 billion) and CRE loans of £2.6 billion (2016: £3.0 reduced billion) which have and deleveraging during the period through billion of £1.4 run-off. balance The remaining fair value to (2016: billion) relates £1.4 hedged loans to we have adjustments where financial risks, their associated mitigate risk. rate typically interest it was review, the wider strategy Following lending that the commercial concluded the Society’s to no longer core business was will continue and balances the future vision for managed run-off. through reduce to

continued

Residential mortgages mortgages Residential include prime and mortgages Residential specialist portfolio specialist loans, with the lending. let (BTL) buy to primarily comprising lending in the period increased mortgage Gross £33.7 billion (2016:3% to £32.6 billion), of 14.0% share a market representing (2016: 13.7%). by £9.1 billion (2016: grew balances Mortgage prime £9.3 billion) of which £8.0 billion was lending (2016: billion) and £1.1 £5.4 billion specialist lending (2016: to £3.9 billion).related value (LTV) loan to of new lending The average by value, increased in the period, weighted 71%to our (2016: due to primarily 69%) time the first lending to increase to strategy the importance as we recognise buyer market onto their initial steps of helping people take Modest house price the housing ladder. of LTV in the average growth has resulted flat at 55% remaining our portfolio (2016: have arrears mortgage 55%). Residential flat at 0.45% (2016: 0.45%). remained by reduced have balances Non-performing £2,694 (2016: million million to £485 £3,179 improvement million), with particular three past due up to in those balances the impairment provision months. However, million (2016: £144 to has increased balance in provisions £102 million). This increase loss to our credit an update reflects methodology and assumptions provisioning reflect appropriately provisions that ensure to incurred Thislosses within the portfolio. risk on the credit focusing included update only loans with maturing interest associated of impairment evidence and the period for loans. This date on up to emerge losses to provision increase, with a reduction combined in an resulted in non-performing balances, in impairment provisionsincrease as a of non-performing balancespercentage 5.3% (2016:to 3.2%). Financial review Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

% 51 (4) £m £m 301 985 (34) 24.8 1,572 1,299 21,637 Year to to Year 10,930 36,085 138,715 198,009 208,939 4 April 2016 4 April 2016

2 % 52 £m £m 757 27.1 309 1,716 (247) (255) 11,133 Year to to Year 23,940 40,339 210,537 221,670 144,542 funding ratio 27.1% 4 April 2017 4 April 2017 The movement in cash flow hedge reserveThe movement in cash flow hedge of £247 million expense (2016: £301 million movement before a gross to relates income) million, driven by significant tax of £348 changes in derivative valuations caused by rates. exchange movements in foreign 7. is included in note information Further debt of £2.9 billion (2016: £1.8 billion) and (PIBS) bearing shares permanent interest of £0.3 billion (2016: billion). £0.4 decision was a strategic the year During exit the Nationwide International to taken in a £3.6 billion business. This resulted the representing in balances, decrease with this associated of the deposits majority been business. These outflows have manner with the managed in an orderly by additional funding being replaced member deposits and the use of wholesale appropriate. funding where wholesale positive movements in the Fund’s assets positive movements in the Fund’s (2016: rate than the discount greater £122 less than the discount million return on gross information Further rate). movements in the pension obligation is 33. included in note finance core activities. The increase in The increase activities. core finance outstanding amounts partially reflects activity in the wholesale issuance increased support during the period to markets The wholesale funding liquidity. increased (2016: 24.8%) 27.1% to has increased ratio activity, of this wholesale issuance as a result down of TFS which is as well as the draw included in other financial liabilities. Other financial liabilities Otherinclude customer financial liabilities and bank deposits (including TFS drawdown) billion (2016:of £17.5 £15.9 billion), derivatives and fair value adjustments of £3.2 billion (2016: £3.5 billion), subordinated continued

The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) but excludes Funding for Lending Scheme (FLS) drawings which, as an Scheme (FLS) drawings Lending for Funding of funding (including securitisations) but excludes sheet sources includes all balance The wholesale funding ratio £8.5 billion at from reduced have Off-balance sheet FLS drawings of the arrangement. the substance sheet, reflecting balance not included on Nationwide’s are asset swap, billion. £4.8 4 April 2016 to

Total liabilities Total and equity Members’ interests equity and liabilities members’ interests, Total Debt securities in issue Other financial liabilities Other liabilities tax after Profit Member deposits of pension obligations Net remeasurement Net movement in cash flow hedge reserve Statement of comprehensive income of comprehensive Statement Liabilities Wholesale funding ratio (note i) (note Wholesale funding ratio Net movement in available for sale reserve for Net movement in available Other items Total comprehensive income comprehensive Total Movements in the table above are shown net Movements in the table above are taxation. of related of pension obligations The remeasurement of £255 million expense (2016: £51 million £1,298 million of actuarial reflects income) losses (2016: £164 million actuarial gains), partly offset to by £951 million relating Statement of comprehensive income income of comprehensive Statement Member deposits by £5.8 increased Member deposits have billion (2016: £144.5 billion to £138.7 billion) UK deposits at of all share and our market 4 April 2017 10.1% (2016: was 10.2%). have balances credit account Current billion (2016: £17.5 to £14.8 increased of share our market increased billion). We to and packaged accounts main standard at February 2017 (2016:7.5% 7.1%). Debt securities in issue billion Debt securities in issue of £40.3 (2016: raise used to £36.1 billion) are to in order funding in wholesale markets

Note: i. Financial review Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information % 4.2 4.4 £m 23.2 8,013 9,005 10,654 34,475 213,181 204,346 4 April 2016 % £m 4.2 4.4 25.4 9,547 8,555 12,129 33,641 215,894 228,428 4 April 2017 We continue to monitor regulatory regulatory monitor to continue We an increased lead to developments that could Whilst there level of capital requirements. potential where a number of areas are regulatory be finalised, yet to are requirements financial year during the announcements understanding a clearer mean that we have we will However, impact. of the expected engaged in the development of the remain prepared we are ensure to approach regulatory any change. Whilst these amendments for we do not RWAs, to in increases result may in increase will be a material believe there capital requirements. overall leverage ratio UK The movements described above have The movements described above have to in the CET1 ratio in an increase resulted (2016:25.4% 23.2%). at 4 April 2017 is 4.4% ratio The UK leverage been broadly have (2016: as profits 4.4%) offset in the defined benefit by an increase sheet growth, pension deficit and balance in mortgage driven by increases which was is 4.2% ratio The CRR leverage balances. (2016: 4.2%). 4.4% continued CET1 ratio

Common Equity Tier 1 (CET1) capital Equity Common Tier 1 capital Total Total regulatory capital regulatory Total Data in the table is reported under CRD IV on an end point basis. in the table is reported Data the bank reserves from (PRA) eligible central Authority and excludes the Prudential Regulation by announced is shown on the basis of measurement ratio The UK leverage measure. exposure leverage Act definition of the exposure for the capital amount and the Delegated definition of Tier 1 Regulation using the Capital Requirements is calculated ratio The CRR leverage on an end point basis. and is reported measure

Capital resources (note i) (note Capital resources Capital structure Risk weighted assets (RWAs) Risk weighted UK leverage exposure UK leverage CRR leverage exposure CRR leverage CRD IV capital ratios CET1 ratio ii) (note ratio UK Leverage CRR leverage ratio (note iii) (note ratio CRR leverage Capital structure Capital structure 25.4% CET1 capital resources have increased over increased have CET1 capital resources £0.5 billion the period by approximately £757mainly due to tax after million of profit (RWAs) assets Risk weighted the period. for over the period by approximately reduced run-off continued the of £0.8 billion due to lending book and lower residential commercial inflation of house price as a result RWAs, than offset growth. which more portfolio Notes: i. ii. iii. Financial review Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

Further details of the risks facing Nationwide, details of the risks facing Further these risks and the risk for its appetite given in the are management framework and Risk Report. Business For each of these principal risks, a formal each of these principal risks, a formal For risk defines for appetite of Board statement take to is prepared how much risk the Board in pursuit of the Society’s goals, and decision making. for establishes a framework against regularly is reviewed Performance that the business ensure to these statements within risk appetite. operates managed through are principal risks Our as set adopting policies and practices out below:

macroeconomic environment including environment macroeconomic uncertainty the political and economic vote the Brexit from resulting and data protection cyber security, resilience operational and of change in the digital the pace environments. regulatory that members experience unfair outcomes unfair outcomes that members experience with comply or that Nationwide fails to requirements. regulatory risk: The risk of significant loss Strategic business decisions or damage arising from of the interests that impact the long-term adapt an inability to membership, or from developments. external to : The risk of loss resulting risk: The risk of loss resulting Operational processes, or failed internal inadequate from events. external or from people and systems, risk: The risk and compliance Conduct

within the following themes: within the following • • • risks remain largely unchanged and fall largely risks remain • • •

of retail financial services, in the UK. exclusively almost of retail Nationwide primarily lends on prime residential mortgages and sets prudent limits to control exposure to other to exposure control to and sets prudent limits mortgages Nationwide primarily lends on prime residential lending. let and unsecured such as buy to risk portfolios, new lending is now closed to As commercial maturity. being actively managed to are portfolios The commercial risks. concentration and extension on refinance, focuses business, risk management of these portfolios on derivative activities necessary support Nationwide’s liquidity strategy, only to risk is accepted credit Treasury manage legacy positions. and to support our member proposition to meet tightly managed whilst allowing Nationwide to are funding and solvency, Financial risks, including liquidity, and services. members’ needs when designing products financial risks exist, sufficient their impact. to mitigate residual capital or liquidity is held Where and reputation, members, brand a minimum level of serious disruption to ensure its business to Nationwide operates availability and performance. achieve defined levels of and serviceswith systems designed to as represented. needs and expectations and perform and services meet customer Nationwide’s products the right information by providing Nationwide builds sustainable partnerships with members and customers and services. money products at the right time, and value for detriment and / or dissatisfaction in a timely and fair manner. customer Nationwide addresses personal data, does not exploit asymmetries and does not disadvantage customers Nationwide safeguards vulnerability. customer advantage of segments or take or customer competition. abuse or financial crime and does not distort market or facilitate Nationwide does not conduct priorities at any one time, ensuring the most effective many strategic too by targeting Nationwide does not overcommit focused on the provision to a mutual business model that is committed It is and efficientresources. use of its

Policies and practices are in place to ensure that ensure to in place are and practices Policies • • • • • • • • • • • •

overview

risk: The risk that a borrower Lending the interest pay fails to or counterparty the principal on a loan. repay or to Financial risk: The risk of inadequate to earnings, cash flow or capital requirements or future meet current and expectations. Lending risk Lending Financial risk risk Operational and Conduct risk compliance risk Strategic To manage To Top and emerging risks and emerging Top that the Society’s accepts Whilst the Board business activities involve some risk, it seeks members by managing the protect to that arise. exposures onRisk management activity has focused and business resilience strengthening challenges. and regulatory managing conduct and emerging Nationwide’s top As a result, An enterprise-wide risk management An enterprise-wide managed that risks are ensures framework This is underpinned by the effectively. model which ensures lines of defence three independent oversight and audit of risk management carried out by the business. Nationwide’s principal risks are: • • Effective risk management is at the heart of the business, supporting the the supporting business, the of heart the at is management risk Effective last to built is business the ensuring by strategy Nationwide’s of delivery interests. members’ protecting sustainable, and safe be to continues and

Annual Report and Accounts 2017 Accounts and Report Annual

Risk

Strategic Report Governance Business and Risk Report Financial Statements Other Information

Nationwide Building Society believes everyone Nationwide Building Society believes this to call home, and fit a place should have to on a new programme working are we year help this happen. make members, we are from on feedback Based find local developing a new social ambition to will be issues. We national housing solutions to members locally to and working with colleagues their communities to a long lasting difference make invest at least 1% of our to and we will continue to support good causes. profits pre-tax A long lasting difference

into into Your Your Community and unlocked Invested £21 million community and charitycommunity support, against a of £15 million. target

Your Ethical Business Ethical Your

people 2012 – 2017 Your Your Money Empowered 1.2 million to start saving, against start saving, to of 1 million. a target Your Workplace Workplace Your

958,000

investment Helped Your Your Home people a home into of their own, against of 750,000. a target Your Environment Environment Your The Society scored 98% in the Business in the Community Corporate Responsibility Index. Responsibility Corporate in the Community 98% in the Business The Society scored Your Society Your our values and true to remained As a mutual, we have and ethical way. run our business in a responsible

Corporate Citizenship, an external Corporate Responsibility Consultancy, has assured our social investment has assured Consultancy, Responsibility Corporate an external Citizenship, Corporate at nationwide.co.uk is available Statement The Assurance ISAE 3000 standard. to statements Our members, and charity partners colleagues together worked have theseand have only not targets been met, been exceeded, have they benefiting UK.thousandscommunities theacross of Social investment is about doing what is right by our members and their their and members our by right is what doing about is investment Social society. a building be to means it what of heart the to goes It communities. difference a lasting make could we how members our asked we 2012, in Back side’, your on ‘Living launched we As a result, communities. local their to 2017. by delivered be to targets ambitious three out setting

Annual Report and Accounts 2017 Accounts and Report Annual

Social

Strategic Report Governance Business and Risk Report Financial Statements Other Information

coffee morning. In total we raised £276,000 we raised morning. In total coffee the charity. for World’s Biggest Coffee Morning Biggest Coffee World’s most Support’s Macmillan Cancer For Morning, we Biggest Coffee World’s recent encouraging Partner, a Community were hold their own members of the public to Helping people to avoid and avoid Helping people to debt manage problem our further developed we have This year, Trust, partnership with the Money Advice which helps people tackle debts and manage their money wisely. members to more also referred have We provides that IncomeMAX, an organisation of and advocacy on a range advice free In the and utility bill discounts. benefits, grants £400,000 of this service identified last year, for benefits and savings additional income, work closely to also continue members. We Service by helpingwith the Money Advice develop new debt solutions and standards. The Nationwide Foundation the increases The Nationwide Foundation* for homes affordable of decent availability alleviating socialpeople in housing need, thus disadvantage in the UK.and economic In 2016/17 received the Nationwide Foundation a donation of £2.8 Nationwide million from charitable Society and funded 26 Building housingcauses. Its funding supported: self-build housing, the cooperatives, housing,development of community-led of land and the the availability into research in the private tenants of vulnerable experience and bringing empty properties sector, rented use. into

Our partnership with Elderly Our enabled 5,600 Counsel Accommodation in their own homes stay older people to and our support of its ‘Live Safely through at Home’ campaign and its UK Well service. advice telephone been working with military have We to them easier for it make to communities a home. This work and a mortgage access Society when the received recognised was MOD in its the from a ‘Gold’ award Scheme. Employer Recognition Sponsoring safety education centres in Birmingham, North Wales and Belfast, where students can attend MoneyLIVE workshops where they are taught life key skills such as budgeting, saving and using 18,600 youngan ATM. people benefited MoneyLIVEfrom 2016/17. workshops in Funding ten secondary school teachers through education charity First Teach and Finance (Personal pfeg with working Education on a bespoke Group) programme to train primary school teachers to teach literacy. financial The value of colleagues volunteering their time was £1.2 colleagues (all million are given up to 14 hours to volunteer during work time each year). Through the Nationwide Local Big and Community Match programmes, was£438,000 donated to 1,200 local charities or causes 2016/17. in 4,200 colleagues are now CPR trained through our partnership with the British Heart Foundation and its ‘Nation of Lifesavers’ programme. • • • • • • •

against a target of £4.5 million £4.5 of a target against channelled into communitychannelled into and charity support

people start helped to saving with us this year against a target of 290,000* people helped a home their own of into this year 198,600 of target a against

nationwideeducation.co.uk

We continued our work with housing and continued We help 17,000 to homeless charity Shelter a home of their own. Since people into been helped 2012, 44,000 people have of 16,000. This includes against a target at risk ofinterventions when people are losing their homes and helping vulnerable keep a home. people find and Developing which provides free, independent online resources for children, parents and teachers covering numeracy and financial capability. 75% of our colleagues were involved fundraising,in volunteering or payroll giving was (this 2012). in 6% £1.7 million was raised for charity by our members and colleagues this year.

£5 million Your Community Your 288,000 Your Money Your 226,300 226,300 is a home of their own Helping people into house, it is aboutnot just about buying a call to place and comfortable having a safe helping first time do this by home. We let lending to buy to providing buyers, in and working market support the rental In 2016/17:partnership with charities. • Your Home Your What we have done this year this done have we What Annual Report and Accounts 2017 Accounts and Report Annual As one of the UK’s largest savings providers, we play an important role in encouraging a savings culture. Numbers Talking our Through programme, on focused we have improving young people’s everyday number skills to encourage their included: has This habits. savings • Through ‘Living on your side’ we wanted wanted side’ we ‘Living on your Through at a community a big difference make to donations but not only through level, and unlocking the volunteering also by and capacity of colleagues fundraising members. In 2016/17: • This figure represents new savers to Nationwide who have not had a savings account with us in the last financial account not had a savings to Nationwide who have new savers represents This figure including new adult savers, 46% were The remaining accounts. savings opened children’s Of these, 54% year. and those a mortgage, help secure to money is deposited where ISA account Buy those taking out a Help to ISA. Regular Saver in our savings tax-free benefiting from

* *The Nationwide Foundation is a registered charity (1065552) Society. set up in 1997 by Nationwide Building is a registered *The Nationwide Foundation

Strategic Report Governance Business and Risk Report Financial Statements Other Information

Corporate governance report governance Corporate Audit Committee report Committee Audit Board Risk Committee report Risk Committee Board and Resilience IT Strategy Report Committee Nomination and Governance Report Committee

Board of directors Board membership committee Board biographies Committee Executive report Directors’ on of the directors Report governance corporate • • • • • of the directors Report on remuneration

31 35 36 38 43 Governance

66 Governance Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

Joe Garner Joe MA (Cantab) (47) of Office Term April 2016. Officer since Chief Executive Skills and experience (including directorships): in April Garner joined Nationwide as CEO Joe by the Society’s principle of 2016, inspired mutuality and service ethos. been have organisations Consumer-focused He spent working life. at the heart of Joe’s products with consumer his early career & Gamble and Dixons Procter companies, larger lead to then invited Carphone. He was UK first as Head of HSBC’s organisations, 2010 businesses from and commercial retail at he became CEO 2012. Then, in 2014 to the UK’s digital infrastructure Openreach, Chair of the Financial was Joe provider. from Panel Services Practitioner Authority director 2013, and a non executive 2011 to of the Financial Ombudsman Service from 2010. 2007 to mission has joining Nationwide, Joe’s Since true to remain to colleagues inspire been to the Society’s social purpose; using the power people’s lives. Joe improve to of the collective purpose that we share about the is passionate nationwide’. of ‘building society, Trust. is Chairman of the British Triathlon Joe and son. his wife with He lives in South London

MA, BA (Hons) (47)MA, BA of Office Term 2015. June since director Non executive Independent Yes. Skills and experience (including directorships): as an her background Mai combines commercial with considerable economist help guide the Board’s to experience of thinking and consideration strategic opportunities. emerging as Chief Mai maintains a full-time role Officer at Sky, and Commercial Strategy and commercial she leads strategy where Before the Sky Group. partnerships across on focused of a sector the top reaching and service delivery, experience customer a number advisor to an economic Mai was blue-chip companies. of major and Mai is a member of the IT Strategy Committee. Resilience Mai Fyfield of

directors

Rita Clifton Meet your Board of directors who were in office at 4 April 2017, including including 2017, at 4 April office in were who directors of Board your Meet director executive as election seeking is who Officer, Executive Chief Garner, Joe election seeking are who Prashar Usha Parry Baroness and Kevin and as non executive directors. Annual Report and Accounts 2017 Accounts and Report Annual ensure members’ needs are central members’ needs are ensure discussions. Board to in senior a 20-year career Throughout and UK Limited management at Interbrand among others, Rita has & Saatchi, Saatchi advised some of the UK’s best known including British Airways,organisations, Visa and the British Citigroup, BT, Barclays, is how brand She has demonstrated Army. and business strategy long term to integral the value of analysing and understanding and behaviour. perceptions consumer Committee Rita is a member of both the Audit Committee. and the Remuneration (including directorships): expert and Rita is an acclaimed brand to insight uses her deep consumer Term of Office Term 2012. July since director Non executive Independent Yes. Skills and experience CBE, MA (Cantab), FRSA (59) Board Board

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Lynne Peacock Lynne BA (Hons) (63) BA of Office Term 2011. July since director Non executive Independent Yes. Skills and experience (including directorships): in financial has a deep background Lynne services and brings an extensive understanding of the challenges and the Board. opportunities of mutuality to of National Australia CEO formerly She was of UK business and Chief Executive Bank’s held senior previously plc, having Woolwich positions at the management and board work Her current Society. Building Woolwich of both Scottish director as a non executive plc, and as a Trustee Life and Standard Water with People Society for of the Westminster perspective Disabilities, brings extra Learning Nationwide. to Independent is Nationwide’s Senior Lynne She chairs the Remuneration Director. and is a member of the Nomination Committee the Audit Committee, and Governance Risk Committee. and the Board Committee

Kevin Parry Kevin MA (Cantab), FCA (55) MA (Cantab), FCA of Office Term 2016. May since director Non executive Independent Yes. Skills and experience (including directorships): bringing is a distinguished director Kevin and auditing regulatory commercial, extensive financial notably in international experience, practice. services and professional Chairman of Intermediate He is currently plc, and Senior Independent Capital Group and Chairman of the Audit Director is also plc. Kevin Life of Standard Committee and Chairman of the director a non executive Mail and of Daily and Risk Committee Audit KPMG plc. He is a former Trust General Chief Financial managing partner and was plc. He is chairman of Officer at Schroders a Foundation, National Children’s Royal with difficultcharity supporting children home circumstances. Committee, is chairman of the Audit Kevin Risk and a member of both the Board and the Nomination and Committee Committee. Governance continued

Term of Office Term 2011. July since director Non executive Independent Yes. Skills and experience (including directorships): and formidable brings an extensive Mitchel and operations in IT, background international and change management programme major Nationwide’s Board. to He has spent over 30 years in the financial UBS Warburg, services at JP Morgan, industry, Chief and as Group First Boston, Suisse Credit Bank. Mitchel Officer at Deutsche Information of Currency director is also a non executive platform. Cloud, a payments and Resilience chairs the IT Strategy Mitchel and is a member of the Board Committee MBA, BA (Hons), ACIB, FSI (62) (Hons), ACIB, BA MBA, Risk Committee.

Mitchel Lenson Mitchel directors of Board Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

BA, FCA (56) FCA BA, of Office Term February 2007. since director Executive Skills and experience (including directorships): 30 years’ has accountant, Mark, a chartered financial and across in finance experience financial manage the is to services. His role by the Society. risks faced Mark joined Nationwide as an executive and Chief Financial Officer in 2007. director and Efficiency, Finance for With responsibility Chain and Supply including Treasury Management, he leads Nationwide’s work to so that the maintain its financial strength invest in sustainable to Society can continue growth and member services. He also drives ensuring Nationwide’s financial efficiency, an everythat fact the on focus unwavering pound the Society spends is our members’ money. partner at Mark is a former he where LLP, PricewaterhouseCoopers in the financial services practice, worked banking. and corporate on retail focusing with treasury extensively He also worked finance leasing and asset operations, businesses. of England’s Mark is a member of the Bank Panel. PRA Practitioner Mark Rennison

Tony Prestedge Tony (47) of Office Term 2007. August since director Executive Skills and experience (including directorships): a number has held senior positions for Tony operations, strategy, across of organisations He now leads and technology. transformation all points of customer Nationwide across when era including digital, in an contact, the shape of financial is changing technology expectations. services and customer in 2007 joined the Society and its Board Tony becoming Development Director, as Group Officeras in 2010. He is Chief Operating about Nationwide and its passionate mutuality and service to commitment he started. as the day today excellence a part of the was Nationwide, Tony Before and Bank Retail Barclays for leadership team both UK member for Committee an Executive plc. His roles and Woolwich Banking Personal and Support also included Retail at Barclays of and Managing Director Director Operations experience business unit, the Home Finance Nationwide. to Tony that drew deliver legendary to service goals are Tony’s at Nationwide’s 15 million customers for all channels, every and across interaction the Society’s digital drive forward and to and mobile strategy. continued

(including directorships): at the highest has operated Prashar Baroness levels of public service, and brings a wealth inform of policy expertise and insight to Nationwide’s social purpose and and Chairman of the Select Committee Union Home AffairsEuropean Sub-Committee. positions director has held non executive Usha plc, Channel 4, the Cabinet Office, Unite at ITV, Ealing, Hounslow and and Trust Saving Energy She has also Hammersmith Health Authority. occupied senior posts at the National Literacy Society and the Commonwealth Royal Trust, Appointments Commission. Judicial is a member of the Usha Committee. Remuneration Term of Office Term January 2017. since director Non executive Independent Yes. Skills and experience CBE (68) perspectives. regulatory An active member of the House of Lords, Union European is a Member of the Usha

Baroness Usha Prashar Prashar Usha Baroness directors of Board Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

BSc (Hons), FCA (54) BSc (Hons), FCA of Office Term 2015. June since director Non executive Independent Yes. Skills and experience (including directorships): brings and accountant Tim is a chartered enormous financial understanding and risk the Board. expertise to He has spent over 30 years in finance, including as Chief Financial Officer at Friends Director Finance and Group Ltd, Group Life Group. of Lloyds Banking of Director an Executive Tim is currently their and will become Old Mutual Wealth, regulatory to subject Chief Financial Officer, approval. and Risk Committee Tim chairs the Board is a member of the Nomination and and the IT Strategy Committee, Governance and the Audit Committee Resilience Committee. Tim Tookey

(including directorships): financial services extensive combines David and companies listed expertise at major of experience member-led firms with broad leading, shaping and developing boards. Deputy Chairman Group formerly was David and Chairman of Group of Lloyds Banking also He was Risk Committee. the Board at Barclays Director an Executive previously of Chief Executive he was where Bank, Banking, and Commercial Retail International Executive and a member of the Group also Chairman and was David Committee. Austria’s PSK AG, of Bawag Chief Executive non bank, and is former retail largest second of BAA plc and Absa director executive SA. Group England. Chairman of NHS Vice He is currently 2015, July since As Chairman of the Board and also chairs the Nomination David and is a member Committee Governance and the IT Committee of the Remuneration Committee. and Resilience Strategy BSc (Hons), MBA, PhD (Honorary),BSc (Hons), MBA, (54) CFifs of Office Term and Chairman director Non executive 2014. September Elect from 2015. July Chairman since Independent (upon appointment as Chairman). Yes Skills and experience David Roberts David continued

Chris Rhodes directors of Board Annual Report and Accounts 2017 Accounts and Report Annual Term of Office Term April 2009. since director Executive Skills and experience (including directorships): in financial servicesfor Chris has worked 29 years, with leadership positions in risk and retail distribution, credit finance, design. product in He joined Nationwide and the Board defining for 2009 and is responsible the Society’s for member propositions 15 million customers. of Retail Director previously Chris was part and Leicester, Alliance Distribution for His senior positions at of Abbey Santander. also included Retail and Leicester Alliance Director, Finance Group Director, Operations of Girobank. and Deputy Managing Director member of National Numeracy Chris is a board Board. Standards and the Lending BSc (Hons), ACA (54)

Strategic Report Governance Business and Risk Report Financial Statements Other Information

(Chairman) Membership Parry Kevin Rita Clifton Peacock Lynne Tim Tookey (Chairman) Tim Tookey Lenson Mitchel Parry Kevin Peacock Lynne (Chairman) Lenson Mitchel Mai Fyfield Roberts David Tim Tookey (Chairman) Roberts David Parry Kevin Peacock Lynne Tim Tookey (Chairman) Peacock Lynne Rita Clifton Prashar Usha Roberts David (Chairman) Roberts David Garner Joe Parry Kevin Mark Rennison Peacock Lynne Officer (Chairman) Garner – Chief Executive Joe and Distribution Officer – Chief Relationships Prestedge Tony Officer – Chief Financial Mark Rennison Officer and Propositions Chris Rhodes – Chief Products Officer – Chief Information Bailey Debra Officer Relations and External Beck – Chief Strategy Richard Officer Bennison – Chief Marketing Sara Officer Martin Boyle – Chief Transformation – Chief Risk Officer Dunn Julia Officer and Society Secretary – Chief Legal Ford Keith Advice and Regulated Branches of Intermediaries, Hughes – Director Graeme Officer – Chief Data Raybould Lee Officer – Chief People Alison Robb Auditor – Chief Internal Chapman (attendee) Janet

Audit Committee Audit Risk Committee Board Committee and Resilience IT Strategy Committee Nomination and Governance Committee Remuneration Committee Approval Results Committee Executive Board Committee Board Annual Report and Accounts 2017 Accounts and Report Annual

as at 4 April 2017 as at 4 April Board membership committee

Strategic Report Governance Business and Risk Report Financial Statements Other Information

Chief Legal Officer and Society SecretaryChief Legal and Secretariat leads the Legal Keith Community, the Society’s governance steering and legal affairs, joined Nationwide in having in qualifying as a solicitor Since 2014. July & at Cheltenham 1991, he has worked and most recently Society, Building Gloucester in the UK. of HSBC Counsel as General Sara Bennison Sara Ford Keith Chief Marketing Officer Chief Marketing in advertising, working her career started Sara in the UK and brands a variety of major across 2016 Asia. She joined Nationwide in March 7 years at Barclays, previous spent the having for the Officer as Chief Marketing most recently She is globally. Bank and Corporate Personal marketing, all Nationwide’s for responsible member engagement, social investment and communications. internal biographies

Chief Risk Officer 2013 as joined Nationwide in September Julia She now leads the Officer. Chief Compliance including Compliance, Risk Community, the Society and secure safe keep helping to and our members at the heart of everything she accountant, we do. A qualified chartered spent 13 years with the Financial previously in both supervisionServices and Authority, the Financial and latterly enforcement, of Retail as Director Authority Conduct Supervision.Banking Julia Dunn Dunn Julia Richard Beck Richard Chief Strategy and External Relations Officer Relations and External Chief Strategy lead the joined the Society in 2016 to Richard Relations External Planning and Strategic our with developing charged Community, media, government and engaging strategy He has spent 25 years and opinion-formers. advising continents four working across and on strategy and their boards companies Group management, as a former reputation of an and founder Manager at HSBC, General business consultancy. international

Committee Committee

He has been with the Society since 2004 He has been with the Society since Building Portman when he joined legacy firm that he had over 20 years of Before Society. and retail in consulting change experience financial services. As leader of the Transformation Community, Community, As leader of the Transformation with tasked Martin manages the teams and delivering the Society’s verycreating that meet projects transformative largest, serveNationwide’s ambitions to members. Chief Transformation Officer Chief Transformation Martin Boyle Debra Bailey Bailey Debra Debra joined the Society in 2012 to lead Group lead Group joined the Society in 2012 to Debra Services, spent time in senior roles having She now plc and BT. Woolwich with Barclays, and Deliveryleads the Operations Community, IT and Operations, Product for responsible and all of our systems ensuring Security, run smoothly and efficientlyfor processes and designing and members and colleagues, meet future developing IT solutions to business needs. Chief Information Officer Chief Information

Annual Report and Accounts 2017 Accounts and Report Annual

Executive

Strategic Report Governance Business and Risk Report Financial Statements Other Information

continued

Chief Internal Auditor Chief Internal joined the Society in JanuaryJanet 2017 to which Community Audit lead the Internal and constructive rigorous, provides areas business independent challenge to joined the Society Janet within the Society. Chief Auditor she was where Citigroup from Citi’s global institutional businesses. for Janet Chapman Janet Lee Raybould Raybould Lee Chief Data Officer Chief Data 1995 Nationwide since for has worked Lee He has and is a qualified accountant. roles, as well a number of finance undertaken lending, as time spent in the commercial of areas savings and planning and strategy the for responsible the business. He was and Reporting Financial Performance lead the to being appointed function, before and AnalyticsSociety’s Data Community.

Alison leads the People and Culture and Culture Alison leads the People teams creating for responsible Community, best that are of colleagues and communities meet our members’ needs. to placed Alison accountant, A qualified chartered KPMG and WH Smith before for worked joining the joining Nationwide in 1996. Since the Finance across Society she has worked Group being appointed function, before & Commercial Customer People, for Director 2012. in December Chief People Officer Chief People Graeme has spent 33 years with Nationwide, Graeme in joining as a management trainee since at in a host of roles He has worked 1984. Director of Intermediaries, Branches and Branches of Intermediaries, Director Advice Regulated and in head regionally locally, the Society, manager. office, including as a branch who serveHe now leads the teams our nationwide, and members in branches our intermediary clients. Alison Robb Alison Robb

Graeme Hughes Graeme Executive Committee biographies Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

to the Big Lottery Fund for the benefit of good for the Big Lottery Fund to a social or environmental causes which have the Society purpose. On 5 April 2017, (5 April 2016: £4,996,120 transferred the Ltd, Fund Reclaim to £1,185,455) of the unclaimed assets administrators from contributions scheme. The total £57,498,792. are that date to inception Risk management manage all the risks that arise seek to We There business activities undertaken. from and monitoring for structure is a formal Nationwide, comprising managing risk across detailed by the Board, agreed a risk appetite and risk management frameworks, risk oversight. and independent governance The risk management objectives and risk and set out in the Business are framework Risk Report. and The principal risks, as well as the top affect delivery risks that could emerging of Creditor payment policy payment Creditor of payment the terms agree policy is to Our ensure with suppliers at the start of trading, of of the terms aware that suppliers are with all in accordance pay and payment, and other legal obligations. It is contractual for settle the supplier’s invoice our policy to and services of goods provision the complete for provision is an express (unless there payment within the agreed stage payments) with the full conformity subject to terms, the purchase. of and conditions terms 12 days were days The Society’s creditor at 4 April 2017 (2016: 13 days). also detailed in the are Nationwide’s strategy, and Risk Report. Business a number of committees, are There manage these and policies to frameworks the of set out in the Report risks. These are and in governance on corporate directors Report. and Risk the Business

For the year ended 4 April 2017 4 April ended year the For The Society participates in the Government- The Society participates unclaimed assets scheme, whereby backed been inactive for that have accounts savings cannot holder the account 15 years and where a into be transferred eligible to are be traced fund reclaim fund. The central reclaim central sufficient retaining for has the responsibility reclaims of future meet the costs monies to dormant transferred any previously for any surplus transfer and to balances, account Results for the year include charitable for Results donations of £5,539,117 (2016: £3,963,262), including £2,842,500 (2016: £2,523,333) to In addition, the Nationwide Foundation. time for contributed employees have of at a cost programmes volunteering £1,224,713 (2016: in resulting £1,547,726), of the community to commitment a total (2016:£6,763,830 £5,510,988). No donations political purposes. Time made for were carry employees to out civic dutiesallowed to small number of a donation; a can amount to in this way. supported employees are in the Participation unclaimed assets scheme Charitable and political donations Mortgage arrears Mortgage at 4 April portfolios mortgage The Group’s accounts mortgage 2017 1,674 included including those in possession, (2016: 1,454), than 12 months more were payments where principal outstanding in The total in arrears. £195these cases was million (2016: £182 in these value of arrears million). The total £20cases was million (2016: £18 million) or 0.01% (2016: mortgage 0.01%) of total calculating The methodology for balances. of is based on the Council arrears mortgage of arrears, definition Lenders’ Mortgage by is determined months in arrears where outstanding by balance dividing the arrears payment. contractual the latest

report report

Profits and capital Profits for the year ended 4 April 2017 tax before Profit million (2016: £1,054 was £1,279 million). to the general The tax transferred after profit reserve £757 was million (2016: million). £985 reserves at 4 April 2017 Group were Total £9,610 million (2016: million). Further £9,407 details on the movements of reserves are movements of statement given in the Group The Group’s objectives and future plans are plans are objectives and future The Group’s with together Report, set out in the Strategic indicators. performance its principal key and equity. in members’ interests capital at 4 April 2017 Gross was million (2016:£14,314 £13,160 million) including £531 million (2016: £531 million) (CCDS), shares deferred capital of core million (2016:£992 million) of other £992 equity instruments, £2,905 million (2016: £1,817 and debt million) of subordinated £276 million) of million (2016: £413 capital of gross subscribed capital. The ratio at and borrowings of shares as a percentage (2016: 6.9%) and the 4 April 2017 7.1% was 6.2% (2016: was capital ratio 6.0%). free includes an The Annual business statement explanation of these ratios. Business objectives, future objectives, future Business developments and key indicators performance The Annual Report and Accounts have been have and Accounts The Annual Report with International in accordance prepared (IFRSs) as Standards Financial Reporting by the EU. All financial information adopted solely is taken report given in this Directors’ on this prepared the statutory results from 1 is included in note information basis. More underlying results Unaudited, the Accounts. to between 2017that allow comparison and Report. given in the Strategic 2016 are The directors have pleasure in presenting their Annual Report and Accounts Accounts and Report Annual their presenting in pleasure have directors The 2017. 4 April ended year the for

Annual Report and Accounts 2017 Accounts and Report Annual

Directors’

Strategic Report Governance Business and Risk Report Financial Statements Other Information % 37 63 100 6,905 11,784 Total employees Total 18,689 Number % 71 29 100 109 372 263 Senior managers necessary. We are also proud to note that that note to also proud are We necessary. Nationwide to over 80% of women return on more often leave, maternity following and we are flexible working arrangements, further. that figure increase working to of that is representative a workforce Having better we are means that UK communities serveable to the needs of our members and service that they expect the excellent provide increasing to committed and deserve. are We the senior leadership diversity across leaders and their executive population (Board, by the year 2020 targets Our reports). direct (Black, Asian and and BAME female for in this Minority Ethnic) representation 15% set at 33% and 8% to population are female 4 April 2017, At respectively. the whole Society was across representation in our senior 63.1% with representation representation population at 29.3% and board at 6% was representation at 33.3%. BAME our senior population, with board across at 8.3%. representation a public make to proud This year we were signing HM Treasury’s through commitment and we will Charter, in Finance Women prior to gap reporting publish our gender pay of 4 April 2018. date the Government’s target to made of the progress proud While we are and the diversity of our workforce increase we recognise an inclusive environment, create of in respect do, particularly to is more there now focusing are We ethnicity and disability. these improve on actions that will help to have circles mentoring BAME Our areas. expanded UK-wide with participants benefiting a and working with a senior mentor from development on career focus of peers to group mentoring opportunities. A reciprocal a develop to is also underway programme understanding of differencegreater and the in minority groups of those from experiences make to continue We the workplace. our policies and processes to improvements support disabled employees and are to in placements be trialling work pleased to the organisation. Number % 67 33 100 4 8 12 Board members Board Number Female and male representation across the Society as at 4 April 2017: across and male representation Female Female Total Male Employee engagement Employee our industry maintain aim to leading levelsWe and enablement, of employee engagement mutual successful uniquely positioned as a focus on We financial services organisation. by PRIDE, underpinned an inclusive culture, their full to in which employees can perform about PRIDE and information More potential. the in employee engagement can be found Report. Strategic As a national organisation with local As a national organisation each of to contribute we aim to representation, social investment Our our local communities. engage locally to enables employees strategy In programme. our volunteering through 2016/17 we channelled £5 charities million into and 75% of our employeesand communities and fundraising. involved in volunteering were actively with consult to Nationwide continues Staffthe Nationwide Group Union. The by chaired Employee Involvement Committee, where acts as a forum director, an executive the business and the from representatives on a range information and share Union consult theof business and employment issues for benefit of our employees and our business. and inclusion diversity Equality, diversity and inclusion equality, to approach Our our people strategy. to (ED&I) is integral to a fully inclusive approach take We developing our and to recruitment to equal access provide employees. We career training, processes, recruitment opportunities development and promotion of their ethnicity, all our people regardless for gender identity, faith and belief, gender, Should marital status, age or disability. disabled, we will work employees become possible, put in place wherever with them to, continue need to the adjustments they may their employment, including appropriate where and/or redeployment training

continued

to provide many career progression progression many career provide to talent, whilst our internal opportunities for the Society new talent to attract to we continue sources. external from Talent Emerging award-winning Our are and apprentices graduates for programmes talent strategy an important part of our overall early pipeline development. Going to in regard standards the new apprenticeship forward, our increase to platform an excellent provide of offering a range to commitment both new and current to routes apprenticeship at Nationwide. people here 56,981 training delivered This year we have centre and contact equip our branch to days people with the knowledge, skills and serve to behaviours our members well. An emphasis on induction and serviceincreased will be strategy our refreshed skills aligned to the year ahead. for our focus Through our PRIDE culture and values we our PRIDE culture Through members’ and on putting focused are first, and we believe interests customers’ employer is fundamental that being a great achieving this. to our people Developing invest in the development to continued have We on a new of our leaders and will be focusing 2017 support our for to leadership proposition development and values. Our strategy refreshed been able activity also means that we have Employees 4 April 2017, by 31 December 2017. This 2017. 31 by December 4 April 2017, on by that date will be available information nationwide.co.uk Nationwide’s website: In compliance with the Regulations of Article with the Regulations In compliance IV Directive 89 of the Capital Requirements (CRD IV) Country-by-Country Reporting will 2013, additional information Regulations of the year ended be published, in respect Disclosure requirements requirements Disclosure under CRD IV country-by- country reporting Directors’ report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information - 3.46 15.45 2,448 4,890 58,140 58,140 50,802 259,718 4 April 2011 Baseline year Baseline - 2.81 11.06 3,138 2,239 50,311 50,311 Year to Year 44,934 198,450 4 April 2016 prepared the financial statements on the the financial statements prepared basis. going concern stated whether applicable accounting whether applicable accounting stated subject to been followed, have standards disclosed and departures any material explained in the financial statements • and Transparency by the Disclosure As required the Authority, of the Financial Conduct Rules included a management report have directors of the business and a fair review containing a description of the principal risks and information This facing the Group. uncertainties and the Report in the Strategic is contained the In addition to and Risk Report. Business by as required and Accounts, Annual Report an prepared have the directors the Act, and a Directors’ Annual business statement • We also remain committed to identifying, to committed also remain We inefficiencies and addressing in our targeting been the first high supply chain. Having to be financial services provider street Trust at level one of the Carbon certified achieved in 2015, we Chain Standard Supply during the year. of this standard recertification A summary is as follows: of our performance 1.69 12.83 1,887 4,498 Year to Year 42,225 29,300 35,840 221,560 (12,925)

4 April 2017

to at least 80% by 2020. to and increase the amount we recycle the amount we recycle and increase carbon emissions will not exceed carbon emissions will not 2015 levels by 5% by 2020 use water we will reduce by 100 tonnes waste we will reduce selected appropriate accounting policies accounting appropriate selected and applied them consistently that made judgements and estimates and prudent reasonable are

Annual Report and Accounts which gives a true and Accounts Annual Report and expenditure and fair view of the income the financial for of the Society and the Group year of the affairs and of the state of the Society as at the end of the financial and the Group directors’ of details and which provides year, with Part VIIIaccordance in emoluments of made under it. The and regulations the Act under that the requirements states Act achieve a standards accounting international the Annual In preparing fair presentation. have: the directors and Accounts, Report • • As we continue to grow our business grow to As we continue of on ways focused we are successfully impacts, and our environmental reducing 2016 at least 50% of our electricity July since a solar farm. on has been generated The targets that we set ourselves last year, year, that we set ourselves last The targets unchanged: by 2020, remain achieve to • • • continued

e) in tonnes (notes i and ii) (notes e) in tonnes 2

e is an abbreviation of ‘carbon dioxide equivalent’ and is the internationally recognised measure of greenhouse gas emissions. of greenhouse measure recognised equivalent’ and is the internationally of ‘carbon dioxide e is an abbreviation

2 When calculating our carbon emissions we have used the DEFRA 2015 conversion factors. used the DEFRAWhen calculating our carbon emissions we have 2015 conversion electricity. emissions from 2 covers owned vehicles and Scope of fuels and company combustion direct 1 covers Scope obligations certificates. by renewable backed energy emissions free producing agreement, of a solar power purchase the contribution Represents

Water use (cubic metres) per FTE use (cubic metres) Water Carbon dioxide (CO Carbon dioxide Total carbon dioxide in tonnes per FTE tonnes in carbon dioxide Total Absolute carbon outturn Absolute use (cubic metres) Water PPA carbon reduction (note iv) (note carbon reduction PPA Scope 1 emissions Scope Energy Travel 2 emissions Scope Electricity iii) (note 1 and 2 emissions Scope Total iii. iv. ii. This statement, which should be read in should be read which This statement, auditor’s with the Independent conjunction explain to is made by the directors report, the to in relation their responsibilities and Accounts, of the Annual Report preparation within emoluments disclosures the directors’ on remuneration, of the directors the Report and the the Annual business statement report. Directors’ 1986 Societies Act by the Building As required an prepared have the directors (the Act), Directors’ responsibilities responsibilities Directors’ of the preparation in respect of the Annual Report and Accounts Notes: i. CO

Environment the best performers be among goal is to Our sustainability in the UK environmental for financial services sector. which in turn is business is growing Our creating new buildings and increased a need for and data managementuse of digital technology these challenges facilities. Despite we have our carbon emissions. reduce to continued from divert our waste to also continue We new challenges face We do, however, landfill. numbers of people working such as increased which mean centres, in our administration usage and the amount of waste that water slightly. has increased we produce Directors’ report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

of going concern the the financial statements In preparing satisfied themselves that it is have directors that it is conclude them to for reasonable basis adopt the going concern to appropriate with the ‘Financial Reporting in accordance on Risk Management, Guidance Council’s Financial and and Related Control Internal and IAS 1 Presentation Reporting’ Business of Financial Statements. liquidity day to meets its day The Group the management of through requirements and wholesale funding sources both its retail maintain a sufficient to buffer and is required in capital requirements over regulatory carry be authorised to to continue to order on its business. its with along activities, business Group’s The risk financial position, capital structure, to likely and factors management approach described are performance affect its future and and the Business Report in the Strategic Risk Report. taking and projections, forecasts The Group’s of possible changes in trading account and and funding retention, performance analysis, and scenario testing including stress operate will be able to show that the Group levels of both liquidity and capitalat adequate the Group’s the next 12 months. Furthermore for capital resources and its total capital ratios of PRA requirements. in excess comfortably are are making enquiries the directors After resources has adequate satisfied that the Group the foreseeable in business for continue to to it is appropriate and that, therefore, future basis in preparing adopt the going concern the financial statements. Business Viability Statement statement, the going concern In addition to C.2.2 of the with provision and in accordance the directors Code, Governance UK Corporate reasonable a that they have confirm expectation that both the Society and the in operation continue will be able to Group and meet their liabilities as they fall due over years. In making this the next three has specifically the Board confirmation Committee. the Audit sought input from a period of three The assessment covers by years as this is within the period covered (the Plan) and plan medium-term the Group’s and meet their liabilities as they fall due. Theand meet their liabilities as Viability Business period assessed under the be significantly longer to is required Statement of 12 months over than the minimum period is assessed. which going concern in respect responsibilities Directors’

the financial statements, prepared in prepared the financial statements, by the IFRSs with as adopted accordance EU, give a true and fair view of the assets, of liabilities, financial position and profit and Society the Group keep accounting records which disclose records accounting keep the financial accuracy with reasonable and position of the Society and the Group that the ensure which enable them to with comply and Accounts Annual Report Societies Act the Building for establish and maintain systems inspection business, records, of its control and reports. the management report contained in the contained the management report and Risk and the Business Report Strategic of the includes a fair review Report of the development and performance business and the position of the Group with a description together and Society, of the principal risks and uncertainties that they face.

Going concern and Going concern business viability of in respect responsibilities The directors’ In addition, set out below. are going concern Governance the UK Corporate with compliance in a state to the directors requires Code is whether there Viability Statement Business expectation the Society and the a reasonable in operation continue will be able to Group Directors’ responsibilities Directors’ of accounting in respect control and internal records ensuring that for responsible are The directors undertakings: the Society and its connected • • for responsibility general have The directors and for the assets of the Group safeguarding and the prevention for steps taking reasonable and other irregularities. of fraud detection of who held office at the date The directors that, so far as confirm of this report approval audit is no relevant there each aware, they are are auditors of which the Group’s information all the has taken and each director unaware, as directors taken have to that they ought steps audit of any relevant themselves aware make to establish that the Group’s and to information of that information. aware are auditors Directors’ statement statement Directors’ to the best of each that, confirm The directors and belief: knowledge director’s • • pursuant to the disclosure the disclosure pursuant to rules and transparency

continued

provide high quality, meaningful and meaningful high quality, provide decision-useful disclosures their financial and enhance review areas key for instrument disclosures of interest assess the applicability and relevance of good practice recommendations to to recommendations of good practice acknowledging the their disclosures, of such guidance importance the comparability enhance seek to disclosures of financial statement the UK banking sector across in their annual reports clearly differentiate and that is audited between information is unaudited. that information

Directors’ report report, each containing prescribed information prescribed each containing report, business of the Society the and its to relating undertakings. connected for Association Code The British Bankers’ (the BBA Disclosure Financial Reporting 2010, sets published in September Code), together with principles out five disclosure that The principles are supporting guidance. UK financial institutions will: • • • • • been have Code The principles of the BBA the Annual Report in preparing adopted and Accounts. our disclosures enhance continually aim to We of the the readers and their usefulness to in the light of developing financial statements One such of focus. and areas practice market disclosures forbearance example is the revised and Risk Report. in the Business presented industryBBA participation in a Following aligned our we have working group, Banking the European to reporting forbearance to reporting definitions financial Authority’s and allow consistency greater provide the industry. across comparison improved and Accounts of the Annual Report A copy on Nationwide Building can be found at nationwide.co.uk Society’s website section). The directors and accounts (Results and the maintenance for responsible are of statutory information integrity and audited published on the Information on the website. with in many countries is accessible internet in Legislation legal requirements. different Kingdom governing the preparation the United may and dissemination of financial statements legislation in other jurisdictions. differ from Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

The Group’s principal activities, business principal activities, business The Group’s described are direction model, and strategic 17); 10 to (pages Report’ in the ‘Strategic review of including a A financial summary, and balance statement income the latest Review’ in the ‘Financial sheet, is provided 26); section (pages 18 to capital position of the Group’s A review is included in the ‘Solvency risk’ section 121); (pages 118 to liquidity position is described The Group’s in the ‘Liquidity and funding risk’ section 117);(pages 109 to and risks and and emerging top The Group’s managing for policies and processes described in the ‘Business principal risks are 135). (pages 80 to and Risk Report’

Medium Term Performance Pay Plan are also Plan are Pay Performance Medium Term the Society’s the value of core to linked shares. capital deferred • • • • • The auditors re-appoint to A resolution will LLP as auditors PricewaterhouseCoopers Meeting. at the Annual General be proposed Roberts David 2017Chairman, 22 May The directors are satisfied that the Annual are The directors fair, as a whole, are taken and Accounts, Report the and understandable, and provide balanced necessaryinformation members and other for position and assess the Group’s to stakeholders business model and strategy. performance, that have procedures Details of the governance in support this can be found been embedded to report. Committee the Audit Fair, balanced and balanced Fair, understandable Mitchel Lenson Mitchel Parry 2016) 23 May (appointed Kevin Peacock Lynne 21 2016) July (retired Perkin Roger 18 January (appointed 2017) Prashar Usha Baroness Tim Tookey part of the Board’s review of the Internal of the Internal review part of the Board’s Assessment Process Capital Adequacy of the UK(ICAAP). stress This is a severe in increases with large economy, negatively rates unemployment and interest and households, impacting consumers fall in house prices. in a steep resulting as conducted are tests Liquidity stress Liquidity Adequacy part of the Internal (ILAAP).Assessment Process The ILAAP that sufficient liquid assets demonstrates meet cash outflows during a held to are there where but plausible scenario severe and market-wide is a combined resulting in, Nationwide-specific stress, among other things, in a multi-notch a In addition to downgrade. rating credit Nationwide high-quality liquidity buffer, and maintains diverse funding sources funding arrangements has contingency use in a stress. for available None of the directors have any beneficial have None of the directors of, in, or debentures in equity shares interest undertaking of the Society. any connected the 2016/17 from directors to 56% of awards will be linked Award Performance Directors’ capital the value of the Society’s core to been details of which have shares, deferred on of the directors in the Report provided 50% of outstanding awards remuneration. under the 2014/15 and 2015/16 Directors’ and the legacy 2013-16 Awards Performance • all aspects of emerging considered The review is sufficient there clarity over where regulation the analysis. For inform to standards future capital example, our assessment of the Group’s understanding of our latest position reflects likely requirements capital buffer and leverage be imposed on the Group. to these assessments to relevant Information sections of the in the following can be found and Accounts: Annual Report continued

The Plan is reviewed by the directors in by the directors The Plan is reviewed makes The Plan detail at least annually. assumptions about the performance certain market and the economic, of the Group in which it environments and regulatory operates. of how The Plan includes consideration would be affected financial performance the throughout in a downside scenario assessment period. constructed also are forecasts Alternative scenarios, against a number of stress as downside scenario including a robust

– Chairman Roberts David – Chief Executive Officer Garner – Chief Executive Joe Officer and Distribution – Chief Relationships Prestedge Tony – Chief Financial Officer Mark Rennison Officer and Propositions Chris Rhodes – Chief Products Rita Clifton Mai Fyfield

The Board has agreed that in accordance that in accordance has agreed The Board (see Code Governance with the UK Corporate on corporate of the directors the Report will stand that all the directors governance) on an annual basis. election or re-election for all with these requirements, In accordance at the re-election will stand for the directors Parry Kevin Garner, Joe 2017 apart from AGM standing who are Prashar Usha and Baroness the first time. election for for The directors of the Society who were in office at any point during the year and up to the date of signing the financial statements were: of signing the financial statements to the date in office at any point during the year and up of the Society who were The directors Directors Directors’ report regulatory and internal stress testing. The testing. stress and internal regulatory consideration the time period chosen reflects the to relating that the level of uncertainty period the longer the assessment increases of change of the economic, chosen. The pace in environments and regulatory market undermine may operates which the Group of longer forecasts. the reliability on a based this statement have The directors assessment of those risks that could robust profitability, the business model, future threaten liquidity or capital adequacy of the solvency, In making the assessment, the directors Group. concerning of information a range considered of scenarios, a range each of these risks across the Plan and the to including but not limited stress and internal of regulatory programme In particular: it undertakes. testing • • • Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

Following Joe Garner’s appointment as Joe Following has the Board Officer, Chief Executive the expansion and development supported which has Committee, of the Executive and of skills in a wider range resulted serving your interests. backgrounds ensuring that your for I am also responsible has the right mix of skills, collectively Board provide to diversity and independence oversight of the business in appropriate dynamic, what we believe will be a more financial and fast-moving retail competitive services marketplace. that during report to So I am delighted strengthen been able to we have the year, with two new independent non the Board set details are Further directors. executive of the Nomination and out in the report Committee. Governance Parry and The appointments of Kevin during the period Prashar Usha Baroness skills and the Board’s enhanced have of areas. a range across experience brings deep knowledge of the financial Kevin in career of his successful as a result sector in the roles and non executive both executive practice. and professional financial sector the not-for- skills from brings broad Usha of the and is one and public sectors profit policy advisors. UK’s most experienced the announced the year end we have Since a senior appointment of Gunn Waersted, with a 35-year financial services executive spanning financial services, career and petrochemicals, telecommunications 2017. 1 June from the Society’s Board to governance For the year ended 4 April 2017 4 April ended year the For David Roberts David Your Board’s commitment to good governance good governance to commitment Board’s Your has served your Societyand we will well in the highest standards to aspire always The your interests. safeguard to order of Committee Nomination and Governance in ensuring role a major plays the Board as we on governance focus appropriate and of doing business new ways adapt to landscape. the evolving regulatory that our sure make It is important to for fit stay arrangements governance of changes in best account purpose and take It is also important that our practice. the evolving risks and addresses governance as a modern mutual as challenges we face meet to our business adapts and grows changing member and societal demands. of responsibility I assumed the regulatory 2016. March Whistleblowers’ Champion from and ensuring for This includes responsibility and independence overseeing the integrity, effectiveness of the firm’s policies and on whistleblowing. I also have procedures protect to controls for responsibility being victimised whistleblowers from disclosed their concerns. because they have that our Nationwide’s culture to It is integral speak that they can confidently people feel up if they see something that does not feel right. I am actively involved in supporting of our awareness raise activities to whistleblowing arrangements. Strengthening and Strengthening diversifying our leadership for Effective leadership is a prerequisite part of my role A key good governance. the best possible we have is making sure people running and overseeing the Society. thank my fellow to like I would therefore and commitment the care for directors the constructive which they offer, challenge that they bring and their servingdedication to our members. Report of the directors on the directors of Report corporate

Ensuring strong oversight Ensuring strong ordinary on the belief that founded were We they than together people can achieve more enable that, a strong can on their own. To but is a necessary, framework governance for not in itself sufficient,condition with Many companies sustainable success. failed as beyond have frameworks strong principles that matter are the rules there trust, such as transparency, deeply, openness and balance. is what determines How our people behave so whether we and our members prosper, is fundamentally important. We our culture many examples of bad seen all too have do not things happening when companies why, they will. Which is as they say behave overseeing strategy, as well as determining for management and taking responsibility sets Nationwide’s significant risks, the Board values and standards. Nationwide is the world’s largest building Nationwide is the world’s largest over 130 years, mutuality For society. what we defined has shaped who we are, how we do it. do and informed owned by our we are As a building society, Your them. to answerable members and are success the long term is for mandate Board’s means we have which of the Society, and future current to responsibilities for members. As Chairman, I am responsible effectively operates ensuring that your Board framework, within a sound governance suitable for principles based on best practice Nationwide’s status as a mutual. So, for the UK to adhere example, we seek to Code. Governance Corporate Our founding principles founding Our Dear fellow member, fellow Dear Chairman. as Report Governance Corporate second my deliver to pleased I am Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information continued

As a mutual, our overriding principle is doing our members which is at the right thing for the heart of everything also balance we do. We of a number of stakeholders the interests suppliers,including employees, customers, governance Our and communities. regulators that decisions ensure designed to are structures underpinned by our PRIDE values which are Report. described in the Strategic are Our ambition remains unequivocally ‘member ambition remains Our difficult Sometimes this involves choices. first’. rate low interest in the current instance, For decisions made conscious we have environment, of our the interests balance over the year to our – supporting and borrowers savers uncertainty. members during times of 2016/17 the year for successful another was over 15 million members now have We Society. high standard maintain a to and we continued in the of service, while managing our profits it is our of members. Ultimately interests in and our members day people who deliver for set to will continue directors out. Your day strong Nationwide and provide for the tone the our people. I am confident leadership for has the capacity and capabilities to Board for the responsibility fulfil this to continue benefit of you, our members. Roberts David Chairman

– Being safe, secure, secure, Last – Being safe, Built to sustainable and dependable. values, shared Building PRIDE – Shared doing the right thing. culture, Building Legendary Service – Providing a service – that is genuinely different and personal. lifelong easy, heartfelt, Building Thriving Membership – members. value to Delivering real – Leading Building a National Treasure by example and making a difference. are therefore able to reinvest our profits into into our profits reinvest to able therefore are our members as well supporting lending to service, and customer products as improving the year we During loyalty. and rewarding decisions, such as made conscious have and borrowers, help savers pledging to in a reduction to contributed which have in the year in line with expectations, profits put to our commitment demonstrating first. members’ interests Refreshing our strategy our strategy Refreshing Garner’s appointment as Chief Joe Following 18,000 of our he engaged all Officer, Executive people at Nationwide in ‘The Big Conversation’. this members, from with feedback Together make to strategy our refreshed helped inform we deliver the services customer and sure in 2017 our members want and experience a created we have beyond. As a result, the 22,000 pieces consider to Panel Colleague received. we of feedback is based on building society, strategy Our defined five nationwide and we have which support our purpose cornerstones and plan. They are: • • • • •

The Board adheres to best practice governance principles, in particular, the UK Corporate Governance Code (the Code). Although the Code Although the Code (the Code). Code Governance the UK Corporate principles, in particular, governance best practice to adheres The Board where the Code follow (PRA) Authority expects building societies to the Prudential Regulation companies, public listed for sets the standards alignment ensure to principles and provisions with the Code’s comply the Society aims to possible and appropriate, do so. Where to practical for the Guidance to has regard with mutuals in mind, the Board is not written and openness. As the Code transparency with good practice, assist building societies in applying the Code. Societies Association (BSA) to 2016 version) issued by the Building Societies (June Building the extent to of the Code provisions with the principles and relevant the period, complied that the Society has, throughout considers The Board themes of leadership, key the Code’s follows of this report explains how it has done so. The format this report building societies; applicable to effectiveness, and member engagement. accountability of the report. 5 April 2016 until the date the period commencing covers This report UK Corporate Governance Code principles Code Governance UK Corporate As the world’s largest building society, building society, As the world’s largest its and run for, Nationwide is owned by, of, and committed proud are members. We sets us apart our mutual status which to, compete other types of businesses. We from such as current with banks in areas and personal mortgages savings, accounts, mutual, Nationwide is as a loans. However, owned principally by retail we are different, and also our customers members who are Governance at Nationwide Governance

Listening to our members to Listening that members’ is determined The Board should be at the heart of everythinginterests members, along we do. As our owners, our with a stakeholders with our employees, are in how the Society say is run. real many years we for So, as well as the AGM, around TalkBacks live regular also held have and senior management Directors the country. any subject. and members can raise attend In addition, every and the week the CEO a selection of meet Committee Executive hear employees to centre and contact branch services and products and review feedback with individuals who serve members every day. the government’s call support therefore We of employees and representation greater for decision making in company customers because we see the benefits that it has Nationwide. to brought Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

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management has the necessary skills and within a deliver the Plan to resources and controls. of sound systems framework sets prudent but stretching The Board whilst achieving the strategy for targets adequately risks are ensuring that key adhering to assessed and managed. Whilst essential that the the Plan is important, it is in a timely and Society can respond member needs and manner to considered and evolving market. fast paced the current its time spent the Board How for As part of its ongoing responsibility and holding the performance monitoring Officer and his Executive Chief Executive account, to (‘the Executive’) Committee a number of regular receives the Board as well as and meeting minutes reports of the strategy, components key keeping and significant risks business performance under review. is a sample of some of the The following has considered that the Board matters of how the other details For during the year. spend their time, please refer committees the individual reports: to terms of reference which include a schedule which include of reference terms decision, for the Board reserved to of matters running of the business day to with the day Key Officer. the Chief Executive to delegated are and its committees activities of the Board on an annual basis. planned and documented ensuring for is also responsible The Board in accordance that the business is conducted including and regulations with applicable laws and Rules. the Society’s Memorandum high level and sets the strategy The Board policy which the Remuneration remuneration is implemented. ensures Committee in the documented objectives are Strategic in detail which is reviewed Society’s strategy annually and by the Board and approved the Society’s This year, regularly. monitored and a revised Plan has been reviewed Performance by the Board. approved strategy on an ongoing against the Plan is monitored financial and non-financial basis using key of the along with consideration indicators, in the explained principal risks which are and Risk Report. Business management’s performance, In reviewing that ensure to is concerned the Board Review of analysis of how Nationwide is perceived by members, employees and the public from by members, employees and the public from of analysis of how Nationwide is perceived Review perspective a reputational experience customer the on open banking and how it might improve Updates and advertising campaigns strategy marketing Nationwide’s brand, Considering programme the Member TalkBack from Feedback and documentation notice of the AGM Approval member engagement enhance of how to and consideration 2016 AGM of the analysis of the Review service metrics and customer Officer on performance the Chief Executive from Monthly reports on the outputs of The Big Conversation as well as updates and implementation updates refresh Strategy with employees performance and mortgage savings account, such as current updates Product and borrowers of our savers the interests balance How to the EU impact of the UK leaving the potential Reviewing development for areas within Nationwide and potential The culture principles and reward of the remuneration Review and activities investment strategy Nationwide’s social Reviewing Key activity/items discussed activity/items Key • • • • • • • • • • • • • •

Board responsibility Board Members and other customers and Strategy performance and culture People, remuneration

Leadership and effectivenessLeadership of the Board The role in the UK financial services player As a major in place we have that it is imperative sector, risk management and control robust governance. to including in relation frameworks, of internal is the set governance Corporate and principles established by the standards sound and prudent control ensure to Board sets the tone over the business. The Board promoting for and is responsible the top from governance, values, culture, leadership, ethical and risk management. The Board controls on management, via the Chief Executive relies to standards to cascade the agreed Officer, the business. The Society’s governance the to communicated are arrangements the Nationwide Governance business through Manual (NGM). is based structure Nationwide’s governance The on the leadership principles in the Code. the ensuring for is responsible Board sustainability in order of the business model of members for success deliver long term to under formal operates Board The the Society. Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

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– the Board Risk – the Board Risk Committee Board an by Tim Tookey, is chaired Committee with director independent non executive financial retail of major experience strong of the Board services Work organisations. is detailed in the Board Risk Committee The purpose of the report. Risk Committee oversight provide is to Risk Committee Board current to in relation the Board to and advice and risk exposures future and potential including determination risk strategy, future of risk appetite.

1 The Board committees are: committees The Board is Committee – the Audit Committee Audit an independent non Parry, by Kevin chaired appointed who was Kevin, director. executive audit 2016, is an experienced in July the role to by chairman and is considered committee in accounting a competency have to the Board and relevant and auditing as well as recent considers also The Board financial experience. as a whole has Committee that the Audit The work of the experience. sector relevant oversight of, provide is to Committee Audit reporting, amongst other things, financial audit, compliance and external internal and risk controls oversight, internal work The Committee’s management systems. report. Committee is detailed in the Audit Monthly updates from the Chief Financial Officer regarding business performance, including profit, sales and including profit, business performance, Financial Officer the Chief regarding from Monthly updates and liquidity capital performance, retail assumptions and market of economic Review of the Financial Plan and efficiencyReview initiatives results and full year interim management statements, of the interim Approval distributions of payment Approving and analysis results testing Stress Chairman as well as the Chief Risk Officer on the risk profile Risk Committee the Board from Updates of the business Authority with both the Prudential Regulatory detailing interaction monthly reports, engagement Regulatory Authority and the Financial Conduct policies (MAR) and associated Abuse Regime the Market regarding Updates of the whistleblowing officer Annual report Conduct risk considerations Conduct of the Society’s Programme IT Security Cyber and Progress recovery and disaster IT service resilience and Monitoring example, cloud computing impact including, for IT innovations and their potential future Considering Industry Security Strategy Cyber developments and the Government’s updated security updates Cyber Policy and Succession Composition of the Board example review for arrangements, of governance Annual review and of the Board the skills and experience expand and enhance to directors Appointment of new non executive of the Chairman the re-election of the Chairman’s performance Review of interests register of the directors’ Authorisation Appointment of the Society Secretary Key activity/items discussed activity/items Key • • • • • • • • • • • • • • • • • • • • •

Board responsibility Board and Finance controls internal Risk and compliance

Technology and Technology security Governance Report of the directors on corporate governance How the Board committees committees the Board How spent their time time is devoted adequate that ensure to In order through operates the Board business, Board to committees. constituted a number of formally and of the Board of reference The terms at least annually reviewed are its committees on the Society’s website: and can be found nationwide.co.uk and its activities of the Board The key planned on an annual basis are committees or but also allow sufficientfor urgent time on a timely be considered to ad hoc matters all committee to has access basis. The Board from reports regular and receives minutes chairs on the business committee the relevant meeting. at each committee transacted Annual Report and Accounts 2017 Accounts and Report Annual

Operational oversight of the Society’s whistleblowing arrangements (as per C.3.5 of the UK Corporate Governance Code) is provided by the Whistleblowing Committee. is provided Code) Governance (as per C.3.5 of the UK Corporate oversight of the Society’s arrangements whistleblowing Operational 1

Strategic Report Governance Business and Risk Report Financial Statements Other Information continued

Officer Executive Board Risk Board Committee Committee Chief Executive Chief Executive – Committee and Resilience IT Strategy Lenson, by Mitchel is chaired the Committee director. an independent non executive provide is to The purpose of the Committee IT on the the Board to oversight and advice delivery and roadmap architecture, strategy, The controls. governance architectural of the strategic also has oversight Committee and oversight of all investment portfolio investment an with individual programmes spend of over £50 million or of strategic is The work of the Committee importance. and Resilience described in the IT Strategy report. Committee IT Strategy IT Strategy Committee

and Resilience and Resilience Audit Committee – the Committee – the Remuneration – the Remuneration Board Board committees Board Committee Nomination by the Chairman of the Board. is chaired and review is to of the Committee The role in by the Board decisions made execute and Accounts, the Annual Report to relation and the Interim Results the Interim Management Statements. Committee Remuneration an Peacock, by Lynne is chaired Committee who is also director independent non executive The the Society’s Senior Independent Director. authority the Committee to has delegated Board of remuneration for the framework determine to and other senior the Chairman, the directors of activities A review of the Society. executives in the during the year is contained undertaken on remuneration. of the directors Report Committee Approval Results and Governance and Governance Results Approval Approval Committee Committee Remuneration Further information on the role of the Board of the Board on the role information Further in the can be found and its committees and effectiveness section of this Leadership reports. and in the individual committee report

An overview of the Board structure and its committees as at 4 April 2017 2017 4 April at as committees its and structure Board the of An overview below: out set is Board structure

Committee Nomination and Governance the is also – the Chairman of the Board Governance and Nomination the Chairman of of the Committee The purpose Committee. the keeping assist the Chairman in is to under review, of the Board composition on the Board to recommendations make to lead level appointments and to executive nominations for the appointments process also reviews The Committee the Board. to and arrangements governance the Board’s to the Board to recommendations makes consistent are that the arrangements ensure with best practice. Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

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helps ensure that the quality, skillset, knowledge that the quality, helps ensure best collectively of the Board and experience to time. time the Society’s needs from reflects serves director a non executive Where that will review the Board term, a third service on an annual basis. continued director’s annual stand for to required are All directors election by members. is a clear division of responsibilities There between the Chairman, as leader of the Board, Officer who is and the Chief Executive running of the day to the day for responsible of the Chairman, responsibilities business. Key (SID), non Senior Independent Director and the Chief Executive directors executive summarised in the table below. Officer are of non executive directors who fall outside who fall outside directors of non executive no longer are the Senior Managers Regime by the regulator. pre-approval subject to responsibilities and individual The collective also set out in the members are of Board Manual. Nationwide Governance non executive appointment for of Terms on the Society’s available are directors statements These and any relevant website. can also be obtained from of responsibility Officer and Society Secretarythe Chief Legal on request. appointed are directors non executive Typically, years and may of three an initial period for serve or on occasion, to be invited a second, the overall This is subject to term. a third needs and and succession composition Board Provides leadership of the Board and ensures the effectiveness of all aspects of the Board’s role. the effectiveness of all aspects of the Board’s and ensures leadership of the Board Provides directors and non executive between the executive and mutual respect of open dialogue a culture Fosters all directors. from an effectiveand facilitates contribution directors. challenge of the executive and constructive debate open and honest Facilitates of the Society. and risk appetite direction the strategic members, sets with other Board Together the accountability and ensures success the long term promotes members, with the other Board Together its members. of the Society to of the Society. the interests Promotes Supervises Officer. and supports the Chief Executive the for the Board to running of the business and accountable day to the day for Responsible performance. financial and operational the management of the business generally. and co-ordinate direct to Committee the Executive Leads and controls and oversight of responsibilities, the apportionment for systems Implements and monitors efficiency operational for and which maintain Nationwide’s reputation policies and processes best practices, of business conduct. high standards and all directors with the Chairman, the Board Establishes and maintains effective working relationships Officer. Chief Risk Officer and Chief Compliance Auditor, the Chief Internal to and officers and is available the Government, industry sector with regulators, Establishes and maintains effective working relationships and lobbies these bodies as and when influences and the media and strategically organisations analysts, trade of Nationwide. in the best interests appropriate standing in the UK financial services image and social industry. corporate Nationwide, its good Promotes the Chairman. for a sounding board Provides by the Board. of the Chairman’s performance the annual review Leads it is necessary concerns and members should a situation arise where for directors to Is available Officer. the Chairman or Chief Executive other than through the Board to be referred to Responsibilities • • • • • • • • • • • • • • • •

Role Chairman Chief Executive Officer Senior Independent Director

Roles and responsibilities Roles of Board and responsibilities The roles and set out by the Board agreed members are individual descriptions and in in writing in role of service.terms These and any relevant reviewed were of responsibilities statement in January 2016 by the Board and approved of the Senior the introduction reflect to 2016. Given the in March Managers Regime over the Society’s they exercise influence the Chairman, principal Committee conduct, Chairs and the Senior Independent Director all aspects of the Senior Managers subject to are directors In addition, all non executive Regime. Whilst all Rules. the Conduct subject to are relating must satisfy requirements directors the appointment their fitness and propriety, to Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

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Joe Garner was appointed as Chief appointed Garner was Joe Officer on 5 April 2016. Executive Senior Independent Director Perkin, Roger retired Committee, and Chair of the Audit served having at the 2016 AGM on the Peacock six years. Lynne for Board as the Senior Perkin Roger succeeded 2016. in July Independent Director on 23 Parry May joined the Board Kevin as Chair Perkin Roger 2016 and succeeded 2016. in July Committee of the Audit joined the Board Prashar Usha Baroness on 18 January 2017.

Board changes Board been a number of have there the year During detailed as follows: the Board, changes to • • • • 2017 1 June With effect Gunn Waersted from as an independent non will join the Board director. executive led generally are the Board Appointments to by the Nomination and Governance can be found information Further Committee. report. in the Committee’s Member nominations the right to Members of Nationwide have the Board, election to for candidates nominate and the Society’s own Rules subject to with PRA requirements. and FCA compliance No such nominations had been received this being the deadline for by 4 April 2017, at the 2017 the Board AGM. election to representation to 33% by 2020 across the 33% by 2020 across to representation executive senior leadership population (Board, with an reports) leaders and their direct pipeline of senior objective of building a strong other aspects of enhance to women. In order for set a target has also the Board diversity, of 8%Black, Asian and Minority Ethnic (BAME) in the same senior 15% representation to detailleadership population by 2020. Further of the Nomination the report in can be found Committee. and Governance Independence been assessed have directors All non executive Committee by the Nomination and Governance and character be independent as to to and of relationships be free judgement and to their that might impact other circumstances independence. be deemed to Chairman, was Roberts, David the independent upon his appointment to and Chairman director of non executive role a substantial Elect. As the Chairman commits and represents the role of his time to proportion Nationwide in a number of capacities, will it is acknowledged that his independence diminish during his tenure. Collectively set the tone from the top, in particular in relation to culture and governance and hold the and and governance culture to in relation in particular the top, from set the tone Collectively and values. the Society’s embedding and maintaining culture for account to Executive effective oversight over risk exercising risk appetite and of the strategy the development to Contribute management controls. against the Plan. performance Monitor and engage in open and honest the boardroom to Bring independent judgement, skills and experience directors. the executive challenge and support to including constructive debate, that the Society benefit of members and ensure the of the Society for success the long term Promote firm. obligations as a regulated meets its regulatory As members of the Board, collectively with non executive directors, set the strategy, risk appetite, risk appetite, strategy, set the directors, with non executive collectively As members of the Board, and values. culture management ensuring timely and accurate approval, decision or for the Board to proposals Submit sound decision making. facilitate to information issues on a timely basis. escalating matters, of all significant informed is kept that the Board Ensure of the business. the performance and of the strategy the execution for the Board to accountable Are running of the business. day to in the day Hold specific management responsibilities Responsibilities • • • • • • • • • •

Executive directors Executive

Role Non executive directors Report of the directors on corporate governance Board composition Board as at the in place all directors for Biographies of set out in the Board are of this report date section. directors of is made up of a majority The Board As at directors. independent non executive comprises the Board of this report, the date the Chairman, seven independent non directors executive and four directors executive possess an appropriate who collectively Nationwide’sfor of expertise suitable balance not director business. Each non executive of business range only brings a broad but also provides knowledge and experience retail banking, such as key areas specific skills in brand, strategy, technology, information risk and public policy. finance, Diversity diversity and inclusion at NationwideImproving throughout the Board for a focus has remained met the 2011 The Board the financial year. of 25% of women on the target Review Davies the appointment 2015. Following by July Board almost 40% 2017, on 1 June of Gunn Waersted and over half of the non of Nationwide’s Board will be women. In addition, directors executive female increasing to Nationwide has committed Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information ------1 (1) 2 (2) 2 (2) 3 (3) 3 (3) 3 (3) Results Approval Approval Committee ------and 7 (7) 7 (7) 7 (7) 7 (7) Resilience Resilience IT Strategy Committee continued

------5 (5) 9 (9) 9 (9) 9 (9) 6 (6) Conflicts of interest Conflicts conflicts avoid a legal duty to have Directors appointment, potential Prior to of interests. disclosed and assessed are of interest conflicts which no matters are there that ensure to taking on that person from would prevent has considered the appointment. The Board appointments of all external the current a situational give rise to which may directors conflicts potential and has authorised conflict appropriate. where arises, the Society’s conflict If any potential authorise the to permit the Board own Rules conditions or limitationsto such subject conflict, In situations determine. may as the Board arises, the director conflict a potential where any meeting or themselves from will excuse that to in relation discussion, and all material including Board will be restricted, matter papers and minutes. to attend shown in brackets. The table only shown in brackets. attend to meetings for record shows the attendance In addition, members. are at which directors at a number present are directors the executive A list of as attendees. of the Committees is each Committee for attendees regular reports. Committee included in the respective Board Risk Board Committee ------2 (2) 11 (11) 11 (11) 11 (11) Committee Remuneration Remuneration ------and 2 (2) 5 (5) 5 (5) 5 (5) 3 (3) Committee Governance Governance Nomination ------Joined the Board on 18 January 2017 the Board Joined on 21 2016 July the Board from Retired 7 (8) 7 (8) 2 (2) 7 (7) 8 (8) Audit Audit *** **** Committee, whether the director has any whether the director Committee, responsibilities director executive external requirements. regulatory and any relevant to equates this time commitment Typically, a per annum for between 40 and 60 days Chair and a minimum of 30 days Committee who director a non executive per annum for does not chair a Committee. The Chairman will spend a minimum of two per week on Nationwide and a half days business. Details of his other directorships in the Annual business statement. listed are of notice which might impact attendance attendance which might impact of notice tenure. during the early part of their the Board for record The attendance is set out below. members during the period number of The table shows the actual with the number of meetings attended eligible were which directors meetings for Committee

4 (4) 3 (3) 9 (10) Board 11 (12) 12 (12) 12 (12) 12 (12) 12 (12) 12 (12) 12 (12) 12 (12) 12 (12) 12 (12)

Executive Directors Executive 2016 on 23 May the Board Joined

Tim Tookey David Roberts David Chris Rhodes* Mark Rennison* Tony Prestedge* Tony Usha Prashar*** Usha Roger Perkin**** Roger Lynne Peacock Lynne Kevin Parry** Kevin Mitchel Lenson Mitchel Mai Fyfield Garner* Joe Rita Clifton Attendance record for Board members Board for record Attendance All directors receive papers for Board meetings. Board papers for receive All directors allowing electronically, delivered These are no matter information access to directors in the world. Should a director they are where the meeting, the attend be unable to views in advance Chairman seeks the director’s of the meeting. directors The amount of time that non executive of in the discharge commit to expected are upon an individual their duties is agreed basis and depends upon their responsibilities. the As part of the appointment process, non executive for individual time commitment appointment and upon is agreed directors this year, For annually thereafter. reviewed the Chairman has individually confirmed been they have that with each non executive sufficient fulfilling to allocate time able to the time their duties. When considering each individual from expected commitment into will be taken factors certain director, account, for exampleappointee the whether member ofor Chair onethe is or moreBoard ** Notes: * Report of the directors on corporate governance Attendance and time commitment Attendance year, met 12 times during the The Board in conference including an annual strategy set in schedule is 2016. The Board October of meetings. notice allow adequate to advance appointed that new directors It is recognised the same level during the year do not receive Annual Report and Accounts 2017 Accounts and Report Annual

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During the year, the risk management and the risk management the year, During been reviewed have systems control internal is the Board and, on the basis of this review, satisfied that Nationwide has an adequate of risk management and internal system be enhanced to will continue The ERMF control. the size for appropriate it remains ensure to and is of the organisation and complexity business sophistication, increased to responsive change. developments and regulatory emerging Individual – Individual accountability and senior manager at Board accountability during the year level has been strengthened of the Senior the introduction following 2016. in March Managers Regime under framework This established a revised and individually which senior managers are of specific areas for personally accountable a certification the business. It also introduced an assessment of the requiring regime of stafffitness and propriety in positions pose could the decisions they make where to the business or customers. significant harm to access have In support of this, all directors of the Chief Legal the services and advice to able and are Officer and Society Secretary, on advice obtain independent, professional their responsibilities. to relating matters and officers’ insurance directors’ Appropriate of legal and is maintained in respect cover and claims against directors regulatory Nationwide’s business. to relation officers in and Rules, Under the Society’s Memorandum directors by law, permitted the extent and to an indemnity by Nationwide been granted have party liabilities which of any third in respect of holding office. This they incur as a result during the financial year in force policy was of this report. of approval and at the date on risk management information Further is controls of internal and the performance the report, Committee set out in the Audit and the report Risk Committee Board and Risk Report. Business

– The Board approves approves – The Board

Risk Committee Board responsibility It has delegated risk appetite. against appetite performance monitoring for along with Risk Committee Board the to of the Enterprise approval for responsibility (ERMF) and Risk Management Framework The strategies. principal risk management ERMF isframework risk an enterprise-wide how risk management should defines which the business. Further across operate the in out set is information about the ERMF and Risk Report. Business has delegated The Board – Committee Audit the adequacy reviewing for responsibility the to and effectiveness controls of internal has also Board The Committee. Audit oversight of the management of delegated to auditors with the external the relationship set details of which are Committee, the Audit The Audit report. Committee out in the Audit the external from reports receives Committee and LLP, PricewaterhouseCoopers auditors, auditors has a discussion with the external a year without management at least once no are that there ensure to present, issues of concern. unresolved and Board Committee Audit and Committee The Audit – Risk Committee regular the Boardreceive Risk Committee which include year, the throughout reports by the conducted reviews about information The chairs Audit. Risk function and Internal and the Audit Risk Committee of the Board Committee to are the Board to accountable covering updates regular provide both which the an activities, providing committees’ areas highlight any potential to opportunity 2016/17 During of concern. the Audit also Risk Committee and Board Committee held a joint discussion allow for meeting to and risk control of internal challenge and both to management issues relevant Between them, the Audit committees. Risk Committee and the Board Committee of the ERMF, all components reviewed have including the effectiveness of local risk and and reporting. management control

Report of the directors on corporate governance Board effectiveness Board under review its performance keeps The Board its effectiveness evaluates on an and formally review, an external annual basis. Following last Limited by Independent Audit facilitated an in 2017 has undertaken the Board year, with support effectivenessinternal review to Limited, by Independent Audit provided and comparability thematic continuity ensure overseen by the was of output. The process Committee. Nomination and Governance in that can be found information Further report. Committee’s Accountability the members of to is accountable The Board their interests balance the Society and seeks to of stakeholders, range with the broader employees, including other customers, suppliers and the wider community. regulators, ensuring that a for is responsible The Board is maintained control of internal sound system and support Nationwide’s strategy to objectives. the risk approves The Board testing and metrics and stress appetite Test, Stress including the Concurrent results, Assessment Capital Adequacy the Internal and the Individual Liquidity Adequacy Process regular It receives Assessment Process. and assessments of risk and control reports the from and recommendations processes, spanning on matters Risk Committee Board and risk appetite. risk categories all major assessing the for is responsible The Board principal risks facing Nationwide, including its threaten potentially those that could solvency performance, business model, future set out in the These risks are or liquidity. which explains how and Risk Report Business manage these being managed. To they are the risk monitors the Board risks effectively, systems control management and internal of their and carries out an annual review detailed delegates effectiveness. The Board Risk Committee the Board of these to review as set out below. Committee and Audit Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information continued

We review every suggestion we receive. every review suggestion we receive. We examples of why member see past To our Society, to engagement is so important visit nationwide.co.uk/about/why-choose- nationwide/all-about-membership The number Social media and e-newsletter: on our main social media channelsof followers by almost 40% over the last has increased our Voices to relating 12 months with content campaign, social investment and fraud the most engagement. education generating As well as commission: we The research find out how to we commission the research our service, we have our members rate our 5,000 members signed up to around panel ‘Member research online customer which helps us by providing Connect’, Each week variety on a topics. of feedback This part in a survey. take we ask them to us their views on topics year the panel gave our savings lending in retirement, like and cashless innovations. They can promises is concerning on whatever feedback provide part in take also ask them to them. We online discussions and polls. It’s a regular channel: everytwo-way out we send quarter their contribution recognising a newsletter has them how their feedback and telling shaped our thinking. contactless credit cards credit contactless showing ‘pending transactions’ on the mobile banking app through member loyalty recognising our proposition. We also work throughout the year to the year to also work throughout We members as owners with our communicate feedback encourage of the business, and to in The main ways we operate. on the way done this during 2016/17which we have are as follows: popular Member TalkBack Our face: to Face 2016/17 into continued with the programme delivery the UK. Over of eight events across part in these events over 600 members took These events aim to of the year. the course dialogue between our members facilitate and senior directors and our Society’s board management, and 100% of members valued’ as a ‘valued’ or ‘more felt attending of taking part. Of the 106 questions result 99% of members answered, been which have fairly answered thought the questions were and honestly. a series of new branch also started We us providing members, which saw activities for our members before ‘sneak peek’ events for and Belfast opened, in Stratford new branches as well as a series of engagement events to in members and the community hear from opening. the Glastonbury branch the run up to the veryOnline: 2016 saw first Nationwide the benefit of for webinars being delivered members. Two members and potential one for so far, been delivered webinars have wantingfor members first time buyers, another about digital innovation. find out more to be a popular forum, to The webinars proved 3.8/5 stars and them with members rating time slot was that the 30-minute 82% saying about right. In addition, members can use our online received Scheme. We Member Suggestion over 1,000 ideas via this scheme during the of the member just a few are Here year. over the past received suggestions we have working on: 12 months that we are • • •

to make it as easy as possible for members it as easy as possible for make to prefer they us in whichever way talk to to their suggestions to and respond listen to and services with products and comments their needs built around include members in any activities they to be involved in. to would like

Listening to our members members our to Listening our members are As a mutual organisation, and, as such, also the owners of Nationwide their views on share be able to they need to seek We of the business. direction the overall of they can do this in a number ensure to aims are: Our ways. • • • is the the AGM the AGM: to Contributing their event at which members can have key the Society hear is run and on the way say It is the main their directors. first-hand from as account to hold the Board opportunity to or against those for members can vote and on a number of election standing for issues. other key Member involvement is such an important to work hard as a mutual. We us principle for members to it as easy as possible for make work to and constantly their say have we Last year, our communication. improve the paper pack more make to used research saw members, and as a result, to accessible a paper a small uplift in members returning The online voting hub ballot in the AGM. than ever before information more provided their decisions about make members to for although in the AGM, cast their vote how to down on the previous the online turnout was a number for As has been the practice year. of years, the meeting will be held at venues truly the UK, meaning we are across the year, This nationwide and accessible. Birmingham on ICC, will be held at The AGM 2017. 20 July Thursday Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

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Chief Relationships and Distribution Officer Chief Relationships Chief Risk Officer Reporting of Financial Director Testing Planning and Stress of Financial Director LLP PricewaterhouseCoopers from Representatives Regular attendees Regular Chairman of the Board Officer Chief Executive Officer Chief Compliance (incl. interim) Auditor Chief Internal Chief Financial Officer Officer and Propositions Chief Products

Financial reporting covering the appropriateness of accounting policies and their applications including: the going concern presumption presumption policies and their applications including: the going concern of accounting the appropriateness covering Financial reporting accounting to relating clarity the of disclosures results, financial in the annual and interim judgements the key and business viability, meets the principles of financial reporting whether the external as to the Board to and its recommendation judgements and estimates and understandable’. balanced being ‘fair, money laundering, financial crime, prevent to and procedures over financial reporting controls and internal Risk management systems bribery and corruption. audit key work programme, Audit of the Internal the approval Auditor, the appointment or dismissal – of the Chief Internal Audit Internal work. Audit findings and the quality of Internal Oversightfunction. findings of the Compliance work and key The approved of external independence This includes: the and the effectiveness audit process. of the external auditors with the external The relationship audit agreeing of the skills of the audit team, the annual plan, the quality of the audit work and the appropriateness reviewing auditors, process. audit tender and any external and non-audit fees function Audit the Internal Chairman for Committee of: the Audit Oversight under the Senior Managers Regime of the fulfilment of duties reporting. financial and regulatory function and the Chief Financial Officer for and the Compliance

Committee members Committee 2016) July Parry (Chairman – from Kevin Rita Clifton Peacock Lynne Tim Tookey What does the Committee do? What does the Committee on: the Board to oversight of, and reports provides The Committee • governance Committee of reference. with its terms held eight meetings and fulfilled its duties in accordance the year, throughout in place was The Committee Former Committee members Committee Former 2016) (Chairman until July Perkin Roger • • • • • at nationwide.co.uk available and are at least annually by the Board and approved reviewed are of reference terms The Committee’s Thanks are also due to Matt Cheetham of Deloitte who was seconded to head the Society’s Society’s the head to seconded was who Deloitte of Cheetham Matt to due also are Thanks Auditor. Internal Chief time a full of recruitment the pending function Audit Internal This is my first report to you as Chairman of Nationwide’s Audit Committee. I am delighted delighted am I Committee. Audit Nationwide’s of Chairman as you to report first my is This predecessor, my thank to like should and Committee a well-established inherited have to significant of a period years, six last the over diligence and work hard his for Perkin, Roger sector. services financial UK’s the in change Dear fellow member, fellow Dear Chapman, Janet with working to forward I look and function the modernise to much did Matt development. its of next stage the to Audit Internal take to appointed recently was who

Audit Committee report Committee Audit Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information continued

Internal controls and risk management encompassing Internal Audit plans and reports; compliance plans and reports; control financial developments and responses to improvement recommendations Financial reporting, including accounting and financial reporting considerations and disclosures External audit, including the independence, scope and findings of PwC’s audit and non-audit work Statutory and duties, similar such as reporting to regulators and providers capital.of Report on the year the on Report agendaAudit The Audit Committee has a rolling agenda comprising recurring business, seasonal business (notably financial and regulatory reporting) and other business as ad (such hoc investigations). As recurring business, the Committee reviews and discusses: • • • • Detail of work The focus of work respect in of 2016/17 below. described is reportingFinancial The Committee reviewed the Society’s accounting policies and confirmed they were appropriate to be used the in financial statements.There are no importantchanges this year but the Committee also considered future changes. The implementation of IFRS 9 (particularly respect in of loan loss a complicated is provisions) project and consequently the Committee regularly reviewed its progress so that the Society can comment on the impact of the implementation when reliable estimates are available during 2017/18. The Committee believes that some non-GAAP (generally accepted accounting principles) measures, known as Alternative Performance Measures, can add insight to IFRS reporting and provide a more useful indication of long term operating performance balanced ‘fair, (see and understandable’ below). The Committee was content with the measures used, such as underlying profit, and the definitions of quantification. their Governance All members ofthe Committee are independent non executive directors. Their attendance at Audit Committee meetings during the yearset is out the in Report of the directorson corporate governance. After each meeting, I provide a verbal report to the Board on matters discussed by the Committee. skills and Membership The Boardbelieves members of the Audit Committee have the financial, risk, control and commercial expertise required to provide effective challenge to management. and I are consideredTim Tookey by the Board have to competency accounting in and auditing as well as recent and relevant financial experience. Individuals from the above table are regularly invited to meetings, but the Audit Committee typically meets privately for part of its meetings and also has regular private meetings separately with the Chief Risk Officer, Chief Internal Auditor and the external auditors. These meetings address the level of co-operation and information exchange and provide an opportunity for participants to raise any concerns directly with theCommittee. Duties In carrying out its duties, the Committee is authorised by the Board to obtain any information it needs from any director or employee of the Society. It also is authorised to seek, at the expense of the Society, appropriate professional advice as needed. The Committee not did need to take any independent advice during the year. Effectiveness The Committee reviews its effectiveness In 2016,annually. an external review was facilitated by Independent Audit Limited. In the review2017, was internally-led being designed conjunction in with Independent Audit Limited to ensure thematic continuity and comparability of output. The review confirmed the effectiveness of the Committee and determined that it would on occasion benefit from additional external perspectives. Additionally, I met individually with each member of the Committee to discuss directly the effectiveness of the Committee. No important matters emerged. continued

The developmentof the Internal Audit function under its new leadership. Preparations for the implementation of IFRS The 9. International Accounting Standards Board completed the final element its of comprehensive response to the financial crisis with the publication of IFRS 9 Financial Instruments July in 2014. The package of improvements introduced by IFRS 9 includes a logical model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially-reformed approach to hedge accounting. IFRS effective 9 is for annual periods beginning on or after January1 2018. The content of private reporting the to Prudential Regulation Authority (PRA) by the external auditor. Third party management. risk End to end process management. Report on the year Internal Audit External audit.

Audit Committee report Committee Audit Report of the directors on corporate governance In addition our to normal business, in 2016/17 the Audit Committee addressed: • • • • • continueWe to work closely with the Board Risk Committee. recognise We that some matters are relevant to both the Audit and Board Risk Committees and so, order in to undertake our duties effectively, we have initiated an annual joint Audit and Board RiskCommittee meeting to consider matters of common interest: the overall assurance the theannual plan; compliance annual plan; prudential risk management plan and the Internalannual Audit plan. My report to you structured is four in parts: • Governance • • • Annual Report and Accounts 2017 Accounts and Report Annual

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Fair, balanced and understandable Fair, consideredWe and contributed to the overall presentation of the financial statements, culminating our in assessment of whether the Annual Report and Accounts balanced and understandable.2017 fair, are consideredWe whether the overall portrayal of Nationwide open is and honest, whether we set out both our successes and our challenges, and whether we use language that a person with reasonable knowledge of financial sectorreporting financial can understand. considered We whether the reporting was contextualised against the backdrop of our clearly defined strategy. The Committee reviewed and was satisfied that the AlternativePerformance Measures which complementthe IFRS numbers give a more complete view of the performance of the business. For example, the Committee considered carefully and was satisfied that the on gain the sale of the stake Visain Europe was properly treated and disclosed within underlying profit. Additionally, the Committee debated the measurement the of financial benefit delivered members to and was satisfied with the explanation of its quantification. wereWe provided with a report by management setting out the review processes used to assess the overall presentation of the annual report and financial statements. included This an independent management review which concluded that the reporting was clear, consistent, balanced, open and appropriately focused on material items. After consideration of management’s report and our own review, we concluded that we could inform the Board that, our in opinion, the Annual Report and Accounts were fair, balanced and understandable. – we keep abreast of – we debated changes to

customer conduct issues, always seeking to ensure that Nationwide behaves to ethicalhigh and regulatory standards. Where mistakes have or might have been made, provisions for redress and related expenses are estimated. The Committee ensures that provisioning based is on realistic outcomes and up to date information such determination as the FCA’s of the final period for PPI claims. Defined benefit pension liabilities – we reviewed market key and accounting assumptions used to calculate the pension deficit, comparing them to market data and assessing the sensitivity of the deficit to changesin those assumptions. Impairments of fixed assets – we reviewed the output of a review of the carrying value of fixed assets, particularly capitalised to relating hardware and software. were We satisfied with the impairments.quantification of Impairment provisions for loan loan for provisions Impairment portfolios assumptions with management ensure to that they were fully substantiated and satisfied ourselves that the provisions properly reflected loanimpairments. In the continuing low interest rate environment, particularly it is difficult to identify events leading to impairments. concludedWe that it was appropriate to increase provisions relating to interest only mortgages, as well as making adjustments to the reference periods used determine to losses where arrears have not yet emerged. were We also satisfied that provisions were sufficient to cover cases of forbearance. continue We to scrutinise the adequacy of loan loss provisions accordance in with currently in standards. anticipate accounting We force that provisions will be higher under IFRS 9 as a result of moving from an incurred loss to an expected loss model. Customer redress

• • The Committee also reviewed and was satisfied that issuesno arosein respect of management’s application of the effective interest rate method, revenue recognition and hedging. Accounting estimates and judgements and estimates Accounting In compiling a set of financial statements it necessaryis estimates to make and judgements about outcomes that are typically dependent on future events. This year the more significant matters related to: • • continued

The Committee reviewed the basis of accounting, including the going concern basis of preparation of financial statements and the business viability statement. We assessed profitability, of levels capital, availability of funding and together liquidity, with output of stress tests and reverse stress tests. considered We the cash flows resulting from its business activities and factors to affect likely its future performancedevelopment, position, and together with the assessment of principal risks as set out more in detail the in Business and Risk Report. concluded We that the profitability, sheetbalance and capital position are robust, and that it remained appropriate prepare to the accounts on a going concern basis. As last we concludedyear, that our work also supported the business viability statement for a three year period, which within is the period covered by medium the term Group’s plan, regulatory and internal stress testing and the period over which important and regulatoryfinancial changes typically emerge. Significant time was spent on our review of the half and year financial full year statements, and also the interim management statements published in August 2016 and February In 2017. considering the financial statements, we discussed and challenged management’s analyses, the external auditor’s work and conclusions on the areas main of judgement. Internal controls and risk management systems are place in to provide assurance over the preparation of the Annual Report and Accounts. Financial information submitted for inclusion the in financial statements attested is by individuals with appropriate knowledge and experience. The Annual Report and Accounts are scrutinised throughout the process by relevant senior stakeholders before being submitted to the Audit Committee, who provide debate and challenge, before requesting the Board to approve. Key controls the in process are subject regular to testing, the results of which are reported to the Audit Committee. Audit Committee report Committee Audit Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information continued

Reviewed the proposed audit plan in advance the of audit. annual Approved the audit engagement letter and proposed audit fee. Reviewed and discussed formal reports provided by PwC. Reviewed the annual findings of the Audit Quality Review team of the Financial Reporting Council (FRC) respect in of the audit firm. External audit The Audit Committee responsible is for oversight of the relationship with PricewaterhouseCoopers LLP (PwC), the external audit firm, and the effectiveness of the audit process. This includes making recommendations to the Board and subsequently to members on the reappointment of the external for auditor, determining their independence from the Society and agreeing the scope and fee for the audit. Following its review, the Committee recommended the reappointment of PwC prior to seeking the approval of members at the AGM. The Committee also: • • • • We monitoredWe the adequacy of Internal financial the including resources, Audit budget and the availabilityof external specialists. were We satisfied that Internal Audit had adequate resources and continued to develop its sophistication, drawing on the findings of the prior year external quality assurance review. During the year there was a processof succession for the Chief Internal Auditor, overseen by the Committee. This resulted in us approving the appointment of Janet Chapman to the role. Janet an experienced is auditor of banks and we anticipate she will bring her knowledge and experience to bear developingin the Internal Auditfunction in Nationwide. I met monthly with the Chief Internal Auditor, and spent time with the Internal Audit team discussing the priorities for their work. The Committee attended a number of workshops with Internal Audit senior management, discussing audit planning and priorities. Based on its review, the Committee concluded that the function continued to be effective and has determined that there should be an increased focus on customer conduct and service audits the in next year. financial The external auditors not did place reliance on the work of Internal Audit this year.

– the The implementation of the approved plan and proposed changes that to plan. Key findings from completed reviews including theimpact on financial reporting processes and related applications. The status of management’s agreed improvement of implementation actions including the reasons for any rescheduling of committed actions. The assessment of the effectiveness of Internal Audit. In particular, the Committee reviewed a follow-up report to the last external assessment undertaken by EY and was satisfied with progress made the in year. Internal and external audit reports external and audit Internal Audit Committee approved the Internal Audit and plan discussed for the year, detailed quarterly reports from Internal Audit as well as an annual report which gave an overall assessment of the effectiveness of internal control. The Committee received reports from the external auditors throughout the year. Details of both audit functions are set below. out Internal Audit Internal Audit plays role a key providing in independent assessment and challenge of governance, risk and control at Nationwide – it operates line with in its charter which is reviewed by the Committee every year. Internal Audit comprises approximately 80 people and led is by the Chief Internal Auditor who reports to the Committee Chairman. In addition, there are co-sourcing arrangements place in with Deloitte LLP and KPMG LLP which are used to support specific technical reviews. During 2016/17 the function completed approximately 110 internal audits. The Committee was particularly interested the in reports on the effectiveness management access of security, data security and management, commercial real estate lending, evidencing decision making, cross-divisional process management and the execution of change projects. The Committee received regular reports from the Chief Internal Auditor on: • • • • • continued

– we – during the – Compliance – we received – the Audit Committee

Compliance Compliance Oversight Oversight plays an important role in monitoring the Society’s compliance with regulatory requirements and, critically, ensuring that we continue to deliver fair customer outcomes. The Audit Committee approved the compliance oversight and plan discussed for the year, with theChief Compliance Officer the resources available to complete the planned programme of work. The Committee was satisfied with quarterly reports and an annual report setting out the overall results of their oversight work, the more significantissues and themes arising and the effectiveness of action taken to resolve issues. Risk Oversight discussed the annual Risk Oversight plan (that had been approved by the Board Risk Committee) alongside the Internal Audit and Compliance Oversight plans to ensure sufficiency and efficiency of coverage. Further information the in is report of the Board Risk Committee. Financial Crime satisfactory reports on the steps taken and management’s effectiveness in meeting its commitments to prevent financial crime and to avoid bribery, corruption and money laundering. Framework Controls Financial continued to focus on the Financial Controls Framework, the embedding of which further strengthened the internal control environment. Results of assurance testing were presented to and discussed by the Committee. Reports management from year we invited members of the senior management team our to meetings to discuss the more significantissues raised by Internal Audit, Risk Oversight, Compliance Oversight and the external auditors. These discussions demonstrated to the Audit Committee that management takes internal control seriously, and that action taken is to resolve any important issues. Effectiveness of internal controls inform our considerationTo of internal controls, we received and discussed reports from a number of business areas, senior management teams and externalsources during the year: • Audit Committee report Committee Audit • • • • Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

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– regulatory – a formal the audit engagement letter and determined the audit fee to be sufficient to allow PwC to perform its audit. In addition, the Audit Committee Chairman regularly meets the audit partner and interviewed the auditors on the work undertaken to support their opinion on the financial statements. The Committee discussedhas the accuracy financial of reporting (known as materiality) with PwC both as regards accounting errors that will be brought to the Committee’s attention and as regards amounts that would need to be adjusted so that the financial statementsgive a true and fair Overallview. audit materiality has been set at £52 (2016: million £50 million). This equates to approximately of 5% pre-tax profit. is withinThis the range that audit opinions are conventionally thought to be reliable. Audit effectiveness assessment was completed on the effectiveness of the external audit firm. A survey was carried out which considered their expertise and independence, including feedback from senior management. This found the external auditors and the audit process to be both effective. and robust appointment firm Audit requirements for audit firm rotation require the Society change to its external audit firm no later than 2020. The Committee discussed the timing of firm rotation and concluded that we will appoint the successor firmin 2019 to carry out the audit of the 2019/20 financial statements. The tender process to select the incoming audit firm will commence the in with summer a of 2017, recommendation to the Board towards arethe well We advanced end of the year. ourin preparations for the tender which will be robust and thorough. I shall report on the process and its outcome next year. • • If any member has feedback on the content of this report, I should be pleased to receive comments. their Kevin Parry Chairman – Audit Committee continued

– the – in addition – in to – the Board has an

the independence policy set out above the individual and overall non-audit fees were reviewed. All fees payable PwC, to unless they are clearly trivial, are pre-approved by the Audit Committee. The fees are set out the in notes to the accounts. The Committee satisfied is that the non-audit fees as to their nature and quantum do not detract from PwC’s audit independence and quality. materiality and quality Audit Committee places great importance on the quality and effectiveness of the external audit. The Committee looks to continuingthe professional audit team’s education, objectivity, professional scepticism, relationship with management, professional standards and performance against regulatory requirements. The Committee approved Reviewed PwC’s transparency report for the year ended 30 June 2016. Scrutinised the findings of the FRC’s Audit Quality Review team respect in of the Nationwide audit for 2015/16, and discussed them with the audit team. The Committee was satisfied with the audit plan to addressteam’s the findings on their audit for 2016/17. Discussed the auditors’ conclusions in respect of their work on privileged access to systems. Independence established policy setting out the non-audit services that can be sourced from the external The of the aim auditor. policy, which reviewed is to is annually, safeguard the independence and objectivity of the external auditors and comply with the ethical standards of the FRC. The policy specifies services that are permitted, prohibited or require pre-approval. The Committee monitors the implementation of the policy and considers proposals from management to use the external auditors for non-audit services. challenged We the appropriateness of the recommendations and the independence threats potentially arising. Additionally, PwC has confirmed that it has complied with relevant regulatory and professional requirements and its objectivity not is impaired. The Committee satisfied is that PwC remained year. the throughout independent Audit and non-audit fees • • • • The Audit Committee considered the performance and appropriateness of the external audit firm embracing: • • Audit Committee report Committee Audit Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

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Chief Compliance Officer Chief Compliance Officer Chief Credit and Distribution Officer Chief Relationships Risk Strategy of Enterprise Director LLP PricewaterhouseCoopers from Representatives Regular attendees Regular Chairman of the Board Officer Chief Executive Chief Financial Officer Officer and Propositions Chief Products Chief Risk Officer (incl. interim) Auditor Chief Internal

advising the Board on current and potential future risk exposures future and potential on current advising the Board overseeing risk management as a whole at Nationwide (ERMF) risk monitoring, risk appetite, including Risk Management Framework the Enterprise monitoring remuneration. and risk adjustments to Report on the year the on Report reporting Risk

Outlook. Governance Committee members Committee Chair) (Committee Tim Tookey Lenson Mitchel 2016) Parry May (appointed Kevin Peacock Lynne What does the Committee do? What does the Committee for: Responsible • Former Committee members Committee Former 2016) (member until July Perkin Roger • • governance Committee the year and held nine meetings. throughout in place was The Committee risk appetite lines of defence, (ERMF) including three Risk Management Framework detail about the Enterprise Further and Risk Report. in the Business can be found structure and the risk committee • • • My report to you is structured in four parts: four in structured is you to report My • Dear fellow member, fellow Dear key to resilience Society’s the build to continuing on focused have we year, past the Over the of scrutiny ongoing of a background against customers, our of interests the in risks uncertainty political and economic increasing referendum EU the and industry, banking Eurozone. and UK the in

Board Risk Committee report Risk Committee Board Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information continued

Lending risk Lending the and approved reviewed The Committee risk and specialist lending prime residential enable metrics to and associated strategies in portfolios of these effective monitoring into addition, reviews 2016. In September lending specific aspects of the secured the year for during presented were portfolio and challenge, including how debate Nationwide manages intermediary business and collections to and the Society’s approach satisfied that was The Committee recoveries. being managed are the lending portfolios a requested and specifically appropriately value lending and an of high loan to review highly improbable analysis of extreme, (‘tail risks’) therein. scenarios also discussed potential The Committee and the impacts of changes in the economy impact on our members whilst household are high and pressures debt levels remain growth. wage in real being experienced regulatory the recent also debated We and the let market the buy to changes to tax liabilities increased to Society’s response the risks associated as well as landlords, for new cease with Nationwide’s decision to that, with agreed lending. It was commercial risks the planned mitigation, all residual would be within risk appetite. Financial risk Internal the draft reviewed The Committee (ICAAP) Assessment Process Capital Adequacy Audit alongside Risk Oversight and Internal been no significant have opinions. There changes in Nationwide’s underlying risk the recommended Committee and the profile approval. for the Board to results the Internal reviewed The Committee Liquidity Assessment Process Adequacy (ILAAP) with the liquidity and in conjunction due consideration, After funding strategy. that the liquidity considered the Committee appropriate remained and funding strategy liquidity the and prudent, and recommended and ILAAP the Board and funding strategy to approval. for the and approved debated The Committee and business underlying economic the 2016 Concurrent to assumptions related including Risk exercise, Testing Stress opinions. We Audit Oversight and Internal satisfied ourselves that the assumptions not over-optimistic and provided were at a challenge and scrutiny of the results subsequent meeting.

continued

Report on the year Report its agenda to has balanced The Committee of risk management are areas standing ensure to whilst maintaining flexibility addressed during escalated are risks that key consider is Each review of the year. the course line second by an independent accompanied receives that the Committee ensure opinion to 2016/17, the During an unbiased report. relatively remained has Society’s risk profile steps proactive stable. The Society has taken they before manage risk exposures to of Bank of the latest The results materialise. demonstrate exercise testing England stress to Society is resilient that Nationwide Building time was and considerable stress, a severe assessing the lending and financial to devoted strong the Society remains ensure to portfolios has also The Committee and resilient. overseeing the Enterprise for responsibility (ERMF) andRisk Management Framework and strategic lending, financial, operational and their independence risk oversight teams and effectiveness, Committee whilst the Audit Oversight function. oversees the Compliance Committee by the covered Specific matters in the year included: ERMF risk endorsed the Board’s The Committee by the subsequent approval for appetite We at the start of the financial year. Board executive also discussed risk adjustments to of the including a full review remuneration and risk events. Society’s risk performance included a review updates governance Regular of duties between the first of the segregation that ensure to lines of defence and second independent and effective. The both remain in that safeguards concluded Committee effective controls compensating provided place of duties in segregation conflicts potential for goodand that management demonstrated of these issues. awareness of the ERMF’s effectiveness also was A review in its support the Committee to completed the UK Corporate to relating responsibilities risk for requirements Code Governance satisfied was management. The Committee and that Nationwide has an with the report of risk management and system adequate control. internal

Governance Governance independent are All members of the Committee and their attendance directors non executive of the the Report during the year is set out in Following governance. on corporate directors were verbal updates meeting, each Committee summarising Committee the Board, to provided we have where areas activities undertaken, decisions challenged management and key This is accompanied by the Committee. taken the Chief Risk Officer. from by reports Membership and skills membership is set out above The Committee’s the believing that it contains with the Board to necessary and depth of experience breadth management. effective challenge to provide Duties is to The principal purpose of the Committee in the Board to oversight and advice provide a for It allows matters. risk-related to relation provide to directors subset of non executive would be possible in on risk than focus more the regular meetings. In addition to Board management, we invite from attendees on a present experts to subject matter challenge of enable robust to variety of topics each meeting risks facing Nationwide. At key discusses, and challenges as the Committee risk and emerging the current appropriate, of the Society. exposures also oversees the Executive The Committee which is the management Risk Committee, ensuring a for responsible committee risk management approach co-ordinated updates regular all risks, and provides across the Committee where on areas the Board to decisions. has challenged management and key Effectiveness its effectiveness reviews The Committee as part of the annual Board annually, The 2017 was review effectiveness review. of online the form and took internally-led, and interviews with questionnaires, members and members of the Committee 2017 The management team. review remains that the Committee concluded for effective. a number of areas It highlighted more including the need for ongoing focus, other certain from reporting formal of its and a re-balancing committees, on more the focus increase agendas to items. strategic Board Risk Committee report Risk Committee Board Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information continued

Outlook will Over the next 12 months, the Committee and emerging the top on focus to continue the macroeconomic risks, monitor we deliver what is and ensure environment, other and by our regulators required will include of focus authorities. Other areas of with the execution risks associated specific into reviews Nationwide’s strategy, of risk, and the simplification of the areas its effectiveness. further improve ERMF to will also oversee the The Committee insightful forward- development of more looking management information. resilience security, Expectations of the safety, remain and ethics of financial institutions engages fully with high and the Committee continued oversee the management to of these within the Society’s strengthening that our ensure to business operations safeguarded. are interests customers’ Tim Tookey Risk Committee Chairman – Board Risk reporting all across is comprehensive Risk reporting and Risk Business (see the risk categories considers The Committee details). for Report in detail and makes risk appetite Board its for the Board to recommendations performance adoption. It then monitors and undertakes risk appetite against Board issues risk on material reviews appropriate within that the Society remains ensure to metrics risk appetite granular More appetite. when a trigger or limit has escalated are challenge enable robust to been breached the issue. to of management’s response longer considers In addition, the Committee delivering the Society’s strategy risks to term risks present issues that could and emerging risks and emerging These top in the future. and Risk within the Business presented are Report. the oversight also approved The Committee of (with the exception the year plans for oversight, which is overseen by compliance and discussed with the Committee) the Audit to available resources Chief Risk Officer the work. of the planned programme complete satisfied with the was The Committee which set out the overall reports quarterly of oversight work, the more results significant issues and any themes arising the reviews. from

continued

Conduct and compliance risk and compliance Conduct reviewed In November 2016, the Committee risk approved due consideration, and, after and service with product associated strategies sales, sales, after financial design and review, Specific points of crime and firm and culture. of vulnerable discussion included the definition the Firm review and the need to customers its refresh. policy following and Culture Nationwide’s considered The Committee that the Society concluding culture, its for fair outcomes ensure to continued members underpinned by a customer- the stressed The Committee culture. centric of Nationwide being clear on importance of in terms to tryingwhat it was aspire to and our people and members, stakeholders the Firm and redefining consider to agreed governance risk category separate to Culture in the conducted This work was culture. from of culture of a wider review context by the Board. undertaken updates regular also received The Committee on anti-money laundering sanctions capability and action being taken screening The underlying technology. improve to demonstrated this topic discussions around of risk this area that management takes management very seriously and that action any important issues. resolve to is taken risk Strategic reviewed In November 2016, the Committee within, Nationwide’s and inherent risks to, to in order as part of its refresh, strategy, deep-dives for of future suggest a programme These included, as an example, the Committee. that combined of a scenario the consideration inflationary due to rates rise in interest a steep growth. with stagnant wage pressures of the risks in the context It also considered and political and the economic EU referendum The Society took the Eurozone. in uncertainty liquidity and to enhance specific measures the financial stability of Nationwide protect and Nationwide continues ahead of the vote this risk and ensures monitor regularly to appropriate that management takes mitigating actions.

Board Risk Committee report Risk Committee Board Report of the directors on corporate governance The Committee also reviewed the results of results the also reviewed The Committee which aimed to test, stress the 2016 reverse tail risk that would need to relevant explore the point of business get to exist to had considered test stress This non-viability. risks might strategic in which material ways discussed the develop and the Committee with this liquidity risk associated potential submission it for approving prior to scenario (PRA). Authority the Prudential Regulation to the reviewed the Committee 2016, In June Society’s plan and specifically recovery of management actions discussed the scope Nationwide’s recovery and changes to the plan approving before trigger framework the PRA. to submission for the reviewed In addition, the Committee 2016 triennial funding valuation of the and the associated Fund Nationwide Pension the 2016 approved and de-risking strategy noting publication, for Pillar 3 disclosures the disclosures creating for that the process had been enhanced. risk Operational of area be a key to continues IT resilience 2016, and in June the Committee for focus reviewed Plan was Recovery the IT Disaster with the IT Disaster in detail in conjunction The Committee schedule. testing Recovery the 2016/17supported schedule and test had systems that all key sought assurance been included and tested. risk strategies, related Other IT and resilience including the risk of cyber attacks, are and Resilience by the IT Strategy monitored to on behalf of this Committee, Committee sufficiently receive these critical areas ensure detailed scrutiny and review. Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information continued

Usama Fayyad Usama Mark Hartley Prince Conrad S. Greene James Lisa Stanton External experts: External detail on the Committee’s Further at experts can be found external nationwide.co.uk Regular attendees Regular Officer Chief Executive Chief Financial Officer Officer Chief Compliance (incl. interim) Auditor Chief Internal Officer Chief Information Officer and Propositions Chief Products and Distribution Officer Chief Relationships Chief Risk Officer Officer Chief Transformation (optional attendee) Committee Chair of the Audit

IT strategy, architecture, delivery roadmap and architectural governance controls governance delivery and architectural roadmap architecture, IT strategy, of the IT risk profile and review risk categories IT-related strategy IT resilience IT service delivery performance and procedures controls of IT systems, framework investment portfolio. strategic

Report on the year the on Report Outlook. Governance Committee members Committee Chair) (Committee Lenson Mitchel 2016) Mai Fyfield May (appointed Board) (Chairman of the Roberts David Tim Tookey What does the Committee do? What does the Committee oversight of Nationwide’s: for is responsible The Committee • Former Committee members Committee Former N/A • • • • • governance Committee solutions. the year and held seven meetings, including a deep dive on technology throughout in place was The Committee

• • • My report to you is structured in three parts: three in structured is you to report My Dear fellow member, fellow Dear of are systems IT its of resilience the and safety online that recognises Nationwide safeguarding and business the of running day to day the to importance fundamental therefore have we year, past the Over customers. and members our of interests the and cyber risks key to resilience its building in Society the supporting on focused strategy. IT the overseeing

IT Strategy and Resilience Committee report Committee and Resilience IT Strategy Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information continued

Open Banking that Open Banking The Government’s aim is personalised financial will mean reliable, particular to tailored precisely advice, securely delivered individual circumstances recognises Committee The confidentially. and are that changes in society and technology all sectors. across digital trends accelerating Alongside this, within the financial services catalyst for is also a regulatory there sector in the next a reality become to Open Banking has considered 2 years. The Committee 1 to be of digital banking could what the future Nationwide’s as to and advised the Board and debate the strategic informing progress, that the Society remains ensure helping to best and able to the future for well placed serve its members. Over the next 12 months the Committee will Over the next 12 months the Committee on the ongoing level of IT focus to continue service including the changing cyber threat on the deliverylandscape. It will also focus IT initiatives whilst of the Society’s strategic technological emerging also considering the impact potentially that could trends ongoing delivery our members. of service to in which will be the way Of particular note we oversee the investment in our branch on how the network whilst concentrating with will interact changing use of technology member experience. the overall enhance it to Lenson Mitchel and Chairman – IT Strategy Committee Resilience Outlook continued

Report on the year Report that is balanced has an agenda The Committee issues that business and other between regular the year. of during the course escalated are has the year the Committee Throughout on business such as: reporting regular covered of the ITthe level of service performance on the IT service, cyber reporting andplatform; on the information updates IT risk scorecard; solution strategy; management architecture – performance portfolio and the transformation Alongside this the Committee and risk review. both the oversight opinions from also received Audit and Internal Society’s Compliance assist it in its challenge function. functions to by covered specific matters more Additionally, included: in the year the Committee IT service our IT service to reviews The Committee members basis. As our members on a regular in which they wish to changing the ways are use of example the increasing (for transact and mobile banking), payments contactless challenge management as to to it is our role and risk how the Society’s IT infrastructure can support the needs of framework ensuring a positive experience customers, their for platform a secure and providing transactions. and cyber security IT strategy as overseen by of the IT strategy, The refresh focus an increased has led to the Committee, of a cyber with the creation on cyber security, the set-up of a dedicated security strategy, (SOC), Centre and a Security Operations team of technology programme and a rolling with the pace keep investments designed to and sophistication of scope rate, increased and data. our systems to cyber threats digital and Next generation banking programme has overseen the deliveryThe Committee of digital banking elements of the next generation including the Society’s updated programme, functionality to App which offers greater experience. and an improved customers ambition Society’s stated Nationwide Building service leader in customer be market is to market has received and the Committee support deliveryinsight to of this ambition seen the Society be amongstwhich has already to access to offer our customers the first Pay. Android

Governance Governance independent are All members of the Committee and their attendance directors non executive of the in the Report during the year is set out Following governance. corporate on directors were verbal updates meeting, each Committee the Board. to provided Membership and skills membership is set out The Committee’s the year the Committee above. During to support the experts engaged five external digital to commitment Society’s continued innovation, the mobile channel, payments, data and security innovation. This engagement a Board support experts to of external IT to dedicated exclusively sub-committee innovation resilience, technology, strategy, is believed to and business transformation be one of the first of its kind in the financial in the UK. services sector Duties and oversees IT strategy The Committee risk and resilience controls governance cyber to relation including in strategies, and monitors reviews The Committee security. to recommendations the and makes progress It also oversees the Risk Committee. Board investment portfolio. strategic Effectiveness its effectiveness reviews The Committee as part of the annual Board annually, The 2017 was review effectiveness review. of online the form and took internally-led, and interviews with questionnaires, members and members of the Committee 2017 The management team. review remains that the Committee concluded effective, a number of areas and highlighted IT delineate including the need to of focus, and to business strategy, from strategy programmes of major that reviews ensure learnings. highlight key IT Strategy and Resilience Committee report Committee and Resilience IT Strategy Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information continued

Regular attendees Regular Officer Chief Executive Officer Chief People Officer and Society SecretaryChief Legal

Reviews the Board’s governance arrangements, and makes recommendations to the Board on governance matters. on governance the Board to recommendations and makes arrangements, governance the Board’s Reviews so that it is effective of members. in serving of the Board and composition the interests size the structure, Reviews in fulfilling their succeed and set up to selected that leaders are ensure to and on-boarding recruitment all director Reviews members. to responsibilities be effective in the future. leaders now and to help them continue to and development of directors the performance Reviews is a pipeline of talent ready that there ensure to and senior management roles director plans for talent and succession Reviews leadership responsibilities. on future take to arrangements. oversight of governance provides and framework governance Sets the Board Report on the year the on Report Organisational change diversityEquality, and inclusion.

Governance What does the Committee do? What does the Committee • governance Committee business. regular the year and held five meetings for throughout in place was The Committee Committee members Committee Chair) (Committee Roberts David 2016) Parry July (appointed Kevin Peacock Lynne Tim Tookey members Committee Former 2016) (member until July Perkin Roger • • • • • at nationwide.co.uk available and are at least annually by the Board and approved reviewed are of Reference Terms The Committee’s • • • My report to you is structured in four parts: four in structured is you to report My • Dear fellow member, fellow Dear ensuring in role a key play to continued has Committee Governance and Nomination The the that and practice best with line in remains governance corporate Nationwide’s Committee The ambitions. strategic its support to place in talent right the has Society ensuing the and Executive Chief as Garner Joe of on-boarding the overseen has and composition The strategy. refreshed the of support in changes organisational non two new of recruitment the by enhanced further been has Board the of diversity purpose. for fit remains Board the ensuring directors, executive

Nomination and Governance Committee report Committee Governance Nomination and Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information continued

enhancing the Board’s understanding enhancing the Board’s needs of the Society’s of the future membership base of forward-looking enhancing the suite changes in assess future to indicators and the broader member behaviour market and develop the monitor to continuing pipeline of management talent of the IT further developing the role Committee and Resilience Strategy and clarity further the content improving papers. of Board In addition, the Committee had oversight of In addition, the Committee Peacock by which Lynne the process as Senior Independent Perkin Roger succeeded 2016. in July Director induction and development Board a comprehensive undergo All new directors to which is designed induction programme, an early contribution make help new directors is The induction programme the Board. to the individual needs of the individual to tailored as identified during the selection director, as strategy, such matters and will cover process, products, controls, financial risk, culture, members and people. It also includes meetings various the Society and visits to across and office locations. branches a range addresses directors Board for Training regulatory or of Society specific and market included topics the year, During matters. shares capital deferred risk, core conduct perspectives on Nationwide. and external performance regular also have directors Board learning external to and access reviews ongoing development support their to resources and contribution. effectiveness Board under review its performance keeps The Board its effectiveness evaluates on an and formally review, an external annual basis. Following last Limited by Independent Audit facilitated an in 2017 has undertaken the Board year, with support effectivenessinternal review to Limited, by Independent Audit provided and comparability thematic continuity ensure overseen by the was of output. The process and Committee, Nomination and Governance and of online questionnaires, the form took and members of interviews with directors the management team. considered were of the review The results 2017 at its May and it meeting, by the Board remains that the Board concluded was effective. The output of the effectiveness the will be used as the basis for review 2017/18Board’s effectiveness plan, which priorities: will include the following • • • • • continued

The appointment of Kevin Parry as The appointment of Kevin in July Committee Chairman of the Audit requirements 2016, fulfilling succession He has a strong this important role. for and in the financial sector background audit of chairing significant experience both in and outside of retail committees financial services. Usha The appointment of Baroness bringing in January 2017, Prashar and valuable experience considerable the public government and insights into the overall and strengthening policy arena of the Board. composition who The appointment of Gunn Waersted 1 June with effect from will join the Board as a highly bringing her experience 2017, officer of both chief executive successful public and mutually owned businesses. The Committee keeps the composition of the of the the composition keeps The Committee that it provides ensure to under review Board the business, of effective areas oversight of all deal with emerging that it is equipped to the Board to challenges and that changes can be achieved without and its committees undue disruption. Policy and Succession Composition The Board and structure on the size, guidance provides including succession. of the Board, composition on our website: of the policy is available A copy nationwide.co.uk the skills review to continues The Committee that the ensure to required and experience the changing address to is well placed Board needs and challenges of the business. This future the about decisions helps inform and has guided our of the Board composition directorsselection of new non executive to this year. the Board recruitment Board non executive for process The recruitment and is overseen by the Committee directors collectively that the Board ensure is designed to of skills and possesses the right range of business oversee the full range expertise to objectivity activities and brings appropriate and independent judgement. Accordingly, and is rigorous process the recruitment involves the use of an independent search selection process. comprehensive firm, and a extensive subject to All appointments are checks. external has the Committee this process, Using changes Board over the following presided during the year: • • • by the JCA supported was The Committee the appointment of Kevin to in relation Group was Prashar Usha Parry and Gunn Waersted. Audeliss. firm, search by executive introduced

Report on the year Report work in respect of the Committee’s The focus of 2016/17 is set out below: composition Board has the right that the Board Making sure of skills, diversity and independence balance is an important part of ensuring its effectiveness. Governance Governance independent solely comprises The Committee during Their attendance directors. non executive of the directors the year is set out in the Report The Committee governance. on corporate the Board to a verbal update Chairman provided meeting. each Committee following Membership and skills the believes members have The Board necessary of skills and expertise range effective challenge to provide to required management. Duties ensuring for is responsible The Committee is appropriate composition that the Board needs and future the current to regard having planning of the business, including succession level positions. and executive both Board for Along with the Chairman of the Society it is that the Board ensuring for also responsible has the right mix of skills, diversity and oversight appropriate provide to independence of all aspects of the business. The Committee oversees the appointment of non executive assessing the for and is responsible directors and directors of non executive independence the they can commit ensuring that for The Committee necessary their role. time to overseeing governance for is also responsible In on behalf of the Board. arrangements carrying is out its duties the Committee of the Society, seek, at the expense authorised to as needed. advice professional appropriate Effectiveness annual Board overseeing the In addition to reviews the Committee effectiveness review, as part of the its own effectivenessannually, The 2017 review effectiveness review. Board of the form and took internally-led, was and interviews with online questionnaires, members and members of the Committee 2017 The management team. review remains that the Committee concluded effective. that the expansion It highlighted over the year to role of the Committee’s had been matters include governance the also underlined The review successful. as (and the Board the Committee need for the pipeline monitor to continue a whole) to of management talent. Nomination and Governance Committee report Committee Governance Nomination and Report of the directors on corporate governance Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information continued

were open to all employees. Other activity open to were of governance has included a review levels of consistent ensure to arrangements the business. across activity and reporting the power endorse and leverage to continue We by Sponsored of employee network groups. of employees groups senior leaders, these are or life similar characteristics who share use those similarities to and want experiences workplace cross-functional create to development, professional provide connections, opportunities and advance mentoring business initiatives. female increasing to committed have We the 33% by 2020 across to representation senior leadership population (Board, reports). leaders and their direct executive our focus that, due to report I am pleased to at the talent pipeline on strengthening achieved 29.3% level, we have executive therefore and we are representation female our towards progress making excellent 50% as of 4 April 2017, Specifically, target. are directors of Nationwide’s non executive sign the to proud we were In 2016, female. Charter. in Finance Women HM Treasury’s annually updated are All our gender targets published at: and are in September nationwide.co.uk/about/media-centre- and-specialist-areas/women-in-finance- charter also includes initiatives aimed strategy Our in other areas, representation at increasing have We including ethnicity and disability. of between 8% to set an ambitious target the across representation BAME 15% for senior leadership population and, with standing at 6%, representation current will be that further attention we recognise to In relation achieve this target. needed to develop greater working to we are disability, in this area, understanding and confidence the numbers of employees and encouragingly to disclose a disability confident who feel rise. to continues thank Committee to In closing, I would like throughout their commitment members for The Committee year. an active and productive in ensuring an important role play to continues that the Society and has an effective Board to well-placed and it remains Executive, in building sustainable support the Board the benefit of our members. for success Roberts David Chairman – Nomination and Committee Governance continued

61+ 3 6+yrs 3 Equality, diversity Equality, and inclusion with its The Society has made good progress this diversity and inclusion strategy equality, a This has been achieved through year. and raising on awareness focus continued bias education, including unconscious all people managers, new for training and the online training disability awareness managers. for development of an online toolkit 2017In addition, Diversity Week featured and opinion speakers keynote external events that of audience at a range formers Organisational change Organisational the Garner to of Joe the succession Following all employees Officer, of Chief Executive role engaged in ‘The to Big Conversation’ were of our strategy. the refresh help inform their with independent research, Together the helped shape decisions about feedback design. In particular, organisation future to create the insights identified the need speed, agility and greater for conditions of decision making empowerment in respect In turn, it is structures. flatter through that this will help deliver the anticipated our members want service and outcomes efficiency. greater and need and lead to of the in the re-structuring This has resulted Six new twelve Communities. Society into Committee members joined the Executive from of these being progressed with four the next level At within the organisation. filled 73.5% were new leadership roles of oversight provided The Committee internally. pleased with of these changes and we were talent and of good internal the availability we were candidates the quality of external the Society has As a result, attract. able to this period through transitioned successfully deliver of change and is well positioned to strategy. our refreshed 56-60 2 Non executive 8 Female 4 4-6yrs 3 51-55 4

Overseeing compliance with the Senior Overseeing compliance Managers Regime. of the Nationwide Governance Review Manual (NGM) and overseeing the Society’s of governance. system and making recommendations Reviewing and its of the Board on the composition committees. interests. of directors’ Overseeing the register directors’ non executive Reviewing time commitments. of the the implications Considering Skills Committee Innovation and Business, inquiry governance and the corporate Corporate on Paper Government’s Green Reform. Governance Tenure 0-3yrs 6 Board composition Board membership / Non executive Executive Executive 4 Gender Male 8 Age 45-50 3

Nomination and Governance Committee report Committee Governance Nomination and Report of the directors on corporate governance Talent, succession and succession Talent, leadership development our own growing to committed remain We in the as shown talent with good results the last During change activity. organisational senior vacancies12 months, over half of our review our to continue We filled internally. were plans and invest in a pipeline ofsuccession this year the support this. Specifically, talent to plans succession has considered Committee regime by the new regulatory covered roles for the impact of the organisational latterly and talent pipeline. changes on our future investing in the ongoing development are We on the which focuses of leadership capability, deliver our to mindset and skills required PRIDE values. and renewed strategy refreshed Governance that the ensure seeks to The Committee facilitates framework Society’s governance that due sound decision making. It also ensures stakeholders of key the interests is paid to regard employees, including members, customers, suppliers and communities. regulators, activities during the governance Key year included: • • • • • • Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information A deferred award with an initial value with an initial value award A deferred the value of the to of £481,723 linked shares capital deferred Society’s core instalments in three payable (CCDS) 2018. between April 2016 and March Cash payments totalling £589,029 payable totalling Cash payments 2017 instalments between July in four and 2018; and August • is no more This buy-out compensation or amounts than he would in terms generous previous from otherwisehave received employers, and the outstanding amounts employment his continued subject to remain also be subject to with Nationwide. They may or is dismissed for if he resigns repayment within two years of receipt. misconduct gross Joe Garner joined the Society as our Chief Joe on 5 April 2016 and details of his Executive disclosed in last package were remuneration Joe On joining Nationwide, year’s report. awards outstanding incentive Garner forfeited employers and the Committee previous from an for compensation provide to agreed as set out below: element of these awards, • New Chief Executive There will continue to be only one overall be only one overall to will continue There our opportunity for pay performance (the Directors’ directors executive based on or DPA) Award Performance the achievement of challenging Society, and individual objectives. team 2017/18 will be two elements to For there one in which all employees the DPA: participate directors including executive our for on the same basis; and a second most senior population (again, including and which is subject directors) executive The Society’s deferral. long-term to will be assessed by the same performance both elements for and targets measures of the plan. and maximum opportunities target Overall, will fall management remuneration for we have directors, executive For modestly. pay the 2017/18 performance reduced of 98% of salary a target opportunity to and a maximum of 152% of salary the for of of 78% and a target Chief Executive salary and a maximum of 112% of salary Previous directors. other executive for 160% and 120% of maximums were salary respectively. for also being deferred are Senior awards seven years. to longer – extended subject to remain awards Deferred be reduced risk and may adjustment for the years from ten up to for or reclaimed date. award We propose that our policy will operate that our policy operate will propose We as follows: • • • • on our vote members to invite to would like We as described further below. policy, proposed remuneration 2017 4 April ended year the For Report of the directors on of the Report Lynne Peacock Lynne

Our policy Our a undertook the Committee the year, During of the remuneration review comprehensive policy of the Society as a whole, with the aim our people pay we of ensuring that the way with and supports the interests is consistent moving we are of our members. As a result, all employees, including where an approach to assessed on the are directors, our executive In and targets. basis of the same measures tailored have addition, our most senior team targets. and personal performance team Our approach Our we where a place As a mutual, we start from with and reasonable fair, be clear, to want believe in pay We remuneration. to regards is that performance where performance, for That is member interests. to linked directly using drivers performance why we measure outstanding service us, like to key that are and thriving membership. with is commensurate pay to approach Our example, unlike our status as a mutual. For keep to we choose many of our competitors, the regulatory capped at pay our performance remuneration maximum of 100% of fixed (base salary, pension and other benefits) to approval than seeking members’ rather the cap, and we do not pay increase alongside salary. allowances additional fixed that we recognise to we have Of course, the financial services talent across for compete so we need market, and the broader sector too. and be competitive a balance strike to and base pay do that by looking for We for realities, but reflect market to benefits be lower than at most of to pay performance directors. executive for our competitors Dear fellow member, fellow Dear including report, Committee’s Remuneration the present to pleased I am important an is It 2017. 4 April to year the for pay directors’ your of details attract and to seeks Nationwide how you for below out I set and subject team. management your retain Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

Our performance pay plan incorporates plan incorporates pay performance Our sound risk encourage to features features These management practices. of part of our performance include deferral and the ability Remuneration of the pay the deferred or cancel reduce to Committee that the original element if it emerges misleading was assessment of performance declines substantially or if performance period. over the deferral The policy summarised in the table on the the 2017 pages will apply from AGM. following • Member voting on Member remuneration on member votes will be two separate There The first will be on this year. remuneration outlined above. as policy, our remuneration last approved policy was remuneration Our years ago at the 2014 by our members three we are and, in line with best practice, AGM an to Report submitting our Policy therefore intended It is not advisory again this year. vote be made directors to that any other payments other than as a result outside of this policy, change. of regulatory the annual advisory will be vote The second on Remuneration on our Annual Report vote during 2016/17outlining our approach and implement the new to how we propose policy during 2017/18. Committee, On behalf of the Remuneration that you endorse our Policy I recommend on Remuneration. and Annual Report Report Peacock Lynne Committee Chair of the Remuneration continued The performance of executive directors is directors of executive The performance of scorecard assessed against a balanced delivering on which focus measures reflect our members and for our benefits means This approach mutual interests. not encouraged are directors that executive in a single area on performance focus to at the expense of other priorities. seeks input Committee The Remuneration and Risk Committees our Audit from to payments incentive when determining is appropriately the level of reward ensure risk. for adjusted of base levels as a percentage The award salary plan pay under our performance below those of our main competitors. are This means that the maximum potential our executive levels for remuneration total median. below the market are directors • • • Our strong results have led to payments payments led to have results strong Our Details of under the DPA. being awarded been calculated have how these payments In achieving the set out in this report. are set, the which they were targets stretching have that our directors considers Committee for the Societyall and benefits real delivered our members. The impact on directors’ on directors’ The impact pay performance and we strengthened and we strengthened 2 . The number of active 1

Base salaries are reviewed annually and reviewed salaries are Base levels market account set taking into are of pay. and performance, for believe in pay We plan which pay a performance operate the for directors our executive rewards performance achievement of challenging key objectives based on the Society’s Plan.

Correction: The statement included in the original text above that “Underlying income and profit have increased” is incorrect and was included in error. As noted As noted was included in error. and is incorrect increased” have and profit above that “Underlying income included in the original text The statement Correction: lower in 2017wasto 4 April 2017 were than in 2016. In the year underlying income and profit both underlying income and Accounts in the Annual Report elsewhere and £3,333 million respectively. to 4 April 2016 they were £1,337 in the year million was £1,030 million whereas £3,285 million and underlying profit © GfK 2017, Financial Research Survey (FRS), 12 months ending 31 March 2017 vs 31 March 2016, proportion of extremely/very satisfied customers minus proportion Survey of extremely/very minus proportion 2017 satisfied (FRS), customers 2016, proportion 12 months ending 31 March Financial Research vs 31 March © GfK 2017, of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings, high street peer group defined as providers with main current providers with main current defined as peer group high street and savings, mortgage account, current of extremely/very/fairly summed across dissatisfied customers and Santander). (inc C&G), NatWest Lloyds Bank Halifax, HSBC, >6% (Barclays, share market account our capital position. Our cost income ratio ratio income cost our capital position. Our invest in new to and we continue is robust and technologies. products members is at a record high and we have high and we have members is at a record with over relationships main product grown and Underlying income million customers. 7.8 increased have profit Our pay policy and framework for senior for policy and framework pay Our is set at a level which enables roles executive our leadership and retain reward motivate, us to Our our members. deliver value for to team at a level our executives reward is to intention In summary:which is fair but not excessive. • • Remuneration policy for policy for Remuneration directors executive Policy Report Policy Our leadership team has delivered strong strong has delivered leadership team Our driven by our consistent this year, performance on putting the needs of our members focus one number ranked to be continue We first. satisfaction our high amongst customer for peer group street How the directors have have directors How the performed remuneration on directors the of Report Annual Report and Accounts 2017 Accounts and Report Annual 2 1

Strategic Report Governance Business and Risk Report Financial Statements Other Information Not applicable. Not applicable. Not applicable. Performance metrics Performance

continued Cash allowances are set as a are Cash allowances of base salarypercentage in terms pre-existing with accordance of employment. The maximum pension allowance is 40% of base salary. payable are no The defined benefit plans new joiners and longer open to an would only be used for an where director executive the Board to individual is promoted with an existing entitlement. The would that maximum accrual rate apply under existing defined benefit schemes is 1/60th of their pensionable salary each year for of service. Whilst there is no maximum value Whilst there benefits the benefits provided, to ensure to regularly reviewed are appropriate. they remain varyThe value of benefits may depending on service providers, conditions. and market cost be benefits may Additional necessary if considered provided an individual. secure/retain to Whilst there is no maximum, base Whilst there account into set taking salaries are in the similar roles data for market Other financial services sector. include the considered factors and individual’s skills, experience and the approach performance on salaries in the being taken wider organisation. Opportunity Executive directors receive receive directors Executive in lieu of a cash allowance pension. is a deferred M M Rennison member of the Group’s defined benefit plan. Benefits may include a car Benefits may shared to access allowance, drivers when required, and insurance healthcare benefits. Other be provided benefits may enable recruitment/retention to or relocation. Base salaryBase is normally on an annual basis. reviewed normally Any changes are 1 April. effective from Operation

Provides post-retirement post-retirement Provides in a for participants benefits efficientcost manner. Provides a market competitive competitive a market Provides package as part of fixed remuneration. Provides base salaryProvides that is and reflects competitive market of and complexity the size the role. Purpose

Pension Benefits Base salaryBase

Summary of remuneration policy for executive directors – Fixed pay – Fixed directors executive policySummary for of remuneration remuneration on directors the of Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

Detailed performance Detailed performance by approved are measures Committee the Remuneration the priorities of the reflect to iii) (note Society. be may Performance assessed against a broad of financial, strategic, range and individual team with performance measures, being assessed over one year. The weighting of will measures performance with annually, be reviewed the having the Committee adjust the weighting ability to recognise year to year to from particular financial and priorities. However, strategic not less than 60% of the element will senior team be based on Society measures. performance The Remuneration has discretion Committee adjustments to make to reflect to targets performance significant one-off items which occur during the period. performance Performance metrics Performance continued 152% of base salary for the Chief Executive 112% of base salary for directors. other executive

The targets set in the The targets be Society’s Plan need to a generate achieved to and award, ‘target’ to exceeded considerably the maximum generate award. Under the all-employee element, all employees, including our directors, the same percentage receive of salary award. maximum The overall opportunity varies by role (see below) but will not by the limit laid down exceed ii) (note standards. regulatory levels award Maximum DPA (i.e. under both elements are: by role combined) • • Opportunity

In the event that regulatory standards change, the Remuneration Committee has Committee change, the Remuneration standards In the event that regulatory policy even if a revised compliance, regulatory ensure any changes to make to discretion an advisory members for such changes would be included Any has not been put to vote. at the next AGM. in the policy report All-employee element normally paid are Awards the end of in cash following onthe financial year based in the achieved performance on the same Operates year. all employees. basis for element Senior team award pay performance total the end of theis paid after period and at performance for least 60% is deferred and seven between three years in line with regulatory requirements. A minimum of 50% of both At the end of the one year At period an award performance achievement reflect is made to metrics. against performance paid in cash is The award dates. six payment across than 40% of the Not more and deferred the upfront the value to elements is linked capital of the Society’s core and (CCDS) shares deferred a twelve monthsubject to period. retention Committee The Remuneration or cancel reduce may the DPA under payments if it believes that the plan not are outcomes of the overall representative of the Society. performance i) (note Operation Provision to ensure regulatory ensure to Provision compliance. Rewards achievement of Rewards and team Society, stretching a single for individual targets with payment financial year, over the longer-term. spread Purpose

(DPA), (DPA),

In determining out-turns under any performance pay plan, the Committee takes into account performance against targets and considers performance on a performance considers and against targets performance account into takes plan, the Committee pay out-turns under any performance In determining which also formalised process, is a This Risk Appetite. of our Group context of risk within the against defined measures basis, evaluating progress risk-adjusted in relation pay an employee’s performance reduce to has discretion the Committee In this manner, and Risk Committees. the Audit from includes input and feedback matters. risk-related to the circumstances In certain of the Society. performance by the overall supported remain whether prior year payments reviews regularly In addition, the Committee not include but are may circumstances Such payments. all or part of these or cancel reduce to provisions under malus and clawback has discretion Committee subject are management decisions. The period during which awards to attributed be directly which may or under-performance misstatement, material to limited years in some circumstances. ten up to to be extended may clawback to (base salary, remuneration fixed 100% of total cannot exceed under the DPA) pay (performance that the maximum level of variable pay require currently Regulations to 25% of the variable to up can be applied ratio, a discount for this For the purpose of calculating the value of variable pay and other benefits). pension payments at least five years. Details of how for deferred it is paid in instruments that are timescale (time value of money), provided of the payment account take element to pay at www.eba.europa.eu. can be found be calculated may factor the discount based on those measures sets targets Committee The the priorities of the Society. reflect year to each the Committee by selected are measures Performance risk appetite. the Society’s Plan and overall to in relation stretching appropriately at a level which it considers

Summary of remuneration policy for executive directors – Other directors executive policySummary for of remuneration Regulation comprises two comprises elements: (i) an all-employee element. (ii) an element in which the most senior team subject participate deferral to provisions. Our performance performance Our plan, the pay Directors’ Performance Award Summary of remuneration policy for executive directors – Variable pay – Variable directors executive policySummary for of remuneration ii. iii. Notes: i. remuneration on directors the of Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information £1,471k

50 Max 191

16% 44% 40% 821 580 £1,274k 35% 19% 46% Target

C S Rhodes £821k C S Rhodes 71% 29% Fixed

Performance pay Performance Pension and benefits Pension Salary £1,683k 152

625 206 983

Max 21% 37% 42% £1,471k

33% 24% 43% Target £983k M M Rennison M M Rennison 64% 36% Fixed In particular, individuals may hold outstanding individuals may In particular, operated our previously under awards plans, including the Directors’ pay performance the Directors’ Plan (DPPP), Pay Performance and the Medium (DPA) Award Performance Plan (MTPPP). Pay Performance Term operated under previously awards Outstanding be to plans will continue pay performance and other performance paid out, subject to in line with their relevant, where conditions schedules. original payment Remuneration Committee Committee Remuneration discretion reserves the Committee The Remuneration any or defer zero) (including to reduce right to reduce to and has discretion made payments account into take to made of payments the size risk or other factors.

continued

87 191 £1,508k 580 858

Max 39% 18% 43% £1,311k

21% 35% 44% T P Prestedge Target £858k T P Prestedge 68% 32% Fixed

181

342 855 £2,678k 1,378 Max

32% 19% 49%

J D Garner £2,216k

38% 24% 38% Target £1,378k J D Garner 38% 62% Fixed Total remuneration opportunity for 2017/18 opportunity for remuneration Total remuneration) (£k and % of total Any contractual commitments or performance or performance commitments Any contractual with the in accordance into entered awards pay disclosure the current before policy, previous a or before force came into regulations will be honoured. person became a director which apply outstanding awards are There which under arrangements made directors to policy looking not part of the forward are will be Payments the AGM. effective from the made under these legacy plans following awards), (in satisfaction of these historic AGM part of this policy. they form and therefore Prior contractual Prior contractual and awards commitments plans under legacy incentive

– assuming we deliver target levels – assuming we deliver target

– this shows the remuneration Fixed (base salary, elements of pay fixed pensions and benefits). Target set against the measures of performance plan. pay out in our performance pay Maximum – assuming performance out in full. This would pay arrangements has performance only occur where of the all across been truly exceptional set. measures Total fixed remuneration fixed Total Benefits (2016/17 actual) Pension Breakdown of fixed remuneration for 2017/18 (£’000) remuneration of fixed Breakdown Salary

What our executive directors could earn in 2017/18 earn could based on performance directors What our executive The remuneration policy for our executive our executive policy for The remuneration in line with the is designed directors philosophy and principles that remuneration the wider Society. for underpin remuneration are whilst there Within this framework, opportunity across in reward differences incentivised seniority levels, individuals are goals and business consistent towards element objectives. Indeed, the all-employee with the same operates of the DPA same and opportunity measures performance of salary) all levels (as a percentage for directors. employees, including executive Remuneration arrangements arrangements Remuneration the Society throughout remuneration on directors the of Report Annual Report and Accounts 2017 Accounts and Report Annual The chart below illustrates the amounts The chart below illustrates would be paid under directors that executive scenarios: performance different three • • •

Strategic Report Governance Business and Risk Report Financial Statements Other Information 20 April 2009 20 April 2009 C S Rhodes Any outstanding deferred payments under payments Any outstanding deferred would be paid on the normal the DPA continued subject to dates, payment adjustment requirements. performance for would normally be pro-rated Awards time served year over the initial three period although the Committee deferral deferred of the the proportion increase may leaver by a retained are that payments based on the facts and circumstances of the departure. • Depending on the individual circumstances, discretion retains Committee the Remuneration to continue to allow a departing director to in other outstanding cycles of any participate the application waive plans, to pay performance under the Pension Factor of the Early Retirement any other compensatory make Scheme, or to that might be deemed appropriate. award in other circumstances Individuals who leave only contractual would receive (e.g. resignation) entitled and which they are to payments in respect any payment would not receive plans, unless the pay performance of Remuneration there determines Committee discretion. is a due case for Mitigation policy is that Committee’s The Remuneration should be made in in lieu of notice payments mitigation monthly instalments and subject to although enforceable), contractually (where this if waive to has discretion the Committee in individual appropriate this is considered executive All of the current circumstances. mitigation. This allow for contracts director Nationwide, should leaving means that after any they start employment elsewhere, due in lieu of notice outstanding payments Nationwide will lapse and not be paid. from compensate the individual through our existing through the individual compensate plan an individual tailored plan, performance with regulatory In line would be put in place. continue may awards buy-out requirements, malus and clawback subject to be to of the individual’s at the discretion provisions employer. previous offer any would be to Although our intention benefits in line with the policy new director set out in the policy table, if individual this, the Remuneration required circumstances offering a new would consider Committee might be such additional benefits as recruit their services. secure to required continued 1 February 2007 1 February 2007 M M Rennison 28 August 2007 28 August 28 August 2007 28 August T P Prestedge Eligibility for deferred payments is normally payments deferred Eligibility for during employment continued subject to years of the plan four cycle, the first period. including the initial performance in good leaver an individual leaves Where the end of the following circumstances normallywill year they performance relevant for award 25% of the deferred receive each full year served under the plan, year. performance including the current the retains Committee The Remuneration of the adjust the proportion to discretion by a retained that are payments deferred based on the facts and circumstances leaver following Furthermore, of the departure. Committee the Remuneration departure, if payments or cancel still also reduce may not are it believes that the plan outcomes performance of the overall representative of the Society. plan and deferred awards Retained paid at the usual payment are payments although the Remuneration date to discretion will have Committee the leaving to any payments accelerate circumstances. in exceptional date the subject only to which are Awards in full period would be paid retention the plan, subject for on the normal dates adjustment performance continued to requirements. • • • • plans in operation pay of performance In respect to 2016/17, some financial years prior for these For or deferred. retained are awards would be offered: plans, the following • The Remuneration Committee may also also may Committee The Remuneration consider it is necessary whether offer any to of one-off on the recruitment arrangements buy-out to director a new executive and any other remuneration pay performance or previous current from arrangements the such offer, employers. In making any the that ensure will seek to Committee the to similar terms buy-out is on materially of their in terms being forfeited arrangements account into and take value and vesting dates, conditions which performance to the extent possible, Where the original awards. applied to the within any buy-out will be structured pay of our existing performance parameters to is not sufficient plan. If there scope 5 April 2016 5 April 2016 J D Garner

Where an individual leaves during the an individual leaves Where year in good leaver performance at the they may, circumstances a pro-rata receive discretion, Committee’s the period of time served, for the award portion of which will lapse and deferred not be paid.

Date first appointed to the Board first appointed Date Service contract effective from effective from Service contract Executive director Executive Executive directors’ terms and conditions of and conditions terms directors’ Executive detailed in their individual employment are period of which include a notice contracts the individual the Society to 12 months from the period of six months from and a notice period The notice the Society. individual to would be in line any new recruit to offered a includes Each contract with this approach. in lieu of payment a termination for provision a maximum of 12 months’ base up to notice salary of and benefits, with the exception C S Rhodes and J D Garner whose contracts to up in lieu of notice payment for provide a maximum of 12 months’ base salary only. an executive to The settlement offered will depend on the on termination director of their departure. circumstances provisions Leaver in good leaver If an individual leaves redundancy, (defined as circumstances ill health, death or by mutual retirement, redundancy/succession e.g. for consent, planning purposes), they would, subject to on an individual by the Committee approval in lieu a payment basis, normally be offered 12 months’ base salary, covering of notice benefits, pension accrual (or contractual basis for neutral on a cost cash alternative, subject the Society) and pension allowance, mitigation (as described below). to 2017/18: from of the DPA In respect • Service contracts and policy on payments to departing directors to and policy payments on Service contracts If a new executive director is recruited, the is recruited, director If a new executive will as far as Committee Remuneration their ongoing remuneration possible determine policypackage as set out in the table. director, executive On the appointment of a new would consider Committee the Remuneration necessary offerwhether it was a higher to level under our performance maximum award the desired secure to plan in order pay would remain increase Any such candidate. limit laid down by regulatory within the overall the for and would only be applicable standards appointment. period of twelve months following Recruitment policy Recruitment remuneration on directors the of Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information 2.1% 1.8% 1.8% 3.6% % increase Whilst there is no maximum Whilst there into set taking are level, fees at other practice account as the as well organisations the role for time commitment at Nationwide. Opportunity Consideration of member Consideration views a significant received we have AGMs recent At of our remuneration in favour vote majority also mindful of views are We reports. by individual members regarding expressed When taking specific aspects of the policy. the policy, decisions on remuneration conscious is always Committee Remuneration are executives ensure of the need to deliver value for to and rewarded motivated our members. 2016/17 £614,000 £840,000 £560,000 £568,000 continued The Chairman’s fee is normally reviewed is normally reviewed The Chairman’s fee by the Remuneration and approved basis. on an annual Committee normally are fees director Non executive by the executive and approved reviewed the Chairman on an and directors annual basis. paid a basic fee, are directors Non executive with an additional supplement paid for serving Committee. on or chairing a Board directors The Chairman and non executive pay part in any performance do not take plans or in any pension arrangements. considered if be provided Benefits may appropriate. typically effectiveAny changes are 1 April. from Operation 2017/18 £625,000 £855,000 £580,000 £580,000 aggregate increase of 2.2% applies across of 2.2% applies across increase aggregate which is in line with directors, the executive the wider employee for review the pay of 3.6% that the increase population. Note he is now recognise is to Mr Prestedge for role. undertaking a broader Our policy is to offer packages which are offer policy packages which are is to Our with the financial services market competitive individuals where and in which we operate members. delivering value to for rewarded are The individual elements of remuneration varyoffered For roles. between the different reflect to is tailored example, benefits provision roles. different for practice typical market with the shared of the policy was A copy Staff of Nationwide Group Union in advance no formal was there publication. However, also Those employees who are consultation. vote members of the Society to will be able and the Annual Report Report on the Policy on Remuneration. Provide a market competitive competitive a market Provide at the role level for fee Nationwide. Purpose

J D Garner became Chief Executive on 5 April 2016 J D Garner became Chief Executive

Chairman and non fees director executive Summary of remuneration policy for non executive directors non executive policySummary for of remuneration T P Prestedge Base salaryBase i) J D Garner (note M M Rennison C S Rhodes Note: i. Base salaryBase The table below sets out the base salary in were which directors executive levels for effect during the year and their revised An overall salaries as at 1 April 2017. Annual Report on Remuneration Annual Report The pay and conditions of the broader employee of the broader and conditions The pay when account into taken population are The remuneration. executive determining base salary reviews Committee Remuneration remuneration levels, other elements of fixed plans offered pay and details of performance and is always all employees each year, to policy for mindful of ensuring that the pay and culture with the is consistent senior roles values of the Society as a whole. Consideration of employment of employment Consideration in the elsewhere conditions Society

Remuneration policy for non executive directors directors non executive policy for Remuneration remuneration on directors the of Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information 27.1% 21.0% 23.5% 71.6% (9.7%) 61.9% Executive Executive directors achieved achieved (% of salary) 35.7% 30.2% 26.5% 92.4% 80.0% (12.4%) Performance pay Performance Chief Executive 1 Payments are made at the discretion of the made at the discretion are Payments reduce may who Committee Remuneration if it believes that the payments or cancel of the not representative are plan outcomes of the Society. performance overall back claw The Society also has the ability to years ten to up for awards pay performance some in awarded were they after circumstances. continued Outcome 1st in our high street 1st in our high street with peer group a 6.7% lead Main product Main product with relationships million customers 7.81 CIR of 60.2% + Performance relative relative Performance targets to Above target Above target Above target, Above target, approaching maximum Marginally above Marginally target Member measures Member measures (75% of award) satisfaction (25%)Customer (25%) relationships customer Growing Financial efficiency (25%) Individual performance (25% of award) objectives Individual performance contribution each individual’s reflecting the delivery of the towards Society’s Plan In reviewing performance under the DPA under the DPA performance In reviewing then assessed during 2016/17, the Committee against three the Society’s performance measures: equally weighted

Performance target target Performance – threshold range: maximum 1st – 1st with an 8% lead 7.33 million – 7.33 million 7.90 62.5% – 54.0%

Measure Customer satisfaction rating satisfaction rating Customer the for (based on average financial year) Growing customer customer Growing relationships Financial efficiency CIR) ratio, income (cost Total performance pay achieved based on Society performance based on Society performance pay achieved performance Total adjustment) Committee Remuneration (prior to the reflect of 60.2% did not appropriately that the CIR outcome concluded Committee The Remuneration particularly during financial efficiency, to of the Society principally with respect underlying performance apply a downward decided to the Committee As a result, in this area. performance on improving a time of focus 62.3%. 60.2% to from CIR performance adjustment which effectively reduced based on Society performance pay achieved performance Total adjustment) Committee Remuneration (after © GfK 2017, Financial Research Survey (FRS), 12 months ending 31 March 2017, proportion of extremely/very satisfied customers minus proportion of extremely/very/ of extremely/very minus proportion satisfied customers proportion Survey 2017, (FRS), 12 months ending 31 March Financial Research © GfK 2017, market account providers with main current defined as peer group high street and savings, mortgage account, current summed across fairly dissatisfied customers and Santander). (inc C&G), NatWest Lloyds Bank Halifax, HSBC, >6% (Barclays, share on measures of statutory profit and CET1 of statutory profit on measures achieved was and this gateway capital ratio, in 2016/17. Outcomes for DPA 2016/17 DPA for Outcomes any passed before must be A risk gateway under the plan, based is made payment The DPA was the only performance pay plan pay performance the only was The DPA participated directors in which executive in 2016/17. 2016/17 level for The maximum award was 160% of salary and the Chief Executive for 120% of salary directors. other executive for 2017/18, opportunity levels for For overall slightly been reduced have pay performance and 112%. 152% to individual element rewards The DPA and the attainment of performance financial metrics. and challenging strategic broad fall within the following The measures benefits on delivering focus and ensure areas our members: for Current variable Current – Directors’ remuneration (DPA) Award Performance remuneration on directors the of Report Annual Report and Accounts 2017 Accounts and Report Annual 1

Strategic Report Governance Business and Risk Report Financial Statements Other Information

n/a 41.7% 61.7% 74.9% 76.9% 40.7% 84.5% 80.8% as % of maximum available Medium term performance pay earned performance Medium term subject to a six month retention period and a six month retention subject to participants, in cash, in the so will be paid to December. following

continued -11.54% +9.37% 71.9% 74.4% 75.4% 75.8% 33.8% 83.3% 60.6% 60.6% Annual performance pay Annual performance Comments his overall reflecting performance, individual strong for Above target leadership of the Society. the reflecting performance, individual strong for Above target and innovation. strategy a refreshed around achievement of objectives his leadership reflecting performance, individual for Above target year. for the financial performance of the Society’s strong and the trading reflecting performance, individual for Above target of the division under his leadership. financial performance as % of maximum available Annual performance pay earned Annual performance -9.46% +8.85% Benefits date of award. 50% of the upfront portion portion 50% of the upfront of award. date to portion is linked and 60% of the deferred capital of the Society’s core the performance These elements are (CCDS). shares deferred £’000 £1,961 £2,251 £2,571 £1,539 £2,258 Salary -5.94% £3,413 (note iii) (note £3,413 £3,386 (note ii) £3,386 (note £3,397 (note iii) £3,397 (note -2.36% (note ii) -2.36% (note Total remuneration Total 35% / 40% 26.7% / 30% 23.3% / 30% 23.3% / 30% Performance pay achieved (% of salary) pay achieved / Performance maximum available

Change in incumbent from G J Beale to J D Garner. J D Garner. G J Beale to Change in incumbent from roles, and junior fewer senior and more a change in the year-on-year mix of employees with This reflects both years. individuals employed across in salaries for than a reduction salaries, rather their corresponding Joe Garner commenced his role as Chief Executive on 5 April 2016. In all previous financial years, Graham Beale was the Chief Executive. was the Chief Executive. Beale financial years, Graham on 5 April 2016. In all previous as Chief Executive his role Garner commenced Joe form part of ongoing do not awards These (£1,071k), notes. table and accompanying This includes the value of buy-out awards detailed in the single figure which are would be the figure If this amount is excluded, £2,315k. remuneration. previous under the directors’ as well as legacy payouts 2014/15 under the DPA and 2015/16 for includes awards remuneration total The Chief Executive’s period between plans. of the transition plan as a result medium-term

2010/11 2009/10 2011/12 2013/14 2012/13 2014/15 2015/16 2016/17 Chief Executive (note i) (note Chief Executive Average employee Average Financial year i) (note J D Garner T P Prestedge M M Rennison C S Rhodes Executive director Executive Notes: i. ii. Change in remuneration of Chief Executive of Change in remuneration only) pay performance (base salary, benefits (including pension) and annual The change in remuneration all other employees is as follows: for 2015/16 2016/17 the average from to to the Chief Executive for compared Notes: i. ii. iii.

Chief Executive remuneration for the past eight years the past eight for remuneration Chief Executive years. eight the previous for remuneration The table below shows details of the Chief Executive’s remuneration on directors the of Report Annual Report and Accounts 2017 Accounts and Report Annual For 2016/17, 40% of each individual’s award 2016/17, award 40% of each individual’s For 2017 60% vests in June and the remaining in five equal amounts payable is deferred, the and seven following between years three For the element based on individual performance, performance has been assessed as follows: has been assessed performance based on individual performance, the element For

Strategic Report Governance Business and Risk Report Financial Statements Other Information - 1,411 1,277 1,264 2,547 1,492 2,315 1,328 1,289 6,499 6,424 legacy package Total pay pay Total package excluding excluding Total pay Total excluding excluding buyout award award buyout - £875 1,810 3,413 1,632 1,633 1,492 1,328 7,495 1,289 8,488 3,386 legacy package Total pay pay Total package (note iv) (note including Total pay Total including £651 Retained earnings Retained buyout award buyout - - - - 355 369 399 866 1,071 1,071 1,989 (note v) (note The performance pay plan awards shown are shown are plan awards pay The performance than under each plan, rather award the total DPA For the amount that is paid upfront. 2016/17 for only 40% of the award is awards, in 2017 is deferred payable and the remainder seven years. up to for (note iii) (note £736 remuneration remuneration continued Buyout award award Buyout Legacy variable Legacy - £793 481 520 463 523 484 958 496 1,083 2,547 2,461 All employee remuneration (note ii) (note Variable Variable (note ii) (note Variable Variable Variable Variable remuneration remuneration remuneration - 177 917 911 184 357 199 187 185 203 336 Pension Pension Pension Pension allowance allowance 2015/16 2016/17 - Relative importance of importance Relative spend on pay (£ million) 83 87 90 60 50 214 181 152 447 470 other mandatory reporting regulations, as well regulations, other mandatory reporting Companies and Medium-Sized as the Large and Reports) (Accounts and Groups 2013, which the (Amendment) Regulations Society has voluntarily adopted. remuneration The table below shows the total the years ended for director each executive for 4 April 2017 and 4 April 2016. (note i) (note (note i) (note Benefits Benefits

Fixed Fixed remuneration -

557 614 536 602 893 560 840 568 2,588 Salary 2,582 Salary

Taxable benefits include private medical cover, car allowance and the use of a company vehicle and driver when required for business purposes. required company vehicle and driver when and the use of a car allowance cover, medical benefits include private Taxable set out earlier in this 2017 are Annual Report measures performance Details of this plan and associated under the DPA. of the awards consists remuneration Variable based on salary determined the 12-month period ending 31 amounts are March. for that DPA Note on Remuneration. 74% (CCDS), shares capital deferred core to the value of the Society’s linked award total value of a deferred two elements: i) the initial represents This buy-out figure be paid in four due to £589,029 which are totalling 2018; and ii) cash payments be paid in March due to 26% paid in the year with the remaining of which was 2017instalments between July 2018. and August would be single figure the total £2,315k. If this amount is excluded, value (£1,071k)This total part of ongoing remuneration. does not form of the buy-out awards of the plan which the nature 2014, years starting after for discontinued Although the plan was under the MTPPP. of awards consists variable remuneration Legacy in 2013. of the MTPPP initiated in 2016 in respect awards were year period means there over a three business performance measured Report on set out in the 2016 Annual loss of office are for April 2016. Details of his payments on 4 as Chief Executive the board down from G J Beale stepped 2016). and Accounts the Annual Report (within Remuneration (Audited) Executive Executive directors Single total figure of remuneration for each executive director (£’000) director for each executive remuneration of figure Single total 2016 Executive directors (Audited) Single total figure of remuneration for each executive director (£’000) director for each executive remuneration of figure Single total 2017 J D Garner J D Garner T P Prestedge T P Prestedge T P Prestedge T P Prestedge M M Rennison M M Rennison M M Rennison M M Rennison C S Rhodes C S Rhodes Total G J Beale (note vi) G J Beale (note Total

Notes: Notes: i. ii. iii. iv. v. vi. Executive directors’ directors’ Executive remuneration the tables in the following indicated, Where by been audited sections have LLP. PricewaterhouseCoopers included in compliance are These disclosures and 1986 Societies Act with the Building The chart opposite illustrates the amount illustrates The chart opposite all employees paid to spent on remuneration compared Society, of Nationwide Building earnings. with retained of total 39.2% represent costs Payroll expenses. Nationwide’s profit administrative Relative importance of importance Relative £757 the year was for tax after million, of £106 paid as distributions million was which £651 million is held as and the remaining earnings. retained remuneration on directors the of Report spend on pay Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information - in year Directors’ Directors’ contributions contributions - Transfer Transfer increase value of the

- (e) in year in year earned pensions Additional Additional continued 242

value

(c)-(d) transfer transfer Change in

(d) 1,341 value at Transfer Transfer 4 April 2016

(c) 1,583 value at Transfer Transfer 4 April 2017 increases that are required by legislation. required that are increases The increase in transfer values over the year in transfer The increase to used changes in the assumptions reflect individual values for pension transfer calculate normalpension fund members. The the Society’s pension age for retirement 65. 60 to from plans ranges No payments for loss of office were made loss of office were for No payments during the year. past directors to Payments past directors to made were No payments during the year. Payments for loss of office for Payments

58 (b) Accrued Accrued

pension at 4 April 2016

59 (a) Accrued Accrued pension at 4 April 2017

The transfer value basis is set by the Nationwide Pension Fund Trustee and is based on financial market conditions at the calculation date. The increase in transfer in transfer The increase at the calculation date. conditions and is based on financial market Trustee Fund value basis is set by the Nationwide Pension The transfer in executive directors) Fund including for all members of the value transfer the have increased changes (which these financial market value over the year reflects age. normal retirement is one year older and thus one year closer to director fact that the executive the addition to by legislation. required pension during the year other than inflationary accrued no additional deferred increases M M Rennison

M M Rennison M M Rennison (Audited) Table of the value of pension benefits for executive directors (£’000) directors for executive of the value of pension benefits Table Executive directors Other directorships and members of senior directors Executive non become to be invited management may of other companies, directors executive of the Society. the agreement subject to These appointments provide an opportunity to an opportunity to These appointments provide outside Nationwide experience gain broader Providing benefit the Society. and therefore a lead to to not likely that appointments are may directors executive of interest, conflict appointments and retain non executive accept 2014, 1 July With effect from received. the fees appointments that the number of external can directors and non executive executive under CRD IV. as required hold is limited 2. Explanations: pension entitlement at 4 April 2017 and 2016 respectively. (a) and (b) show deferred at 4 April 2017. pension in (a) calculated value of the deferred (c) is the transfer at 4 April 2016. pension in (b) calculated value of the deferred (d) is the transfer was built up. no additional pension for inflation, allowing means that, after figure A zero in pension built up during the year. (e) is the increase Notes: Notes: 1. M M Rennison has ceased ongoing has ceased M M Rennison participation of the Society’s benefit defined a deferred pension plans and has become accrued any director No executive member. during theadditional pension entitlement The change in accrued pensions shown year. of inflationaryin the table below is as a result Executive directors’ pensions directors’ Executive remuneration on directors the of Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information - 8 87 217 510 130 293 £’000 7 66 99 111 514 165 238 £’000 - 6 113 124 237 318 555 £’000 5 92 62 213 571 154

204 £’000 continued £5,000 Fees for Fees 2016/17 £15,000 £15,000 £10,000 £35,000 £35,000 £25,000 £40,000 £65,000 - £383,000 4 159 106 587 322 265 £’000 - 3 £5,000 114 171 Fees for Fees 2017/18 285 365 650 £15,000 £15,000 £10,000 £25,000 £40,000 £35,000 £35,000 £66,000 £389,000 £’000 - 2 131 718 391 327 196 £’000 - 1 412 247 165 875 463 £’000

The Senior Independent Director fee is inclusive of committee membership fees. Committee Chairmen fees will continue to be paid. to will continue Chairmen fees Committee membership fees. is inclusive of committee fee The Senior Independent Director Fixed remuneration includes base salary remuneration and car allowance. Fixed

Total remuneration remuneration Total Total variable Total Contractual severance Contractual Deferred cash bonus Deferred Variable Cash bonus (note i) (note Fixed IT Strategy and Resilience Committee member Committee and Resilience IT Strategy IT Strategy and Resilience Committee Chairman Committee and Resilience IT Strategy Nomination and Governance Committee member Committee Nomination and Governance Remuneration Committee member Committee Remuneration Fee Policy Policy Fee Remuneration of eight highest paid senior executive officers (excluding main Board directors) directors) Board main officers (excluding paid senior executive of eight highest Remuneration 2017 Remuneration Committee Chairman Committee Remuneration Member of the Audit Committee or Board Risk Committee Risk Committee or Board Committee Member of the Audit Chairman fee Basic Senior Independent Director (note i) (note Senior Independent Director Chairman of the Audit Committee or Board Risk Committee Risk Committee or Board Committee Chairman of the Audit Additional fees may be paid for other committee responsibilities during the year. responsibilities committee other be paid for may fees Additional Note: Note: i. Chairman and non executive directors Chairman and non executive been made 1.5% have Inflationary of around 2017. increases in March last reviewed policy was The fee Note: Note: i. to both the Chairman fee and the basic fee for non executive directors. There have been no increases no increases been have There directors. non executive for and the basic fee both the Chairman fee to policy. other elements of the fee to The pay details of the eight highest paid senior executive officers who are not main Board not main Board officers who are senior executive details of the eight highest paid The pay and transparency to of our ongoing commitment This is part set out below. are directors disclosure. on remuneration best practice meeting sector Remuneration of eight highest paid senior executive officers senior executive highest paid of eight Remuneration main Board – excluding remuneration on directors the of Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

- - 51 97 26 92 96 98 127 125 268 306 2016 1,018 continued £’000 Society & Group fees Group - - 74 16 43 95 99 130 105 138 252 383 2017 1,083 £’000 Society & Group fees Group

D L Roberts succeeded G M T Howe as Chairman on 23 July 2015. on 23 G M T Howe as Chairman July succeeded D L Roberts June 2015. on 2 joined the Board Tookey M Fyfield and T 2015. on 23 July the Board from M K Jary retired 2016. on 23K A H Parry May joined the Board on 21 2016. July as Senior Independent Director R K Perkin succeeded L M Peacock on 18 January 2017. joined the Board U K Prashar January after 1990. who joined the Board directors non executive to pension rights granting The Society stopped

G M T Howe (Chairman) (note i) G M T Howe (Chairman) (note i) (Chairman) (note D L Roberts R Clifton R Clifton (Audited) Single total figure of remuneration for each non executive director for each non executive remuneration of figure Single total M Fyfieldii) (note M K Jary iii) (note M A Lenson K A H Parry iv) (note v) (note (Senior Independent Director) L M Peacock v) (note (Senior Independent Director) R K Perkin ii) (note T Tookey Total vii) (note directors past non executive to payments Pension U K Prashar (note vi) (note U K Prashar Notes: Notes: i. ii. iii. iv. v. vi. vii. The total fees paid to each non executive director are shown below. are director each non executive paid to fees The total Single total figure of remuneration for non executive directors non executive for remuneration of figure Single total remuneration on directors the of Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information 13,341 69,518 (8.6%) 69,518 738,438 (91.4%) 738,438 Remuneration Policy Remuneration Committee is also supported by and receives and receives by is also supported Committee In no Committee. Audit the Board input from when their own case is any person present is discussed. remuneration to invited were directors All non executive meeting during the one Committee attend for strategy discuss the remuneration year to the Society. its duties, the Remuneration In performing of on the advice draws Committee the During consultants. independent external on advice received year the Committee and developments, best practice regulatory who LLP, Deloitte from trends remuneration following by the Committee appointed were process. a tender is a member of the Remuneration Deloitte and as such, voluntarily Group Consultants in of conduct under the code operates consulting remuneration executive to relation in the UK. As well as advising the Remuneration tax, also provided Deloitte Committee, audit and internal risk, financial advisory, the Society services the during to consulting is satisfied that the The Committee year. is objective and independent, received advice annually all other services and reviews this continues ensure to by Deloitte provided on charged are fees be the case. Deloitte’s to for a time and expenses basis. Their fees during the Committee to provided advice 2016/17 £252,275. were continued 10,211 40,987 (6.47%)40,987 592,100 (93.53%) 592,100 a comprehensive strategic review of our review strategic a comprehensive remuneration to approach for targets the performance agreeing taking under the DPA, be made to awards the Society’s Plan account into of the the outcome reviewing which were plan awards pay performance of the year paid in respect the PRA / FCA to ongoing work in relation and how they apply Codes Remuneration Nationwide as a mutual to executive for the approach agreeing base salary 2017/18. for director increases The Committee met eleven times during the met eleven times during The Committee remuneration This includes three year. outside meetings which were review strategy part of the usual of meetings scheduled as annual cycle. during the year of the Committee Activities included: • • • • • was the Committee the year During the Officer, by the Chief People supported and Human Resources Divisional Director, who the Chief Executive, appropriate where meetings to Committee attend to is invited and information further background provide in its duties. assist the Committee to context is supported Committee The Remuneration on risk related Risk Committee by the Board plan pay including performance matters design, the assessment of specific performance risk to and wider issues relating measures, The Remuneration and business protection. Report of the directors on remuneration of the directors Report

Votes against Votes withheld Votes Votes in favour Votes

Lynne Peacock Lynne Committee Chair of the Remuneration 201722 May A resolution to approve the 2015/16 ‘Report of the directors on remuneration’ was passed at the was on remuneration’ the 2015/16 of the directors approve ‘Report to A resolution In each AGM. at the 2014 by members last approved was Policy The Remuneration 2016 AGM. cast as follows: were case votes Voting at AGM Voting The Remuneration Committee is responsible is responsible Committee The Remuneration with the Board and agreeing determining for the and policy for strategy the remuneration of the Chairman, the executive remuneration other members of the and directors of the Society well as as Committee Executive fall to deemed are any other employees who of the PRA Remuneration / FCA within scope of the agreed and, within the terms Codes packages remuneration the specific policy, the This includes approving these roles. for the performance design of, and determining any discretionary performance for, targets the by the Society for plans operated pay Committee’s benefit of employees within the annual the total and approving remit, such plans. under payments also oversees the The Committee the Society, policy throughout remuneration focus on the risks posed by with a specific policies and practices. remuneration last were of reference terms The Committee’s The full in April 2017. and updated reviewed on the available are of reference terms Society’s website. The members of the Remuneration all independent non executive are Committee of the Society and include a directors Risk Committee. member of the Board members the Committee the year During (Chairman of the Peacock Lynne were: and Rita Clifton Roberts, David Committee), January 2017). (from Prashar Usha Remuneration Committee Remuneration remuneration on directors the of Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

Risk Report Risk Residential mortgages Residential Consumer banking Consumer Commercial lending Commercial Treasury assets Treasury Liquidity and funding risk Solvency risk Market risk Market Pension risk Pension Earnings risk

Introduction Principal risks risks and emerging Top risk Lending • • • • Financial risk • • • • • Operational risk Operational risk and compliance Conduct risk Strategic Managing risk

81 82 82 83 Business and Risk Report

108

129 131 132 133 Business and Business Annual Report and Accounts 2017 Accounts and Report Annual

80 Strategic Report Governance Business and Risk Report Financial Statements Other Information 31 £m 3,636 Head office functions Treasury including funding, liquidity and Treasury risk management market support functions Central • •

Credit risk Credit risk Operational £m 100 5,636 Commercial Business activities Operating segments Operating continued

Social housing lending lending finance Project lending estate real Commercial Nationwide Building Society • • •

Credit risk Credit Operational risk Operational Regulatory risk weighted assets as at 4 April 2017 risk weighted Regulatory £m 4,734 19,504 Retail

Prime residential lending Prime residential lending Specialist residential banking Consumer products Savings Investments

• • • • • Credit risk Credit Operational risk Operational

Note: No amounts are shown for market risk RWAs as the Group has elected to set these to zero, as permitted by the Capital Requirements Regulation (CRR) whereexposure the is below the threshold of 2% of own funds. Nationwide is organised into three business operating segments: Retail, Commercial and Head office functions. The Group is predominantly is predominantly and Head office functions. The Group Commercial segments: Retail, business operating three into Nationwide is organised both UK and overseas markets. from within the UK. Wholesale is accessed funding almost exclusively which trades operation focused a retail structure, of the Society basis, and given the dominant position within the Group managed on a Group are As the risks of the organisation and the Society. the activities of both the Group basis covering on a consolidated are and Risk Report in the Business the disclosures regulatory risk The measures. in its risk reflected activities are segments and how these The chart below shows Nationwide’s business operating and Nationwide’s RWAs details regarding Further carries as at 4 April 2017. risks each area the relative below indicate assets (RWAs) weighted included in the ‘Solvency risk’ section of this report. capital position are Keeping members’ money safe by being secure and dependable is fundamental to the the to fundamental is dependable and secure being by safe money members’ Keeping being of principle strategic the within encapsulated is This operates. Nationwide way Business This management. risk to approach a prudent on focuses Last which to Built it how and to exposed is it risks the business, Group’s the explains Report Risk and risks. those manages Introduction Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information Products and services should meet customer needs and and services should meet customer Products as represented. expectations and perform with members and customers built partnerships are Sustainable at the right time, and value for the right information by providing and services. money products in a detriment and/or dissatisfaction is addressed Customer timely and fair manner. personal data, does not exploit Nationwide safeguards or customer asymmetries and does not disadvantage customers vulnerability. advantage of customer segments or take abuse or financial market or facilitate Nationwide does not conduct competition. crime and does not distort many strategic too by targeting Nationwide does not overcommit priorities at any one time, ensuring the most effective and efficient business model a mutual to It is committed use of its resources. financial services, almost of retail on the provision that is focused in the UK. exclusively Nationwide primarily lends on prime residential mortgages and mortgages on prime residential Nationwide primarily lends such other portfolios, to the exposure control sets prudent limits to lending. let and unsecured as buy to maturity, being actively managed to are portfolios The commercial new business. Risk to lending is now closed as commercial extension on refinance, focuses management of these portfolios risks. and concentration support the liquidity strategy; only to risk is accepted credit Treasury necessaryactivities derivative proposition; member the support for to manage legacy positions. and to tightly managed, whilst allowing Nationwide Financial risks are and services. meet members’ needs when designing products to financial risks exist, sufficient residual amounts of capital Where their impact. mitigate held to or liquidity are a minimum level ensure business to its Nationwide operates and reputation, members, brand of serious disruption to levels achieve defined and serviceswith systems designed to and performance. of availability • • • • • • Attitude • • • • • • continued

non-compliance with regulation or legislation with regulation non-compliance being undermined, or integrity market customers. for created being an unfair outcome

The risk of significant loss or damage arising from The risk of significant loss or damage arising from business decisions that impact the long term an inability from of the membership, or interests developments. external adapt to to The risk that a borrower or counterparty fails or counterparty The risk that a borrower the principal repay to or the interest pay to instrument (such on a loan or other financial as a bond) on time. • • The risk of Nationwide having inadequate earnings, inadequate The risk of Nationwide having or future to meet current cash flow or capital and expectations. requirements or failed inadequate from The risk of loss resulting or from people and systems, processes, internal events. external inappropriate The risk that Nationwide exercises of its in the execution errors judgement or makes business activities, leading to: • Definition

Strategic Lending Financial Operational and Conduct compliance Risk category The frameworks for managing the above risks, including associated risk appetite, limits and supporting policies, are reviewed at least annually, at least annually, reviewed limits and supporting policies, are risk appetite, managing the above risks, including associated for The frameworks committees. governance by the relevant monitoring continuous subject to and are In addition to the above principal risks that are inherent in Nationwide’s business, the top and emerging risks that could affect delivery risks that could are and emerging of the strategy in Nationwide’s business, the top inherent the above principal risks that are In addition to are of risk. Steps that all business activities involve some degree element of risk management. It is accepted as an integral identified and monitored focuses cornerstone last’ strategic ‘built to Nationwide’s managed appropriately. activities are members by ensuring that these protect to taken therefore members. sustainable and dependable for secure, on being safe, throughout closely tracked report and are outlined in the ‘Managing risk’ section of this the process identified through risks are and emerging Top under close observation risk reporting. kept through These risks are structure. the governance the widespread risks. This is due to the EU is one of the top exit from the impact of the UK’s impending of the EU referendum, the result Following this, risk management activity over the past year In addition to it has caused, which spans all risk categories. uncertainty political and economic Nationwide’s top environments. of change in the digital and regulatory and managing the pace business resilience on strengthening has focused categories: risks fall within the following and emerging Top and emerging risks and emerging Top Whilst it is accepted that all business activities involve some degree of risk, Nationwide seeks to protect its members by appropriately managing the its members by appropriately protect of risk, Nationwide seeks to all business activities involve some degree that Whilst it is accepted set out below. managing them, are within the business, and the attitude to its activities. The principal types of risk inherent risks that arise from Principal risks Principal Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information continued

continued Definition and specialist lending separately Nationwide manages prime property; on residential secured Loans cards personal loans and credit overdrafts, account lending including current Unsecured lending estate real Initiative and commercial Finance loans made under the Private social landlords, registered to Loans derivatives and discretionary portfolios liquidity, Treasury

Portfolio mortgages Residential banking Consumer lending Commercial Treasury In addition, a small other lending portfolio is held of £17In addition, a small other lending portfolio million (2016: £20 consideration million) which primarily includes £8 million of deferred to lending is no significant exposure There transactions. support repurchase to an investment in Visa Inc and £5 to million of collateral relating risk on this portfolio. lending risk to Maximum exposure of Nationwide’s total (2016: 85.9% for 87.3%) which account customers, to loans and advances to exposure arises from risk largely Lending (2016: 91.4% 90.7%) for which account loans and mortgages, of total residential primarily to relates Within this, exposure lending risk exposure. the proportion in and possessions. The increase of arrears high quality assets with low occurrences and which comprise customers to advances to the £8 billion contributed first time buyers which has support for driven by Nationwide’s continued is primarily mortgages of residential growth in prime lending in the year. recognised financial assets For lending risk on all other financial assets. Nationwide is exposed to customers, to loans and advances In addition to impairment. For sheet carrying for the balance allowance value after lending risk represents to exposure sheet, the maximum on the balance be to were if the guarantees pay to is the maximum amount that Nationwide would have the maximum exposure off-balance sheet guarantees, facilities, the of the respective over the life irrevocable that are commitments related and other credit loan commitments called upon. For facilities. is the full amount of the committed maximum exposure £220 loans. risk has risen from lending residential mortgage £234 to the growth in billion to Nationwide’s maximum exposure billion, reflecting Lending risk Lending financial instrument (such the principal on a loan or other repay or to interest pay fails to or counterparty risk is the risk that a borrower Lending risk. risk and concentration extension risk also encompasses as a bond) on time. Lending with details of the level of together and advances, loans lending risk arising from to on Nationwide’s exposure information This section provides each of the for risk measures about the key information during the period. It also provides recognised held and impairment charges collateral loan portfolios. portfolios: each of the following Nationwide manages lending risk for Macroeconomic environment Macroeconomic the effects of impacts. Domestically, their potential for preparedness ensure to factors global and domestic macroeconomic Nationwide monitors low of the continued The impact areas. focus are referendum Scottish a second for election and the potential UK general the upcoming Brexit, economic risks to also discusses the potential Board The closely monitored. the business model are and the risks to environment rate interest financial crisis, geopolitical instability or a downturn in China or that would be posed by a Eurozone growth and stability financial markets within markets. emerging their initial since recovered have UK growth projections Reassuringly, uncertainty. political and economic has caused vote of the Brexit The result Nevertheless, a number of key their objectives or policies. to changes immediate made no have fall and the UK regulators post-referendum Nationwide to leave. a vote despite law UK into that these will transpose and it is expected in flight are Commission the European initiatives from this position and any monitor to initiatives, and will continue these from resulting the requirements and implement to respond to is well placed impacts. associated resilience and operational data protection security, Cyber Nationwide is very and non-financial sectors, within both financial being reported cyber security sophisticated compromises With increasingly on focus to a high priority and Nationwide will continue security remains Cyber of its cyberdefences. the risks posed by breaches alert to its defences of the developing threats, build its understanding to and employees, as well as continuing of its customers the awareness improving cyber attacks. to and its resilience against data defended Nationwide has successfully date, To systems. maintain and protect to by investing heavily Members’ data is safeguarded that they expect. the protection receive to so that members continue date up to are that developments ensure to and continues breaches, a Nationwide operates and effectively. volumes of data securely larger manage considerably to is pressure digital world, there In an increasingly services. and widely available highly reliable secure, it meets member expectations for ensure function to Resilience Operational dedicated environments of change in the digital and regulatory The pace that they can bring. the convenience and services due to digital products in the demand for increase has been a dramatic years there Over recent has increased. disruptors and the number of challenger banks and Fintech place This has seen an influx of innovative new offerings in the market the possible monitor to continues pricing. The Board and product markets Nationwide’s core to pose a challenge the changes may Collectively technologies. in its digital channels and new payment invest heavily to impact on Nationwide’s business model, and continues of and ring fencing amongst other things, Open Banking from, environment impact on the competitive and the resulting Changes in regulation changes, and to regulatory these complex to respond to Nationwide is well placed by the Board. be considered to UK banks, continue the major Nationwide’s ability review to will continue The Board needs. meet customers’ designed to and services a variety which are of products provide in an efficient respond and agile manner. to Top and emerging risks and emerging Top Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information ------1 1 2 2 2 2 2 5 4 4 6 6 6 % 13 % 14 87 79 78 86 100 100 exposure % of total % of total exposure % of total % of total lending risk lending risk 67 92 94 £m £m 126 756 746 1,774 3,627 8,797 3,706 2,702 3,898 9,764 3,706 10,612 5,043 14,203 13,017 33,113 27,895 13,406 192,322 220,217 174,398 200,912 183,708 234,025 exposure exposure exposure exposure Maximum Maximum lending risk lending risk ------75 75 39 26 115 115 £m £m 115 851 1,774 1,065 13,515 1,889 12,336 13,630 13,541 (note i) (note 15,430 12,589 (note i) (note Commitments Commitments

- 19 17 67 £m £m 126 756 746 value 3,591 value 8,797 3,588 2,587 3,898 9,764 13,138 10,612 5,043 3,680 27,780 13,017 31,224 12,555 171,119 178,807 187,371 162,062 206,587 Carrying 218,595 Carrying ------(1) £m £m (59) (25) Less: Less: Less: (102) (281) (443) (443) (144) (438) (438) (269) provisions provisions impairment impairment continued

- 17 67 20 £m £m 126 756 746 3,591 Gross Gross 8,797 Gross Gross 3,869 2,587 13,197 3,898 9,764 10,612 5,043 3,949 27,780 13,017 31,224 12,580 162,164 179,250 207,030 171,263 balances 187,809 219,033 balances continued

In addition to the amounts shown above, the Group has, as part of its retail operations, revocable commitments of £9,202 million (2016: £8,513 million) in respect of credit of £9,202 million (2016: of credit commitments £8,513 million) in respect revocable operations, has, as part of its retail the amounts shown above, the Group In addition to by the cancellable are commitments Such considerations. certain subject to lend in the future, to agreements represent facilities. These commitments and overdraft card the full level of exposure. down to be drawn to not expected are and given their nature requirements, notice subject to Group, securities (RMBS) under backed mortgage a maximum of £1.8 billion of residential up to subscribe to to a commitment had entered Nationwide date, sheet the balance At following the £1.2 billion RMBS wholly fulfilled by Nationwide purchasing was assets. This commitment mortgage & Bingley residential securitise Bradford to a programme to maturity (HTM) investment securities. been classified as held These have issue on 25 April 2017. lending hedged risk (included within the carrying micro hedged risk and the fair value adjustment for value of the commercial portfolio The fair value adjustment for by Nationwide’s with the underlying loans covered the relationship lending risk through exposed to indirectly adjustments. They are hedge accounting represent portfolio) hedging programmes. transactions. support repo to balances an investment in Visa Inc and collateral to relating consideration includes deferred The other lending portfolio

Maximum exposure to lending risk to Maximum exposure 2016 Maximum exposure to lending risk to Maximum exposure 2017 (Audited) (Audited) Loans and advances to banks to and advances Loans customers: to and advances Loans mortgages Residential banking Consumer Total Investment securities – AFS iii) lending (note Commercial Fair value adjustment for portfolio portfolio adjustment for value Fair iii) hedged risk (note iv) Other lending (note Cash Cash Investment securities – HTM (note ii) (note Investment securities – HTM Derivative financial instruments Investments in equity shares Loans and advances to banks to and advances Loans Investment securities – AFS Derivative financial instruments Fair value adjustment for portfolio portfolio value adjustment for Fair iii) hedged risk (note Investments in equity shares Loans and advances to customers: to and advances Loans mortgages Residential banking Consumer Commercial lending (note iii) lending (note Commercial Other lending (note iv) Other lending (note Total Notes: i. ii. iii. iv.

Lending risk Lending Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information - - (8) £m £m 797 885 Total 1,214 1,214 (418) (851) (140) Total 1,738 1,051 (248) (704)

------5 5 10 (5) (2) (3) £m £m Other Other lending lending - - 6 38 45 (1) 171 171 £m £m (70) 608 (26) (122) (283) (105) lending lending Commercial Commercial Commercial Commercial - - (1) 113 £m £m 110 (41) 225 (10) 260 260 233 (27) (44) (92) banking banking Consumer Consumer Consumer Consumer - - 1 (2) £m £m 412 412 391 401 499 358 (66) (37) (410) (333) Specialist Specialist mortgages mortgages continued

- - (6) (5) £m £m 343 372 396 366 323 366 (23) (14) (344) Prime (298) Prime mortgages mortgages continued

temporary cash flow problems; covenants; or of financial breaches maturity. at contractual repay an inability to Movements in impaired loan balances in impaired Movements 2016 Movements in impaired loan balances in impaired Movements 2017 (Audited) (Audited) during the year Classified as impaired Disposals At 5 April 2015 5 April At Amounts written offAmounts written At 5 April 2016 At impaired from Transferred unimpaired to and other movements Repayments Classified as impaired during Classified as impaired the year At 4 April 2017 4 April At Transferred from impaired impaired from Transferred unimpaired to Amounts written offAmounts written Disposals Repayments and other movements Repayments 2016 4 April At Forbearance arrears proactive through facing financial difficulty to find a solution supporting customers by working with them to Nationwide is committed lending. banking and commercial consumer mortgages, residential for This is the case management and forbearance. difficulties face in is facing or about to of a loan, when the customer terms the contractual made to are occurs when concessions Forbearance previous to the could be a modification which assistance, receives the customer is where concession A commitments. meeting their financial principally are concessions for Requests or at maturity. of debt, either mid-term or partial refinancing of a facility or a total and conditions terms attributable to: • • • approach a consistent ensure established to which was Association working group, in a British Bankers Nationwide participated the year, During Banking definitions based upon the European use forbearance to agreed The working group the industry. across of forbearance the reporting to agreed reflect the to reporting has been updated reporting. Nationwide’s consistent for reporting definitions as the basis financial Authority treated. in financial difficultiesare how customers has been no change to There approach. banking consumer mortgages, residential for forbearance subject to classify balances used to which are events and exit criteria The concession sections of this report. described in the relevant lending are and commercial Note: compared each month end, when relevant status at are based on the classification or out of the impaired into transferred and loans that have classified as impaired that were Loans month end. the previous to

Lending risk Lending Business and Risk Report Movements in impaired loans by lending risk segment loans by in impaired Movements financial the entire represents shown The balance impaired. the year of all loans classified as movements throughout The table below shows the than just the amount that is overdue. asset rather Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

- 1 1 % 18 20 80 100 2016 £m 348 859 2,338 32,191 28,646 162,164 129,973 - - 1 % 19 18 81 100 continued

2017 £m 317 784 2,071 33,259 30,087 171,263 138,004

Buy to let to Buy Self-certified Near prime Sub prime Sub

(Audited) Specialist: Residential mortgage lending mortgage Residential Prime Total residential mortgages residential Total Note: Self-certified, near prime and sub prime lending were discontinued in 2009. discontinued near prime and sub prime lending were Self-certified, Note: In part this has been driven by continued support for first time buyers and reflects a commitment given to the UK government to make available to make to the UK government commitment given a reflects and first time buyers support for by continued In part this has been driven borrowers its support for In the period Nationwide widened lending criteria. meeting our subject to this segment of the market £10 billion a year to Operating pension income. of a regular those in receipt for proposition in Retirement of a Borrowing with the introduction life stages of in the later its members and support the UK economy. to stand by intention Nationwide’s reflect commitments these within risk appetite value at higher loan to size the maximum loan restrict designed to criteria the application of credit its lending risk through Nationwide controls is closely performance Portfolio exposures. higher LTV that regulates framework scoring (LTV), affordability calculations and a credit robust limits. risk appetite against approved and monitored measured at 55%. by value, has remained weighted LTV, stable and the average the UK has remained distribution across Over the period the geographical to a to 36% contributed (2016: 28%). This has to this segment increase of new lending made time buyers has seen the proportion first for Support 71% 9.6% of new lending to above 80%, rising to LTV an LTV with of the portfolio (2016:rise in the average and growth in the proportion 69%) multiples of 4.5 or greater at income being written of new lending in the proportion an increase (2016: that led to 8.5%). It is also one of the factors 10.6% (2016:which during the year has risen to 7.0%). (2016: in May 14% a decision taken 22%) following this year to let segment has reduced the buy to of lending made to the proportion In contrast 75%. These 80% to from the maximum LTV and reduce 145% 125% to from (ICR) requirement ratio cover the minimum interest increase 2016 to affect which will materially the cash let borrowers buy to for available tax relief the income changes to forthcoming to in response taken were steps sustainable and affordableremains to let borrowing buy to ensure designed The lending policy changes are for some landlords. flow and affordability tax the lower impact of the forthcoming recognise to taxpayers basic rate for 125% ICR lending 2017 In May we reintroduced our borrowers. for changes on these borrowers. and environment rate conditions and low interest economic the favourable prime and specialist lending, reflecting low across levels remain Arrears months in arrears than three of loans more proportion at the point of lending. The assessment and affordability controls credit by robust supported UK lessfor the outlook of 0.91%. With the immediate average Lenders (CML) Council of Mortgage and significantly below the at 0.45% remained a very is for demand, the expectation rise in arrears less investor gradual and potentially costs facing increased let market and the buy to certain these low levels. from the to of enhancements a result as 1.6% (2016: impairment increased for to 2.0%) while provisions loans reduced of non-performing The proportion These losses within each portfolio. incurred the appropriately reflect to they continue ensure methodology and assumptions to provision a loss event to arise from for arrears period the extended reflect million of impairment charge, in an additional £45 which resulted enhancements, only loans. at the maturity of interest balances capital repay to with the ability of borrowers and the risks associated new business and Lending portfolios: mortgages The table below summarises the residential Summary advances branded mainly Nationwide are mortgages and specialist loans. Prime residential include both prime mortgages Nationwide’s residential under The Mortgage originated let mortgages network and intermediary of buy to the branch consists channels. Specialist lending made through (UK) plc (TMW)Works brand. £171 £162 billion to from grow exposure mortgage billion over the year. has seen the residential portfolio levels of new lending in the prime Strong Lending risk – Residential mortgages Residential risk – Lending Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information % 71 65 69 2016

% 71 72 62 2017 Average LTV of new business LTV Average Prime let) Specialist (buy to Group Note: The LTV of new business excludes further advances and product switchers. and product further advances of new business excludes The LTV Note: - 1 2 9 8 11 % % % 12 31 14 61 18 22 78 55 26 54 28 40 100 100 2016 2016 2016 continued

continued - 1 3 3 9 11 % % % 17 14 14 31 19 26 54 55 59 30 36 86 100 100 2017 2017 2017

Home movers Other First time buyers Remortgagers Buy to let new purchases to Buy Buy to let remortgagers to Buy

Total LTV distribution of new business LTV 85% to 90% to 85% 95% 90% to Over 95% Average LTV of loan stock LTV Average Specialist Group 85% 80% to Prime 60% 0% to 80% 75% to 60% to 75% 60% to Distribution of new business by borrower type (by value) type (by borrower by Distribution of new business Prime: Total prime Total Specialist: Total specialist Total Total new business Total The average LTV of buy to let new lending reduced by 3 percentage points. This is due in part to the introduction of a reduced maximum LTV of 75% in maximum LTV of a reduced the introduction points. This is due in part to by 3 percentage let new lending reduced of buy to LTV The average 80%). 2016 (previously May In October 2014, the Financial Policy Committee (FPC) introduced a 15% limit on the proportion of new lending that may be written at income at income be written of new lending that may a 15% limit on the proportion (FPC) introduced Committee the Financial Policy 2014, In October multiples of of new lending at income let. The proportion buy to excluding mortgages, residential multiples of 4.5 and above. This limit applies to to first time buyers as Nationwide of lending the higher proportion partly reflects The increase 10.6% (2016:4.5 or higher has averaged 7.0%). and multiples of 4.5 or higher is closely monitored of new lending at income The proportion of the market. support this segment to continues risk appetite. within remain to controlled and increasing of Nationwide taking a lead in the market during the year as a consequence reduced let investors buy to of lending to The proportion investors. some property affordability on for tax rises will have in anticipation of the effect forthcoming requirement ratio cover the minimum interest risk Lending to the industry average. compared by a low level of arrears as demonstrated a low risk profile have to lending continues mortgage Residential Note: All new business measures exclude existing customers who are only switching products and/or taking further advances. products only switching who are existing customers exclude All new business measures Note: The residential mortgages portfolio comprises many relatively small loans which are broadly homogenous, have low volatility of credit risk outcomes risk outcomes low volatility of credit homogenous, have broadly small loans which are many relatively comprises portfolio mortgages The residential segments. and geographic terms of the UK market diversified in and are concentration and lending risk LTV most to is considered approach This LTV. arrive at an average to by the individual loan balance level LTV by weighting the borrower is calculated LTV at risk. the exposure reflect appropriately

Lending risk – Residential mortgages mortgages Residential risk – Lending Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information - % 1.6 1.6 0.2 98.2 98.4 100.0 11 £m 55 50 90 66 192 192 319 269 520 459 339 Total 100% 1,028 1,988 2,628 2,694 13,708 31,647 24,652 24,652 32,295 63,960 171,263 168,250 168,569 168,569 7 11 11 12 10 10 £m 76 25 40 38 2% 48 124 124 140 140 199 357 357 324 324 352 239 395 833 2,401 2,401 2,764 2,764 2,640 Ireland Northern - - 3 3 8 8 17 12 14 15 £m 24 20 3% 707 102 105 681 972 233 Wales 5,210 1,208 5,105 1,296 5,097 - 1 7 2 2 15 16 £m 18 28 42 7% 40 36 171 157 173 173 2,915 1,285 2,619 1,649 2,366 11,180 11,007 10,991 Scotland - - - 1 1 2 3 6 41 £m 32 49 66 9% 102 195 195 West West South 3,141 3,141 1,207 2,198 3,426 3,426 5,630 15,707 15,704 15,902 England - - - - 1 1 2 6 21 £m 58 69 132 120 East 274 274 12% South 1,314 1,314 2,216 4,637 8,783 8,783 3,852 21,210 20,934 20,934 20,936 20,936 England 1 5 11 12 £m 35 53 40 69 86 107 105 100 15% 532 520 699 699 5,737 3,748 3,748 6,361 5,897 3,304 25,746 25,746 26,318 26,318 25,786 25,786 England Northern - 1 1 1 7 5 6 £m continued 42 94 98 153 105 237 237 18%

500 499 continued 5,612 9,737 2,483 2,483 4,905 6,888 Central Central England 29,862 29,868 29,868 30,368 - - - 1 1 5 4 8 17 £m 69 791 791 192 192 504 288 34% 5,169 5,169 3,084 3,084 8,659 8,659 11,822 57,515 57,515 London 58,311 58,311 57,520 57,520 Greater Greater 28,493 28,493

Up to 50% Up to 60% 50% to 60% to 70% 60% to 80% 70% to 80% to 90% 80% to Over 100% LTV (A) Over 100% LTV 90% to 100% 90% to Collateral value on A Collateral Negative equity on A Up to 50% Up to 50% to 60% 50% to 60% to 70% 60% to 70% to 80% 70% to 80% to 90% 80% to 90% to 100% 90% to Over 100% LTV (B) Over 100% LTV Collateral value on B Collateral Negative equity on B

Residential mortgage balances by LTV and region and region LTV by balances mortgage Residential 2017 (Audited) Performing loans Performing ratio: LTV collateralised Fully Not fully collateralised: Total performing loans performing Total loans Non-performing ratio: LTV collateralised Fully Not fully collateralised: Total non-performing loans non-performing Total Total residential mortgages residential Total Geographical concentrations Geographical to has increased than 80% LTV of new lending greater 95%. The proportion is customers new prime residential for The maximum LTV the first time buyer market. support to (2016: of the strategy 34% 25%) in part as a result concentration Geographical Lending risk – Residential mortgages mortgages Residential risk – Lending Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information % 1.9 0.1 0.3 2.0 97.7 98.0 100.0 81 18 65 99 127 £m 262 592 559 380 454 445 Total 3,179 1,884 1,086 100% 3,080 11,024 31,364 59,232 24,788 30,248 162,164 158,540 158,985 7 12 12 12 12 14 81 53 26 46 60 151 141 £m 2% 271 371 301 785 248 346 390 2,314 2,615 2,756 Ireland Northern - - 5 5 13 13 13 19 16 27 24 20 119 £m 3% 212 124 637 657 903 1,178 1,273 Wales 4,873 4,997 4,860 - 2 3 3 31 13 29 43 42 28 28 46 £m 7% 232 203 200 2,711 1,547 1,380 2,776 2,095 10,741 10,772 10,975 Scotland - 1 1 1 3 2 4 17 73 52 60 48 60 £m 9% 918 252 253 West West 5,051 2,733 South 2,359 3,460 14,581 14,585 14,838 England

1 1 1 1 1 7 2 - 74 76 42 66 127 £m 327 329 East 12% 894 2,211 7,855 South 4,262 4,363 19,651 19,981 19,652 England 7 3 73 22 73 25 80 68 98 £m 107 139 901 108 618 593 16% 3,135 3,402 5,052 6,282 5,866 24,718 25,336 24,638 England Northern - 1 7 3 3 8 14 74 131 114 161 £m continued 177 100 597 594 18%

2,210 4,971 5,454 8,795 continued 6,636 28,251 Central Central 28,243 28,848 England - - 1 1 7 7 6 - 29 85 110 £m 914 914 522 245 33% 1,559 4,062 8,465 53,512 12,350 53,519 26,991 54,433 Greater Greater London

Up to 50% Up to 50% to 60% 50% to 60% to 70% 60% to 80% to 90% 80% to 90% to 100% 90% to 70% to 80% 70% to Collateral value on A Collateral Over 100% LTV (A) Over 100% LTV Negative equity on A Up to 50% Up to 50% to 60% 50% to 60% to 70% 60% to 70% to 80% 70% to 80% to 90% 80% to 90% to 100% 90% to Over 100% LTV (B) Over 100% LTV Collateral value on B Collateral Negative equity on B

Residential mortgage balances by LTV and region and region LTV by balances mortgage Residential 2016 (Audited) Performing loans Performing ratio: LTV collateralised Fully Not fully collateralised: Total performing loans performing Total loans Non-performing ratio: LTV collateralised Fully Not fully collateralised: Total non-performing loans non-performing Total Total residential mortgages residential Total Geographical concentrations Geographical

Lending risk – Residential mortgages mortgages Residential risk – Lending Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual The value of partially collateralised non-performing loans has reduced to £66 million (2016: £66 million the growth to £99 million), primarily reflecting loans has reduced non-performing The value of partially collateralised in house prices. 9.6% (2016: the new lending to 8.5%) reflecting than 80% has increased greater with an LTV of loan balances the period the proportion During 5.8% London is LTV(2016: 3.0%). in Greater than 80% of lending greater comparison, the proportion first time buyers. In and support for

Strategic Report Governance Business and Risk Report Financial Statements Other Information - - % 1.1 0.1 1.6 0.2 0.2 98.4 100.0 1 26 £m 144 182 235 329 Total 1.6% 1,921 5.3% 2,694 0.08% 171,263 168,569 1 91 18 £m 110 118 173 663 3.2% 1,064 10.3% 0.33% 32,195 33,259 Specialist - 8 91 34 £m 117 156 1.2% 2.1% 1,258 1,630 Prime 0.02% 136,374 138,004 % 1.04 0.35 0.45 0.90 2016 continued

continued % 0.91 0.45 0.36 2017 0.89

Past due over 12 months Past only) interest Litigations (past term Possessions Past due 6 to 12 months due 6 to Past : Impaired 6 months due 3 to Past Past due up to 3 months due up to Past Neither past due nor impaired

all impaired loans all impaired or missed late due is received a payment including any loan where past due but not impaired, loans which are litigation. gone into only loans which have interest past term Total non-performing loans non-performing Total Total residential mortgages residential Total mortgages residential loans as a % of total Non-performing Residential mortgages by payment status by mortgages Residential 2017 Number of cases more than 3 months in arrears as % of total book as % of total in arrears than 3 months Number of cases more Prime Specialist CML industry average Group Impairment provisions (£m) Impairment provisions (Audited) Impairment provisions as a % of non-performing balances as a % of non-performing Impairment provisions Non-performing: Performing: Impairment provisions as a % of total residential mortgages residential as a % of total Impairment provisions

Lending risk – Residential mortgages mortgages Residential risk – Lending Business and Risk Report • • overdue. than just the payment rather loan balance the entire loan amount represents The non-performing with of concession, status as at the date their payment to according initially categorised are concessions holiday only or payment on interest Loans this category of the concession. to assessed against the terms subsequent revisions Provisions portfolio. mortgage segments of the residential and non-performing both the performing to held in relation are Impairment provisions to assigned are Individual impairment provisions based on objective evidence. date, sheet at the balance been incurred losses which have reflect losses arising reflects loans, the provision performing currently For all other accounts. is assigned to provision in possession and a collective accounts reporting date. at the not identifiable but are within the portfolio occurred impairment events that have from Favourable economic conditions and a continued low interest environment have resulted in the arrears performance of both the prime and performance in the arrears resulted have environment low interest and a continued conditions economic Favourable further than movements rather upward be gradual to likely more changes are any future a level where reaching portfolios specialist mortgage of 0.91%. (CML) industry rate Lenders’ of Mortgage average Council half of the approximately was of 0.45% rate arrears falls. The combined loans Impaired months than three greater defined as those are accounts status. Impaired identified primarily by arrears loans are and non-performing Impaired include: accounts possession. Non-performing subject to in and include accounts arrears • Arrears Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information - - % 1.5 0.1 0.2 0.2 2.0 98.0 100.0 - 24 £m 102 166 230 358 Total 3.2% 2.0% 3,179 2,401 0.06% 162,164 158,985

- % 91 18 77 115 £m 188 780 0.01 0.01 0.03 0.04 1,192 3.7% 6.5% 32,191 0.24% 30,999 Specialist - 2016 6 57 75 25 117 115 174 £m 170 1.3% 1.5% 1,621 1,987 Prime 0.02% 127,986 129,973 properties Number of

8 % 10 18 £m 0.01 0.01 2016 0.05 0.03 continued

continued 2017 11 47 58 89 £m 136 225 2017 properties Number of

Past due 6 to 12 months due 6 to Past due over 12 months Past only) interest Litigations (past term Impaired: 6 months due 3 to Past Possessions Neither past due nor impaired 3 months due up to Past

Prime (Audited) book in possession as % of total Number of properties Impairment losses for the year Impairment losses for Prime Specialist Total Residential mortgages by payment status by mortgages Residential 2016 Specialist (Audited) Group CML industry average Performing: Non-performing: loans non-performing Total Non-performing loans as a % of total residential mortgages residential loans as a % of total Non-performing Total residential mortgages residential Total Impairment provisions (£m) Impairment provisions Impairment provisions as a % of non-performing balances as a % of non-performing Impairment provisions Impairment provisions as a % of total residential mortgages residential as a % of total Impairment provisions

Possessions

Lending risk – Residential mortgages mortgages Residential risk – Lending Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual Repossession numbers have increased in the year following revisions to the repossession process. the repossession to revisions in the year following increased numbers have Repossession The proportion of non-performing loans has reduced to 1.6% (2016: 2.0%) as a consequence of the portfolio growth and continued low levels growth and continued of the portfolio 1.6% (2016: to 2.0%) as a consequence loans has reduced of non-performing The proportion of early arrears. million (2016: £144 been reviewed to methodology and assumptions have £102 has increased million). The provisioning balance The provision Specific in provisions. £45 million increase resulting in a losses within the portfolio, incurred reflect they appropriately ensure to and updated loans. date on up to emerge losses to only loans and the period for included maturing interest of focus areas

Strategic Report Governance Business and Risk Report Financial Statements Other Information

% % 11.7 14.5 total total 29.3 % of book 88.9 26.8 89.4 % of total total book £m £m Total Total 28,612 18,838 47,450 45,817 29,732 16,085

£m £m 16,178 27,084 43,262 41,641 13,604 28,037 after Due five years Due after after Due five years five more than more more than more 1 4 15 10 £m

£m £m Specialist 1,731 1,173 1,002 2,733 1,636 2,809 Due after after Due two years five years Due after after Due two years years two and before five years five and before - 1 2016 2 3 £m

Prime £m £m 216 475 254 729 444 660 one year Due after after Due one year one year two years Due after after Due two years two and before and before and before and before 1 3 5 9 £m

£m 174 £m 570 337 202 396 539 Specialist one year continued one year

Due withinDue Due within Due continued - 1 1 2017 2 £m Prime 58 98 64 £m £m 156 104 168 (still open) (still open) Term expired Term Term expired Term

Total Specialist Total Prime Prime Specialist Negative equity of non-performing residential mortgages residential equity of non-performing Negative Interest only mortgages only mortgages Interest 2016 Interest only mortgages only mortgages Interest 2017 Past due but not impaired Past Impaired Possessions Total Interest only loans that are ‘term expired (still open)’ are, to the extent that they are not otherwise in arrears, considered performing for six for performing otherwise not considered that they are in arrears, the extent to open)’ are, (still expired ‘term only loans that are Interest forborne. classified as if not in litigation, six months, the loans are, After of the facility. months, pending renegotiation loans equity on non-performing Negative The stable arrears position and growth in house prices have combined to reduce the value of non-performing loans in negative equity to £11 loans in negative equity to the value of non-performing reduce to combined have position and growth in house prices The stable arrears million (2016: £18 million). Forbearance mortgages: residential for reporting included within the forbearance events are concession The following only concession interest term Past is unable a customer Where mortgage. only expiry the capital at term of their interest repay unable to who are Nationwide works with customers Should another forborne. is considered is pursued, the account the facility within six months of maturity but no legal enforcement renegotiate to are provisions Additional occur within the six month period, this will also be classed as forbearance. extension event such as a term concession repay. being unable to risk of a customer the increased for account to held against these mortgages only concessions Interest not categorised and are concession the period of the for the loans do not accrue arrears is granted only concession a temporary interest Where held as if the arrears are amount is maintained. Provisions only repayment interest the revised provided impaired, unless already as impaired, payment. accumulating in line with any shortfall against the full contractual were Note: Note: is capped at the amount outstanding on an individual loan basis. Collateral

Lending risk – Residential mortgages mortgages Residential risk – Lending Business and Risk Report Interest only mortgages Interest balances historical are there basis. However, only on an interest mortgages prime residential for Nationwide does not offer any new advances (this option was agreed only basis was an interest to in terms a change or where only mortgages as interest originally advanced which were loan is the ensure to with customers engaging regularly managed closely, are only mortgages in 2012). Maturities on interest withdrawn repayment. for a strategy agree or to redeemed only basis. an interest on advanced are 85% let loans, of which approximately buy to comprises of the specialist portfolio The majority Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information 19 72 18 46 58 39 161 £m £m 131 627 571 245 295 1,151 Total Total 1,094 11 11 18 16 72 70 36 85 33 86 116 £m £m 141 341 332 Specialist Specialist 7 8 6 10 76 54 42 59 £m £m 541 129 810 154 501 762 Prime Prime continued

continued

agreements for customers to pay less than the contractual amount, but where arrears still accumulate arrears amount, but where less than the contractual pay to customers for agreements not in financial difficulty by eligible customers taken holidays payment maturity six months after up to outstanding for remains which the principal for only mortgages interest financial difficulty. to type that do not relate or repayment changes in loan term

Certain concessions previously reported as re-negotiated loans are not included in the agreed definition of forbearance. This includes: forbearance. definition of not included in the agreed loans are as re-negotiated reported previously concessions Certain • • • • including a two year conditions, and arrears payment if they meet certain loans exit forbearance whereby been introduced, have Exit criteria forborne that had ever been loans included all balances of re-negotiated reporting event. The previous period post the forbearance probation 2008. since

Balances subject to forbearance forbearance subject to Balances 2016 Balances subject to forbearance forbearance subject to Balances 2017 Past term interest only concessions only interest term Past concessions only interest term Past Interest only concessions Interest Interest only concessions Interest Capitalisation Capitalisation Term extensions (within term) extensions Term Term extensions (within term) extensions Term Permanent interest only conversions interest Permanent Permanent interest only conversions interest Permanent Total forbearance Total Total forbearance Total Impairment provision on forborne loans on forborne Impairment provision Impairment provision on forborne loans on forborne Impairment provision Alignment with the European Banking Authority financial reporting definitions, has resulted in two key changes to reporting for Nationwide as follows: for Nationwide as reporting to key changes in two resulted reporting definitions, has financial Authority Banking Alignment with the European 1. 2. Note: Note: event. under the latest reported are event has occurred than one concession more where Loans

Lending risk – Residential mortgages mortgages Residential risk – Lending Business and Risk Report Capitalisation to the ability are full monthly instalments, they have made at least six offered provided they and financial difficulty, from emerges When a customer repayments contractual provided as not impaired categorised and the loans are being repaired account in the This results capitalise standing arrears. for these customers. default of future probability the heightened these loans, reflecting held for are provisions maintained. Additional are (within term) extensions Term their reduce this will mortgage repayment On a capital term of their mortgage. the in financial difficulty to extend Customers may be allowed are Additional provisions the capital at maturity. repay to a longer period will benefit by having customers only interest monthly commitment; customers. for these default of future probability the heightened loans, reflecting these held for only conversions interest Permanent commitment. reducing their monthly conversion, normally only a permanent interest granted in financial difficulty In the past, some customers were for default of future probability the heightened these loans, reflecting held for are provisions 2012. Additional in March withdrawn This facility was these customers. forbearance. subject to mortgages details of residential The table below provides Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information

£m 1,151 Total 13,041 (1,403) (10,487) 6 % 45 49 £m 341 100 1,943 (307) (1,295) Specialist 2016 £m £m 247 810 1,721 1,901 Prime 3,869 11,098 (9,192) (1,096) 7 % 44 49 100 continued

continued 2017 £m 261 1,731 1,957 3,949

The changes in reporting definition have led to the removal of concessions that do not relate to financial difficulty, primarily £6,193 million of loans where there have been there million of loans where primarily £6,193 to financial difficulty, relate that do not concessions removal of to the led definition have The changes in reporting been include all loans that have The amounts removed by an eligible customer. been taken and £2,378 have holidays changes in loan term payment million of loans where 2008. since these concessions subject to

(Audited) Consumer banking balances Consumer Overdrawn current accounts current Overdrawn Reconciliation of balances at 4 April 2016 of balances Reconciliation Personal loans Personal Credit cards Credit banking consumer Total Re-negotiated loans as previously reported previously loans as Re-negotiated Changes in reporting definition (note i) definition (note Changes in reporting Exit criteria for forborne loans forborne for Exit criteria loans Forborne Lending risk – Consumer banking risk – Consumer Lending Summary personal loans accounts, current overdrawn specifically banking products, retail on unsecured balances comprises banking portfolio The consumer £3,949during the million by 2% to grown have portfolios these across balances total competition, intense continued Despite cards. and credit held by existing Nationwide members. This has been achieved by of products proportion period (2016:increasing million), with an £3,869 of digital services. enhancement and continued launch of a student account member needs, with the successful on meeting more maintaining focus continued low interest and risk management practices proactive benefiting from strong, has remained portfolios Asset quality on the unsecured by 12% to reduced off have stable, whilst charged balances remained off have charged accounts) (excluding balances Non-performing rates. Note: i. £76 by 10% to million (2016: million). also reduced million (2016: £84 levels have £174 £197 million) and forbearance The provision banking portfolio. segments of the consumer and non-performing held against both performing are Impairment provisions economic the favourable and rates low interest the impact of prolonged recognise to increased and provisions methodology has been updated, on coverage provision this has increased banking portfolios the consumer Across of arrears. dampening the emergence potentially environment by 5%. balances impaired

Lending risk – Residential mortgages mortgages Residential risk – Lending Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual Lending risk Lending loans Impaired no security is held based on delinquency status, since and reported is primarily monitored banking portfolios risk on the consumer Lending include all impaired accounts Non-performing months in arrears. than three defined as those greater are accounts against the loans. Impaired or missed. The non-performing late due is received a payment including any loan where past due but not impaired, loans and loans which are overdue. than just the payment loan rather the entire loan amount represents with risk appetite. adherence ensure to when appropriate action taken with corrective is closely monitored, of the portfolios The performance reflect provisions and banking portfolio segments of the consumer and non-performing both the performing held for are Impairment provisions reflects loans, the impairment provision performing For based on objective evidence. sheet date, at the balance been incurred losses which have reporting date. not been specifically identified at the but which have occurred events that have the assessment of losses arising from Balances previously reported as re-negotiated at 4 April 2016 were £13,041 million. Using the current definition of forbearance, this year’s report this year’s forbearance, definition of £13,041 the current million. Using at 4 April 2016 were re-negotiated as reported previously Balances summarised below: The changes are at that date. forborne that were includes £1,151 million of balances

Strategic Report Governance Business and Risk Report Financial Statements Other Information 4 4 % 92 100 17 16 78 26 £m 311 7% 174 4% 137 105 164 269 86% Total 3,949 3,638 - 2 12 91 28 42 42 98 £m 3% 8% 133 140 95% 1,731 1,591 cards Credit

11 14 10 73 62 38 48 60 £m 4% 6% 135 108 80% loans 1,957 1,822 Personal Personal 3 3 4 12 14 15 13 22 28 36 £m 9% 261 225 11% 78% current current accounts Overdrawn Overdrawn continued

continued

Neither past due nor impaired Past due up to 3 months due up to Past Impaired: 6 months due 3 to Past Past due 6 to 12 months due 6 to Past Past due over 12 months Past

(Audited) Consumer banking by payment due status banking by Consumer 2017 Performing: Non-performing: Charged off i) Charged (note lending banking consumer Total Total non-performing Total Non-performing loans as % of total loans as % of total Non-performing off charged balances) (excluding Impairment provisions excluding charged off charged excluding Impairment provisions balances Impairment provisions on charged off on charged balances Impairment provisions Total impairment provisions Total Impairment provisions as a % of non-performing as a % of non-performing Impairment provisions offloans (including charged balances) Impairment provisions as % of total balances as % of total Impairment provisions

Lending risk – Consumer banking Consumer risk – Lending Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information 5 4 % 91 100 17 97 26 78 20 85 96 £m £m 7% 197 4% 281 148 184 345 81% Total Total 3,524 3,869 - 3 11 41 27 97 38 44 38 £m 2% £m 135 145 8% 104 93% 1,721 1,576 cards cards Credit Credit

11 11 16 75 79 42 38 28 46 80 121 £m £m 4% 6% 159 76% 1,742 1,901 loans loans Personal Personal Personal Personal 3 4 4 12 13 14 14 41 16 12 27 25 £m £m 247 11% 206 61% 10% current current current current accounts accounts Overdrawn Overdrawn Overdrawn Overdrawn continued

continued

Neither past due nor impaired Past due up to 3 months due up to Past Impaired: 6 months due 3 to Past Past due 6 to 12 months due 6 to Past Past due over 12 months Past

Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending period (up to an extended sheet for held on the balance and are transactions future to closed which are accounts to off relate Charged balances place. take procedures whilst recovery on the product) (Audited) Impairment losses for the year Impairment losses for Consumer banking by payment due status banking by Consumer 2016 Year to 4 April 2017 to Year (Audited) Year to 4 April 2016 to Year Performing: Non-performing: Charged off i) Charged (note Total non-performing Total Total consumer banking lending consumer Total loans as % of total Non-performing off charged balances) (excluding Impairment provisions excluding charged off charged excluding Impairment provisions balances Impairment provisions on charged off on charged balances Impairment provisions Total impairment provisions Total as a % of non-performing Impairment provisions offloans (including charged balances) Impairment provisions as % of total balances as % of total Impairment provisions Strong asset quality in the unsecured portfolio has been maintained, with total non-performing balances (excluding charged off charged accounts) (excluding balances non-performing has been maintained, with total portfolio asset quality in the unsecured Strong by 7%reducing £137 to million (2016: million). £148 Note: i.

Lending risk – Consumer banking Consumer risk – Lending Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual Impairment losses have reduced by £18 million. The charge for the year includes £7 for by £18 million. The charge million (2016: reduced Impairment losses have £29 assumption to in relation million) environment. rate low interest in the prolonged appropriate remain book date in the up to that the provisions ensure made to updates

Strategic Report Governance Business and Risk Report Financial Statements Other Information

7 5 22 19 76 55 52 84 46 43 £m £m Total Total 7 3 2 5 21 31 19 16 18 25 £m £m cards cards Credit Credit

- - - - 25 24 30 30 29 29 £m £m loans loans Personal Personal Personal Personal - - 2 4 5 3 19 17 23 22 £m £m current current current current accounts accounts Overdrawn Overdrawn Overdrawn Overdrawn continued

continued

Personal loans with a repayment plan are only reported as forbearance where interest is suppressed. Previously all repayment plans were plans were all repayment Previously is suppressed. interest where as forbearance only reported plan are loans with a repayment Personal balances. as renegotiated reported not included in the in full, are on a plan had been repaid balance the overdrawn where as a repair, considered previously accounts Current forbearance. definition of current

Certain concessions previously reported as re-negotiated balances are not included in the agreed definition of forbearance: definition of not included in the agreed are balances as re-negotiated reported previously concessions Certain • • including a two year conditions, and arrears payment if they meet certain loans exit forbearance whereby been introduced, have Exit criteria that had ever been forborne loans included all balances of re-negotiated reporting event. The previous period post the forbearance probation 2010. since Balances subject to forbearance subject to Balances 2016 Balances subject to forbearance forbearance subject to Balances 2017 Payment concession Payment Interest suppressed payment concession payment suppressed Interest concession Payment Balances re-aged/re-written Balances concessions payment suppressed Interest Total forbearance Total re-aged/re-written Balances Total forbearance Total loans on forborne Impairment provision Impairment provision on forborne loans on forborne Impairment provision

Note: Note: event. under the latest reported are exposures event has occurred, than one concession more Where

Lending risk – Consumer banking Consumer risk – Lending Business and Risk Report For credit cards subject to such a concession, arrears do not increase provided the payments are made. are the payments provided do not increase arrears such a concession, subject to cards credit For arrangement payment suppressed Interest card credit with an overdraft, customers to be offered and may monthly payments in reduced results concession payment This temporary interest increase. do not and arrears of the concession during the period suppressed are and fees payments or personal loan. Interest re-aged/re-written Balances financial difficulty repair their from we will emerge and begin to of their arrangement their debt in line with the terms repay As customers to over a longer term, their account personal loans we will re-write position. For and performing an up-to-date bringing them into accounts, at which point the ‘up-to-date’, status to and set the payment the account we re-age cards credit For monthly payment. maintain a reduced account. as any other performing in the same way is treated customer these for likelihood any heightened capture that they appropriately ensure to calculated are accounts on forborne Impairment provisions default. to accounts forbearance. to subject are which banking exposures details of the consumer The table below provides Forbearance Forbearance banking: consumer for reporting forbearance included within the events are concession The following concession Payment card. or credit overdraft with an customers to be offered period and may an agreed over monthly payments of reduced consists This concession Annual Report and Accounts 2017 Accounts and Report Annual Alignment with the European Banking Authority financial reporting definitions has resulted in two key changes: in two resulted reporting definitions has financial Authority Banking Alignment with the European 1. 2.

Strategic Report Governance Business and Risk Report Financial Statements Other Information % 10 25 65 84 £m 214 100 (22) Total (108) - 2016 31 42 £m £m (11) 1,197 cards 7,625 1,366 11,831 Credit 13,197 3,009

% (1) 10 67 30 23 £m 138 100 loans (107) Personal Personal 2017 (1) 23 34 £m £m (10) 1,370 7,546 1,096 2,568 11,210 current current 12,580 accounts Overdrawn Overdrawn continued

continued

Loans to registered social landlords are secured on residential property. on residential secured are social landlords registered to Loans contracts. from government or local authority backed on cash flows secured are finance project to in relation advanced Loans loans hedged on an individual basis. to hedged risk relates Micro The amounts removed include all balances that have been subject to these concessions since 2010. since these concessions been subject to that have include all balances The amounts removed Commercial lending balances Commercial (Audited) Reconciliation of balances at 4 April 2016 of balances Reconciliation Commercial real estate (CRE) estate real Commercial Re-negotiated balances as previously reported as previously balances Re-negotiated i) (note social landlords Registered Exit criteria for forborne balances forborne for Exit criteria ii) (note finance Project Changes in reporting definition (note i) definition (note Changes in reporting Fair value adjustment for micro hedged risk (note iii) hedged risk (note micro adjustment for value Fair Total commercial lending commercial Total Forborne balances Forborne Total ii. iii. purpose of core that it is no longer a good fit with the concluded lending business, it was of the commercial review a strategic Following terms. maturity in line with contractual hold and actively manage to to is lending portfolio the commercial for Nationwide. The strategy to now amount portfolios finance 77% and project reflecting the social landlord lending portfolio, commercial (2016: 75%) of the The registered and redemptions. with scheduled repayments managed exit of CRE, together regions. and geographic sectors across well spread remains in CRE lending, the exposure Notwithstanding the reduction term, lower risk nature. reflecting their long remain stable, and fully performing assets are finance and project social landlord The registered risk Lending Nationwide adopts any loan balances. cover to delinquency of collateral and the availability to is linked loan portfolio risk in the commercial Lending the portfolio. arise, from to and manage the risks arising, or likely recognise designed to management policies and processes credit robust and real loans reduces the volume of non-performing of loans contracts, as the portfolio reduce to continues The lending risk in the CRE portfolio be favourable. to continue conditions market estate viability independent drivers being financial strength, the major models with rating using internal is risk rated portfolio social landlord The registered The distribution of social landlord. of the registered the type and Agency and size and Communities by the Homes provided assessment ratings of the portfolio defaults, the risk profile of a long history of zero and, against a backdrop risk ratings the stronger towards more is weighted exposures low. remains rather than Initiative Finance under the Private procured projects from cash flows contractual against is secured portfolio finance The project term cash flows, with long secure and benefiting from now operational which are on projects secured of loans are physical assets. The majority phase. in the construction million, remaining of £24 only one case, with a balance Notes: i. Summary the following: comprises loan portfolio The commercial Lending risk – Commercial lending risk – Commercial Lending Note: i.

Lending risk – Consumer banking Consumer risk – Lending Business and Risk Report Balances previously reported as re-negotiated at 4 April 2016 were £214 million. Using the current definition, this year’s report includes report definition, this year’s £214 the current at 4 April 2016 were million. Using re-negotiated as reported previously Balances summarised below: The changes are at that date. forborne that were million of balances £84 Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information - 1 2 3 % 97 97 100 1 7 3 3 4 71 14 13 13 41 10 74 10 20 33 £m 274 893 Total 1,239 2,487 2,494 100% 2,568 - 1 1 2 5 3 3 4 4 9 12 41 20 29 59 38 £m 361 818 823 359 864 34% (note i) (note Rest of UK Rest ------1 3 3 4 3 4 8 8 11 19 66 £m 178 275 275 286 11% South East - - - 1 1 1 1 2 2 3 8 9 8 21 22 £m 217 702 466 55% 1,418 1,394 1,396 London continued

continued

25% to 50% 25% to Less than 25% Less 75% 51% to 76% to 90% to 76% 91% to 100% 91% to Over 100% LTV (A) Over 100% LTV Collateral value on A Collateral Negative equity on A Less than 25% Less 25% to 50% 25% to 51% to 75% 51% to 76% to 90% to 76% 91% to 100% 91% to Over 100% LTV (B) Over 100% LTV Collateral value on B Collateral Negative equity on B (note iv) Negative equity(note on B

CRE lending balances by LTV and region LTV by CRE lending balances 2017 (Audited) Performing loans Performing collateralised Fully ii): (note ratio LTV Not fully collateralised: Total performing loans performing Total Non-performing loans (note iii) loans (note Non-performing collateralised Fully ratio: LTV Not fully collateralised: Total non-performing loans non-performing Total Total CRE loans Total Geographical concentration Geographical

Lending risk – Commercial lending Commercial risk – Lending Business and Risk Report Loan to value to Loan and region: by LTV table shows the CRE portfolio The following Annual Report and Accounts 2017 Accounts and Report Annual

Strategic Report Governance Business and Risk Report Financial Statements Other Information - 4 4 8 % 92 92 100 2 4 6 6 6 21 19 24 62 38 30 88 £m 126 100 226 220 830 Total 2,777 1,659 2,783 100% 3,009 1 2 2 3 5 5 6 17 18 67 47 20 46 60 48 115 £m 419 923 920 390 35% 1,038 (note i) (note Rest of UK Rest - - - - 1 2 3 5 9 13 14 16 24 52 111 36 66 £m 219 367 370 436 14% South East - - - - 1 7 2 3 3 5 8 17 10 38 45 £m 136 329 51% 1,021 1,535 1,490 1,490 London continued

continued

Less than 25% Less 25% to 50% 25% to 75% 51% to 76% to 90% to 76% 91% to 100% 91% to Over 100% LTV (A) Over 100% LTV Collateral value on A Collateral Negative equity on A Less than 25% Less 25% to 50% 25% to 51% to 75% 51% to 76% to 90% to 76% 91% to 100% 91% to Over 100% LTV (B) Over 100% LTV Collateral value on B Collateral Negative equity on B (note iv) Negative equity(note on B Includes lending to borrowers based in the Channel Islands. borrowers Includes lending to valuation. collateral external independent sheet carrying value of the most recent using the on-balance is calculated of the loan divided by the indexed amount ratio The LTV (IPD) monthly index is used. Databank The Investment Property not impaired. months which are three of less than loans and loans with arrears loans include impaired Non-performing impaired. loans with negative equity are All non-performing

CRE lending balances by LTV and region and region LTV by CRE lending balances 2016 (Audited) Performing loans Performing collateralised Fully ii): (note ratio LTV Not fully collateralised: Total performing loans performing Total Non-performing loans (note iii) loans (note Non-performing collateralised Fully ratio: LTV Not fully collateralised: Total CRE loans Total Total non-performing loans non-performing Total Geographical concentration Geographical Notes: i. ii. iii. iv.

Lending risk – Commercial lending Commercial risk – Lending Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual Non-performing loans have reduced and now represent 3% of CRE balances (2016: 8%). Both the proportion of partially collateralised (2016: collateralised of partially 3% of CRE balances 8%). Both the proportion and now represent reduced loans have Non-performing book improving These changes reflect also reduced. loans have non-performing for loans and the shortfall on collateral non-performing lending strategy. or which do not align to risk appetite assets outside of to exposure reduce and managed exit activity to performance

100

Strategic Report Governance Business and Risk Report Financial Statements Other Information 1 7 3 2 3 6 8 8 6 6 12 14 22 59 25 £m £m 127 157 104 223 812 478 472 993 200 986 1,011 Total Total 3,009 2,568 1 7 3 3 2 2 5 2 5 8 6 12 12 14 87 18 57 38 99 £m £m 317 158 256 222 208 263 209 864 1,038 (note i) (note (note i) (note Rest of UK Rest Rest of UK Rest ------1 4 4 12 71 13 25 37 36 22 69 29 28 £m £m 170 235 436 286 South East South East ------1 1 1 1 1 2 4 3 8 92 29 29 88 48 £m £m 201 222 459 433 666 686 1,535 1,418 London London continued

continued

Includes lending to borrowers based in the Channel Islands. borrowers Includes lending to CRE lending balances and impairment provisions by type and region by and impairment provisions CRE lending balances 2016 CRE lending balances and impairment provisions by type and region type and region by and impairment provisions CRE lending balances 2017 Retail Retail Office Office Residential Leisure and hotel Leisure Residential Industrial and warehouse Other Industrial and warehouse and hotel Leisure Total CRE lending Total Other Impairment provision: Retail Total CRE lending Total Office Office Impairment provision: Retail Residential Residential Industrial and warehouse Industrial and warehouse Leisure and hotel Leisure hotel and Leisure Other Other Total impairment provisions Total Total impairment provisions Total Note: i.

Lending risk – Commercial lending Commercial risk – Lending Business and Risk Report Credit risk concentrations Credit as shown below: regions and geographic sectors, across well spread remains The CRE exposure Annual Report and Accounts 2017 Accounts and Report Annual

101

Strategic Report Governance Business and Risk Report Financial Statements Other Information - - 1 1 2 2 4 8 8 % 32 78 92 26 92 83 100 100 100 2016 3 5 4 21 55 55 54 28 59 115 £m 133 188 226 2,783 3,009 - - - 1 1 1 1 3 % 71 97 20 34 82 44 80 100 100 100 - 1 2017 3 5 £m 17 (34) 74 61 24 32 25 20 29 29 2016 £m 2,494 2,568 continued

continued (5) £m 2017

Neither past due nor impaired Past due up to 3 months but not impaired (note i) (note 3 months but not impaired due up to Past Impaired (note ii): (note Impaired 3 months due up to Past Past due 3 to 6 months due 3 to Past Past due 6 to 12 months due 6 to Past Past due over 12 months Past iii) (note Possessions

The status ‘past due up to 3 months but not impaired’ includes any asset where a payment due under strict contractual terms is received late or missed. The amount late is received terms due under strict contractual a payment includes any asset where 3 months but not impaired’ The status ‘past due up to overdue. rather than just the payment financial asset included is the entire is held. which an individual provision or against months in arrears, than three more which are loans include those balances Impaired derive the maximum benefit to realised ownership of security pending sale. Assets in possession are Nationwide has taken which loans for represent balances Possession assets. parties. Nationwide does not occupy or otherwise any purposes the repossessed use for all interested for Impairment loss/(reversal) for the year for Impairment loss/(reversal) (Audited) Total (Audited) CRE lending balances by payment due status payment due by CRE lending balances Performing: Non-performing: Total Total non-performing balances non-performing Total Impairment provisions Individual Collective Total impairment provisions Total Estimated collateral: Estimated but not impaired loans past due Against Provision coverage ratios coverage Provision balances as % of impaired Individual provisions balances as % of non-performing provisions Total balances as % of total provisions Total Against impaired loans impaired Against Total collateral against non-performing balances against non-performing collateral Total Total non-performing loans, before provisions, have reduced by £152 million to £74 million, and there has been a reduction of £34 million in total million in total of £34 has been a reduction million, and there £74 by £152 million to reduced have provisions, loans, before non-performing Total conditions. in market and an improvement book performance improving the managed exit activity, reflecting impairment provisions, Notes: i. ii. iii.

Lending risk – Commercial lending Commercial risk – Lending Business and Risk Report Arrears and impairment Arrears reflect Provisions portfolio. lending segments of the commercial non-performing and both the performing to held in relation are Impairment provisions facilities assigned to are provisions Individual impairment evidence. based on objective sheet date, at the balance been incurred losses which have provision collective loans, the performing For currently to all other accounts. provision is assigned difficultyexhibiting signs of financial collective and a date. reporting not identifiable at the but are within the portfolio occurred impairment events that have losses arising from reflects within these portfolios. is no non-performance and there portfolios finance or project social landlord on the registered been experienced No losses have against the CRE portfolio. only required are impairment provisions As a result, portfolio: the CRE for status and impairment provisions due the payment The table below sets out Annual Report and Accounts 2017 Accounts and Report Annual

102

Strategic Report Governance Business and Risk Report Financial Statements Other Information 2 41 64 40 £m 142 139 150 537 2016 1

17 34 50 56 80 £m 126 347 2017 continued

continued

Extension at maturity Extension Security amendment of covenant Breach Capital concession Interest concession Interest

Total Impairment provision on forborne loans on forborne Impairment provision Modifications: Refinance Lending subject to forbearance to subject Lending Consistent with the European Banking Authority reporting definitions, loans that meet the forbearance exit criteria are not reported as forborne. as reported not are criteria exit forbearance definitions, loans that meet the reporting Authority Banking with the European Consistent exit from the controlled of £347 a result million, principally as to reduced have forbearance subject to currently the CRE exposures Overall, (2016: of CRE loan balances 18%). 14% represent higher risk loans, and now non-core, portfolios. finance or project social landlord in either the registered of forbearance no instances are There to the align to fully £588 million. Updating the prior year figures April 2016 were at 4 forbearance as subject to reported previously CRE balances to April 2016 forborne at 4 £537 as million. reported to balances revision results in a minor definitions EBA Note: Note: event. under the latest reported are event has occurred than one concession more where Loans

Lending risk – Commercial lending Commercial risk – Lending Business and Risk Report of £5 in a net impairment reversal million. resulted liquidity and capital values, have including increased conditions, CRE market The improved and increased conditions, market by improving impacted balances total impaired of higher levels year reflects in the previous The higher reversal levels of recoveries. Forbearance and customers exposures lending including impaired commercial all level and applies to at borrower and reported is recorded Forbearance basis. on an individual borrower calculated are loans on forborne action. Impairment provisions and recovery enforcement subject to reporting: forbearance are included within events concession following the in financial difficulty, customers commercial For Refinance facilities repay to cannot be secured refinance asset sales or external where will be considered or at maturity, either mid-term Debt restructuring, and Nationwide. both the customer for outcome the best debt recovery provide to is considered a restructure in full and where concession Interest be may accrue arrears, during which period the loans do not charged, rate the interest to or a reduction The temporary postponement of interest difficulties. is experiencing payment the customer where considered Capital concession difficulties, payment the full overcome time to allow the customer to capital repayments of temporary suspensions to consist Capital concessions write-off or the partial of debt. arrears payment of previous or partial consolidation Security amendment as forbearance loan, this will be treated their commercial Nationwide as security for to of assets charged seeks the release a customer Where available. cover or the level of interest exposure value of the remaining of either the loan to in terms Nationwide’s position is weakened where at maturity Extension the negotiate allow them time to expiry to maturity the loan at term extensions given short term be may repay unable to who are Customers refinance. full either via asset sales of facilities in or external repayment of covenant Breach a temporary waiver agreement, covenants, as specified in their loan with either financial or non-financial comply is unable to a customer Where as appropriate. will be considered, the covenants or amendment to forbearance. subject to loans which are details of the commercial The table below provides Annual Report and Accounts 2017 Accounts and Report Annual

103

Strategic Report Governance Business and Risk Report Financial Statements Other Information £m 2016 3,591 8,797 3,898 23,126 27,024 10,738 £m 2017 2,587 9,831 5,043 13,017 30,478 25,435 continued

(Audited) Cash banks to and advances Loans Treasury asset balances Treasury Investment securities Total Treasury portfolio Treasury Total Derivative assets Treasury liquidity and investment portfolio Treasury In line with the Board’s liquidity risk appetite, investment activity is restricted to high quality liquid securities comprising central bank reserves central high quality liquid securities comprising to investment activity liquidity is restricted risk appetite, In line with the Board’s and government banks (‘supranationals’) development of governments, multilateral range issued by a limited debt securities and highly rated bank funding operations. central accessing eligible for liquid assets that are in highly rated agencies. In addition, cash is invested guaranteed risk and no longer within approved the financial crisis prior to of out of policy legacy assets (investment securities acquired balance The total £172 million to ongoing sales. impairment charge A £9 million £423 primarily through from million during the year, has reduced appetite) market be assessed against prevailing to exit positions continue Opportunities to during the year. (2016: recognised was £8 million reversal) and financial implications. conditions emerging to no exposures are or speculative purposes. There trading not used for but are risks market to exposure reduce used to Derivatives are default swaps. hedge funds or credit markets, risks Managing treasury credit liquidity purposes. and investment operational, for the instruments held by Treasury from arises primarily portfolio risk within the Treasury Credit under the supervision framework, of with the risk governance risk in accordance Risk function manages all aspects of credit Credit The Treasury Committee. the Credit losses. A monthly of future assets and assess the likelihood under-performing identify and review exists to structure An established governance assets is Treasury held as security for assets. Collateral of all Treasury performance future and expected of the current is undertaken review asset-backed repos, reverse however, unsecured; generally assets are liquidity portfolio instrument. Treasury’s of the by the nature determined by pools of financial assets. secured securities and similar instruments are in a loss. Impairment assessments will result events and/or performance that current evidence is objective there where impaired Assets are industry and sectoral in the financial health of the obligor, of deterioration volatility in valuation, evidence among other factors, evaluate, and underlying cash flows. performance, collateralised and are organisations with highly-rated only traded the use of derivatives; these are risk arises from credit In addition, counterparty documentation. standard under market Note: Note: £3,182 million derivative liabilities were At 4 April 2017, their fair value is negative. fair value is positive and liabilities where their classified as assets where Derivatives are (2016: million). £3,463 Summary As at 4 April 2017 risk management. market liquidity and, in the case of derivatives, for management is held primarily for portfolio The Treasury 13.7%treasury (2016: assets represent assets. of total 12.9%) the This follows in cash balances. an increase to due year is predominantly the previous to compared in the portfolio The net increase treasury that bills which Nationwide received Scheme (FLS), under Lending for Funding of England’s during the year of the Bank replacement Scheme (TFS), Funding received. under which cash is held off-balance sheet, with the Term were Lending risk – Treasury assets Treasury risk – Lending Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

104

Strategic Report Governance Business and Risk Report Financial Statements Other Information ------1 - - 3 5 2 3 4 3 12 % 12 % 16 100 100 Other Other ------7 2 11 11 13 % 13 15 % 12 17 10 13 13 22 10 25 10 35 32 36 38 33 39 100 Europe Europe ------7 5 5 9 3 9 % 14 % 12 22 18 26 24 24 50 94 US 84 62 US 100 - - - - 6 % % 16 75 51 75 72 78 61 81 78 52 70 28 62 58 78 65 44 68 UK 69 38 90 83 80 98 88 90 UK ------2 2 4 8 6 8 6 17 % % 11 22 25 10 40 38 Other Other ------1 1 7 3 6 A A % 31 % 51 31 67 34 26 54 70 24 50 28 100 ------7 3 % 13 15 10 19 19 % 16 10 18 14 12 74 19 47 28 32 52 50 38 80 90 90 AA AA ------% % 14 14 22 25 79 10 27 39 92 20 82 84 42 90 99 48 86 88 100 100 100 100 100 100 AAA AAA 11 31 40 £m £m 151 145 318 222 120 522 931 528 563 226 796 922 285 459 288 980 3,591 1,529 6,321 continued 8,797 1,068 2,587 6,438 23,126 13,017

18,006 22,052 25,435 continued

Ratings used are obtained from Standard & Poor’s (S&P), and from Moody’s if no S&P rating is available. Internal ratings are used if neither is available. are ratings Internal is available. Moody’s if no S&P rating (S&P), and from & Poor’s Standard obtained from used are Ratings cash and government bonds. AAA for AA from 2016, impacting the ratings by S&P in June to downgraded was rating The UK’s credit certain amounts based on underlying assets. of the reclassification for been restated have Comparatives balances. repo and reverse banks includes derivative collateral to and advances Loans Total Total Loans and advances to banks (note iv) banks (note to and advances Loans Loans and advances to banks (note iv) banks (note to and advances Loans Other securities total Other investments Other securities total Student loans (note iii) Student loans (note Other investments Covered bonds Covered Student loans (note iii) Student loans (note Collateralised loan obligations Collateralised Collateralised loan obligations Collateralised Commercial mortgage backed securities (CMBS) backed mortgage Commercial Commercial mortgage backed securities (CMBS) backed mortgage Commercial Other securities: iii) RMBS (note Other securities: iii) RMBS (note Liquid assets total Liquid assets total Asset-backed securities (other) Asset-backed securities (other) Asset-backed Residential mortgage backed securities (RMBS) securities backed mortgage Residential Residential mortgage backed securities (RMBS) backed mortgage Residential Covered bonds Covered bonds Covered Supranational bonds Supranational bonds Supranational Government bonds (note ii) Government bonds (note Government bonds Liquid assets: banks Cash and reserves at central Liquid assets: ii) (note banks Cash and reserves at central (Audited) (Audited) Liquidity and investment portfolio by credit rating (note i) (note rating credit by portfolio Liquidity and investment 2016 Liquidity and investment portfolio by credit rating (note i) (note rating credit by portfolio Liquidity and investment 2017 ii. iii. iv. Notes: i. Liquidity and investment portfolios Liquidity and investment of £25,435The liquidity and investment portfolio million (2016:of the £23,126 The size liquid assets and other securities. million) comprises and legacy asset disposals. An requirements liquidity and strategic Nationwide’s operational prices, in market fluctuations reflects portfolio location of the issuers is set out below. and geographical rating by asset class, credit sheet portfolios analysis of the on-balance Lending risk – Treasury assets Treasury risk – Lending Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

105

Strategic Report Governance Business and Risk Report Financial Statements Other Information

1 5 6 8 8 13 23 (3) (3) (9) £m (12) (53) 498 (97) (481) (481) (422) (428) (note i) (note (note i) (note Cumulative AFS reserve 2016 31 40 £m 145 318 222 522 528 563 980 1,529 3,591 6,321 8,797 1,068 23,126 18,006 Fair value on value Fair balance sheet balance - - - - 2 4 9 6 (4) £m 370 (21) (31) (17) (44) (402) (423) (423) (383) (note i) (note (note i) (note Cumulative Cumulative AFS reserve - 2017 11 £m 151 120 931 226 922 796 285 459 288 2,587 6,438 13,017 22,052 25,435 Fair value on Fair balance sheet balance continued

continued

Not applicable for ‘Cash’ and ‘Loans and advances to banks’. to and advances ‘Cash’ and ‘Loans Not applicable for certain amounts based on underlying assets. of the reclassification for been restated have Comparatives Other securities: ii) RMBS (note Fair value of treasury assets and AFS reserve Fair Residential mortgage backed securities (RMBS) securities backed mortgage Residential securities (other) Asset-backed Liquid assets total securities (CMBS) backed mortgage Commercial AFS reserve (net) (Audited) loan obligations (CLO) Collateralised Covered bonds Covered Student loans (note ii) Student loans (note Other securities total and taxation hedge accounting AFS reserve before risk rate interest for adjustment Hedge accounting Taxation Other investments banks to and advances Loans Total Liquid assets: banks Cash and reserves at central Government bonds Supranational bonds Supranational Covered bonds Covered As at 4 April 2017, the balance on the AFS reserve had moved to a £44 million gain, net of tax (2016: movements in the AFS £8 million loss). The a £44 on the AFS reserve had moved to the balance As at 4 April 2017, has no not impaired movements and the disposal of legacy assets. The fair value movement of AFS assets that are market general reserve reflect effect on profit. Notes: i. ii.

Lending risk – Treasury assets Treasury risk – Lending Business and Risk Report The analysis on the previous page does not include off-balance sheet funding, including £4.8 billion (2016:does not include off-balance page of primary £8.5 billion) funding, including £4.8 sheet The analysis on the previous liquidity in the ‘Liquidity included in the analysis of funding and funding risk’ of FLS. These are held as a result bills UK Treasury dated short representing section of this report. sale reserve for Available £25,435 million (2016:Of the total £23,126 £9,831liquidity million) million (2016: and investment portfolio, £10,738 as available million) is held in reserves. recognised with fair value movements market, to marked sale (AFS). These assets are for (2016:Of these assets, £66 million for the purposes Level 3 (valuation not based on observable data) classified as £125 market million) are at £81 million, valued Limited, the disposal in Visa of Nationwide’s investment Europe the prior year is primarily due to from of IFRSThe decrease 13. Details of fair value the accounts. 15 to in note details can be found in Visa Inc. Further shares partly offset of preference by the acquisition the accounts. and 25 to 24 in notes movements can be found The table below shows the fair value carrying AFS reserve the liquidity and investment assets. for amount and associated Annual Report and Accounts 2017 Accounts and Report Annual

106

Strategic Report Governance Business and Risk Report Financial Statements Other Information

Total Total - - 3 24 22 86 116 £m £m 182 577 571 467 519 265 242 889

5,751

1,549 1,091 2,542 1,660 1,279 1,285 2,706 5,076

Other assets Other Other assets Other ------

97 54 66 43

£m £m 102 168 533 182 365 279

(note i) (note (note i) (note

------1 3 3

4 3 4 4

corporate corporate corporate corporate 10 10

£m £m

Other Other Other Other

banks banks

------

Loans to to Loans

Loans to to Loans 18 71 27 44 60

£m £m 107 185 627 777 474 350 232

1,162

bonds bonds

------

national national

£m national £m

522 522

459 459 Supra- Supra-

bonds bonds

------

31 Covered Covered

31 Covered 23 52

24 55 £m £m

106 383 455 489 400

securities securities

------7

17 21 backed backed backed backed 22 35

£m £m 513

385 565 373

366 366 Mortgage Mortgage Mortgage Mortgage

continued bonds bonds

------

Government Government Government Government 82 £m £m 242 153 218 365

902 689 855 484 600

1,591 1,455

Cash Cash ------8 continued 16 £m £m 871 871 879 1,274 1,258 1,258

Other corporate exposures are held via a European commercial loan facility reported as part of loans and advances to customers. to as part of loans and advances loan facility reported commercial held via a European are exposures Other corporate and Switzerland. Sweden Denmark, Norway, Canada, Australia, is to of world exposure Rest Total Total ii) of world (note Rest Rest of world (note ii) of world (note Rest USA USA Total Eurozone Total Total Eurozone Total Spain Spain Portugal Portugal Netherlands Netherlands Italy Italy Ireland Germany Ireland Germany France France Finland Finland (Audited) Country exposures Country exposures 2016 (Audited) Country exposures Country exposures 2017 Exposure to Eurozone countries continues to be actively managed. During the year, Nationwide disposed of its Portuguese and Spanish of its Portuguese Nationwide disposed the year, be actively managed. During to continues countries Eurozone to Exposure of Ireland. Bank is with the Central of Ireland assets. Cash held in the Republic backed mortgage in default at 4 April 2017 detailed in the table above were (2016:None of the exposures on these £3 incurred was million), and no impairment assets in the period (2016: £nil). Country exposures carrying sheet at their balance shown values. are outside the UK. The exposures institutions to summarises the exposure table The following ii. Notes: i.

Lending risk – Treasury assets Treasury risk – Lending Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

107

Strategic Report Governance Business and Risk Report Financial Statements Other Information 74 £m Total 1,878 3,898 (1,804) (2,020) - - - - - £m BBB A 2016 58 £m 1,282 2,770 (1,224) (1,488) 16 AA £m 596 1,128 (532) (580) 28 £m Total 2,827 5,043 (2,216) (2,799) - 1 (1) £m 390 BBB (389) 2017 9 A £m 1,546 2,576 (1,537) (1,030) 19 AA £m continued 1,280 (797) 2,077

(1,261) continued Definition meet its liabilities as they fall due and maintain member and Liquidity risk is the risk that Nationwide is unable to to maintain diverse funding sources Funding risk is the risk that Nationwide is unable confidence. stakeholder of concentrations excessive funding risk that can arise from and manage retail markets in wholesale and retail higher risk deposits. cycle and a full economic maintain sufficientto absorb losses throughout The risk that Nationwide fails to capital regulators. and members, the Board prospective investors, and of current confidence sufficientto maintain the of market as a result assets and liabilities is impacted arising from, The risk that the net value of, or net income changes. or rate price Fund. liabilities of the assets will be insufficientto meet the estimated The risk that the value of the Fund’s cash funding in increased Nationwide’s capital position and/or result risk can adversely impact Pension the Fund. obligations to changes in to value, due add the expected to continue or value is unable to of income The risk that a source factors. or other environmental regulatory market,

Collateral Net derivative credit exposure credit Net derivative Net current credit exposure credit Net current Netting benefits Gross positive fair value of contracts Gross (Audited) Liquidity and funding Solvency Market Pension Earnings Risk category Counterparty credit quality credit Counterparty Derivative credit exposure credit Derivative Financial risk is managed within a framework of approved assets, currencies and capital instruments supported by detailed limits set by either and capital instruments supported assets, currencies of approved Financial risk is managed within a framework of derivative approval for responsibility retains The Board mandate. under its delegated (ALCO) or the Assets and Liabilities Committee the Board the use of such derivative classes (within the limitations over risk management purposes, restrictions market be used for classes that may be classified as liquidity. asset classes that may Section 9A) and for Societies Act, imposed under the Building Nationwide is exposed to financial risks as follows: risks as financial Nationwide is exposed to Financial risk

Lending risk – Treasury assets Treasury risk – Lending Business and Risk Report Derivative financial instruments Derivative statement volatilityin the income rules can create although the application of accounting risks, market to exposure reduce used to Derivatives are The fair value of derivative assets at 4 April 2017 was £5.0 billion in a financial year. (2016: fair value of derivative liabilities £3.9 billion) and the £3.2was (2016: billion £3.5 billion). derivative documenting for agreement is Nationwide’s preferred Agreement Master Association (ISDA) and Derivatives Swaps The International CSA, of a Under the terms Agreement. Master with the ISDA in conjunction Annex (CSA)executed Support is always A Credit transactions. two way in the outstanding positions. CSAs are risk inherent counterparty the market-contingent mitigate parties to is passed between collateral basis on a regular paid or received is of the derivative. Collateral dependent on the exposure both parties post collateral where agreements on derivatives. exposures market the mark to mitigate (typically daily) to counterparty. of set off legal rights Nationwide’s CSA same with the overall transactions derivatives grants for legal documentation for values offset positive mark to market to that negative mark the extent to with such positions is reduced risk associated the credit Accordingly, risk within each netting agreement. values in the calculation of credit market can be offset with the same of CSA counterparty outstanding transactions and settled net following Under the terms netting arrangements, event. Under CSA netting benefits of arrangements, a default, or another predetermined £2.2 billion (2016: and available £2.0 billion) were (2016:£2.8 £1.8 held. Only cash is held as collateral. billion of collateral billion) was which it uses (CCP) counterparty with a central clearing arrangements Nationwide has indirect requirements, with EU regulatory comply To derivatives. clear standardised to collateral: netting benefits and after derivative contracts risk for credit counterparty to table shows the exposure The following Annual Report and Accounts 2017 Accounts and Report Annual

108

Strategic Report Governance Business and Risk Report Financial Statements Other Information 5.0 £bn 13.2 45.8 2016 144.9 208.9 5.0 £bn 14.3 55.5 2017 221.7 146.9 Liabilities Retail funding Retail Capital and reserves Other liabilities Wholesale funding 7.0 3.6 13.1 £bn 23.1 2016 162.1 208.9 continued

3.7 8.9 £bn 12.6 25.4 2017 171.1 221.7 at 4 April 2017 122.6% (2016: was 117.2%). 1

Funding profile Funding Assets Retail mortgages Retail Treasury assets (including liquidity portfolio) Treasury Other assets Other retail lending Other retail lending Commercial/Other The loan to deposit ratio represents loans and advances to customers divided by shares + other deposits + amounts due to customers (excluding repurchase agreements and agreements repurchase (excluding customers + other deposits + amounts due to divided by shares customers to advances loans and represents deposit ratio The loan to received). collateral 1 Summary limit setting and strategy, which includes its policy, risk framework Nationwide manages liquidity and funding risks within a comprehensive controls. governance and robust testing stress monitoring, sufficient maintains a stable and diverse funding base and that Nationwide ensures holdings of high-quality assets, so that liquid This framework cannot be met as they fall due. is no significant risk that liabilities there the year. at all times during requirements and regulatory risk appetite be within Board to Liquidity and funding levels continued metric, the Liquidity Coverage liquidity stress short term and the regulatory risk appetite internal to its position relative Nationwide monitors but plausible liquidityto survive that sufficient stress. held term severe which ensures high quality a short liquid assets are (LCR), Ratio in the LCR above 100%. The decrease of maintaining a its strategy (2016: which reflects 4 April 2017 at 142.6%), 124.0% was LCR The Group’s and the impact of a one-off item 1 requirements following the finalisation of new Pillar LCR the inclusion of additional outflows in the reflects LCR with last year’s. consistent remains broadly LCR basis, the financial assets. On a like-for-like acquire to of Nationwide’s commitment in respect on Based (NSFR). Ratio funding metric, the Net Stable Funding regulatory longer-term its position against the future Nationwide also monitors the the NSFR at 4 April 2017 which exceeds 132.6% (2016: and guidance, was 127.9%) requirements of regulatory interpretations current requirement. 100% minimum future expected risk Funding strategy Funding funded by customer largely therefore are loans and advances customer funded; retail retail predominantly remain is to Nationwide’s funding strategy funded by wholesale below. debt, as set out largely loans, are customer treasury lending, including assets and commercial deposits. Non-retail Financial risk – LiquidityFinancial risk and funding Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual Nationwide’s loan to deposit ratio Nationwide’s loan to

109

Strategic Report Governance Business and Risk Report Financial Statements Other Information 1.1 1.8 5.3 3.5 9.2 6.0 £bn 13.7 14.9 25.3 30.2 55.5 Total 100.0

- 3 3 11 21 10 22 30 100 % of total - - - 1.1 2.2 6.0 £bn - 13.3 10.6 10.8 22.4 33.2 59.8 years 1.3 1.3 5.1 4.7 9.7 9.9 £bn 13.8 Total 45.8 Over two two Over ------0.2 0.6 0.8 £bn 1.4 1.8 1.8 3.2 5.8 0.6 0.8 Other £bn years - - 2016 year but year 1.1 Over one Over than two than two 1.6 0.1 not more not more 2.2 0.2 0.4 5.6 £bn USD - - - - - 1.5 1.3 1.8 0.7 5.3 9.2 0.8 £bn 1.2 19.1 1.0 17.6 11.1 0.5 4.8 34.4 £bn EUR 18.6 Subtotal Subtotal one year less than - 1.9 2.3 4.7 2.5 0.2 0.2 9.0 £bn GBP

20.8 - - - 1.2 2.7 0.1 0.1 0.1 2.8 5.0 0.6 0.8 £bn

Over Over 2 3 6 11 10 16 27 25 but not 100 one year % of total more than more six months - - 1.1 1.8 9.2 5.3 3.5 1.1 6.0 £bn 5.1 0.1 2.4 13.7 2.0 6.2 0.3 0.6 0.8 14.9 £bn 55.5 11.2 Total months - but not - - - - - 1.0 more than more 0.2 Over three three Over 0.8 six months £bn Other ------continued 1.7 - - - - 1.3 3.6 3.6 6.5 0.6 2017 £bn 1.4 0.1 1.8 continued 3.6 6.9 £bn USD

months Over one Over not more not more month but than three than three - - - 1.2 1.4 6.2 0.8 - - - - £bn 11.4 EUR 21.0 6.2 5.3 0.4 0.3 0.3 0.5 6.5 11.7 £bn - month 7.7 3.1 5.3 3.3 0.3 0.9 6.0 £bn than one GBP Not more Not more 26.6

Includes protected equity bond (PEB) balances of £0.8 billion (2016: of equity bond (PEB) balances £1.9 billion). Includes protected Of which secured Of which unsecured % of total Other Total TFS Certificates of deposit Certificates paper Commercial notes Medium term Securitisations Covered bonds Covered Deposits (note i) Deposits (note Wholesale funding – residual maturity Wholesale funding – residual 2017 Wholesale funding currency Deposits (note i) Deposits (note Certificates of deposit Certificates Commercial paper Commercial Covered bonds Covered Medium term notes Medium term Securitisations TFS Other Total To mitigate cross-currency refinancing risk, Nationwide ensures it holds liquidity in each currency to cover at least the next ten business days ten business days the next cover at least to it holds liquidity in each currency Nationwide ensures risk, refinancing cross-currency mitigate To of wholesale funding maturities. maturitybelow. basis, is set out maturity of the wholesale a contractual funding book, on The residual Note: i.

Financial risk – LiquidityFinancial risk and funding Business and Risk Report Wholesale funding has a diversified funding Nationwide ensure instruments to and unsecured of secured is made up of a range The wholesale funding portfolio active in core remain is to types. Nationwide’s wholesale funding strategy maturities and investor of instruments, currencies, a range base across and currencies. markets following the inflows collateral £55.5 increased by £9.7 billion to This is due to billion. sheet wholesale funding has increased On-balance sheet Scheme (FLS) maturities with on-balance Lending for of Funding and replacement currencies against other major of sterling depreciation in Nationwide’s wholesale Scheme (TFS). Funding This is reflected Term of England’s Bank the from of drawings funding, including £6 billion at 4 April 2017 (2016: 27.1% liabilities) which was funding 24.8%). of total wholesale sheet funding as a proportion (on-balance funding ratio of Nationwide’s wholesale funding. an analysis by currency The table below sets out Annual Report and Accounts 2017 Accounts and Report Annual

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Strategic Report Governance Business and Risk Report Financial Statements Other Information 1.1 1.1 1.3 1.3 1.3 5.1 4.7 9.7 0.3 0.5 9.9 8.8 £bn £bn 13.8 19.5 14.8 27.9 26.3 Total Total 45.8 100.0 ------1.3 1.4 0.1 0.1 8.7 2.6 0.3 8.4 11.7 0.9 £bn £bn 15.3 USD 52.4 24.0 years Over two - - - - 2016 1.5 1.5 0.1 0.7 3.0 3.0 0.3 0.5 6.6 0.6 0.6 0.6 0.9 0.9 0.8 £bn £bn EUR years year but than two Over one not more not more

- 1.3 1.3 1.4 5.1 2.7 7.9 0.7 0.2 0.4 0.4 0.5 0.9 8.8 16.1 £bn £bn 13.4 41.0 GBP 18.8 23.5 Subtotal Subtotal one year less than

- - 1.2 1.4 1.9 3.3 2.6 5.9 0.5 0.7 0.9 0.3 0.5 0.9 0.9 £bn £bn 11.2 12.9 27.5 Over 13.0 Total but not one year more than more six months ------1.7 7.4 0.1 1.6 1.2 3.4 3.4 0.7 0.2 0.3 £bn £bn USD months but not more than more Over three Over three six months ------2017 continued 1.2 1.6 8.1 3.7 3.7 1.2 0.9 0.2 2.8 0.4 0.5 0.5 £bn £bn EUR continued

months Over one not more not more than three than three month but - - - 1.3 4.1 0.1 0.1 5.7 0.3 5.8 0.2 0.4 0.3 0.3 0.5 £bn £bn 12.6 11.8 GBP 10.0 23.5 month than one Not more Not more

reserves held at central banks reserves held at central banks and supranationals. of governments, central range debt securities issued by a restricted highly rated Includes protected equity bond (PEB) balances of £0.8 billion (2016: of equity bond (PEB) balances £1.9 billion). Includes protected % of total Of which unsecured Of which secured Total Other Other securities Total Securitisations RMBS securities Asset-backed Covered bonds Covered Certificates of deposit Certificates paper Commercial bonds Covered Medium term notes Medium term Government bonds Cash and reserves at central banks Cash and reserves at central bonds Supranational Liquid assets Deposits (note i) Deposits (note Wholesale funding – residual maturity Wholesale funding – residual 2016 At 4 April 2017, cash, government bonds and supranational bonds included in the liquid asset buffer, including FLS treasury bills, represented including FLS treasury bills, represented the liquid asset buffer, bonds included in cash, government bonds and supranational 2017, 4 April At assuming no rollovers. 129% (2016: 128%) of wholesale less than one year, funding maturing in Liquidity risk liquidity Total requirements to meet daily cash flow needs as well as stressed it has sufficientterms of both amount and quality, Nationwide ensures liquid assets, in and Assets set by the Board limits, of the liquid asset buffer liquidity and regulatory is subject to assessments. The composition driven by internal and asset type. currency issuer, to in relation (ALCO), and Liabilities Committee It includes off-balance sheet by issuing currency. categorised equivalent fair value of the liquidity portfolio, The table below sets out the sterling assets. liquidity encumbered (FLS treasury bills) and excludes • of month end balance combined billion of off-balance sheet FLS treasury bills. The average Government bonds in the table above include £4.8 £29.5 bonds during the year was banks, government and supranational (2016: billion cash and reserves at central £22.8 is billion). This increase off-balance sheet treasury bills, with TFS, under which during the year of FLS, under which Nationwide received the replacement due to largely cash is received. Nationwide’s liquid assets are held and managed centrally by its Treasury function. Nationwide maintains a high quality liquidity portfolio, by its Treasury held and managed centrally Nationwide’s liquid assets are comprising: predominantly • Note: i.

Financial risk – LiquidityFinancial risk and funding Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

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Strategic Report Governance Business and Risk Report Financial Statements Other Information - - 8 £m 276 820 Total 3,182 2,376 2,587 9,764 8,734 2,905 6,459 5,043 6,000 13,017 15,784 19,476 20,863 187,371 (6,003) 144,542 208,821 218,602

------£m 276 361 Due Due 384 384 1,174 after after more more years 2,102 7,254 2,361 2,016 5,629 6,280 17,822 (6,003) 158,147 158,147 148,132 148,132 140,325 140,325 than five than five ------1 11 £m 700 Due Due 265 265 395 505 2,317 5,022 2,002 3,870 6,000 6,000 10,137 26,641 26,641 22,057 26,246 two and two between between five years five (146,328) ------8 11 15 28 60 £m 135 216 324 Due Due 1,765 7,259 7,259 1,394 7,859 7,859 9,842 13,198 (5,339) one and between between (146,723) two years two ------1 10 16 57 57 67 90 £m 121 103 Due Due 255 1,431 1,910 4,513 6,533 2,098 twelve twelve (4,435) months nine and between between (141,384) ------41 28 45 30 48 66 £m 128 657 Due Due 336 nine 1,877 2,001 6,160 4,905 (4,159) six and months between between (136,949) ------15 20 35 six (2) £m 116 130 Due Due 305 1,937 1,937 3,126 2,198 1,885 6,169 1,086 12,624 months (10,426) between between three and three (132,790) continued ------11 13 22 20 94 continued £m 123 130 Due Due

three three 1,075 1,438 1,438 1,309 1,666 2,339 5,364 months (3,926) one and between between (122,364) - - - - - 11 37 36 40 £m 341 894 1,818 2,226 2,882 2,499 2,890 month 13,017 15,784 18,220 112,403 120,874 (note ii) (note Due less Due than one (118,438) (118,438)

Cumulative liquidity difference Cumulative Net liquidity difference Off-balance sheet commitments Off-balance sheet commitments v) (note Total financial liabilities Total Subscribed capital (note iv) capital (note Subscribed Subordinated liabilities Subordinated Other financial liabilities (note iii) Other financial liabilities (note Senior unsecured funding Senior unsecured Derivative financial instruments Secured funding – ABS and Secured bonds covered Due to customers to Due Other deposits Of which TFS Of which repo Deposits from banks Deposits from Financial liabilities Shares Loans and advances to customers to and advances Loans Total financial assets Total Available for sale investment for Available securities Derivative financial instruments iii) Other financial assets (note Loans and advances to banks to and advances Loans Financial assets Cash Residual maturity (note i) maturity (note Residual 2017

Financial risk – LiquidityFinancial risk and funding Business and Risk Report Nationwide also holds a portfolio of high quality, central bank eligible covered bonds, RMBS and asset-backed securities. Other securities are Other securities. securities are asset-backed bonds, RMBS and eligible covered bank central of high quality, Nationwide also holds a portfolio sale. through parties or with third agreements repurchase can be monetised through but bank operations central not eligible for held that are of the the liquid nature demonstrates This agreements. (repo) repurchase of form in the transactions securities financing Nationwide undertakes and collateral for pledging assets as return in Cash is borrowed requirements. bufferassets held in its liquid asset regulatory and also satisfies in the value of the changes intra-day a simultaneous ‘deliverybecause settlement is on arises from risk credit basis, the main versus payment’ management processes. by Nationwide’s collateral mitigated This is largely collateral. monetise the liquid asset bufferrapidly is sufficient in a stress. to there capacity ensure to regularly capacity and tested is assessed market Repo of can be used in the Bank of England which assets at the Bank mortgage unencumbered pre-positions purposes, Nationwide contingent For disrupted. liquidity is severely if market England’s liquidity operations maturity of financial assets and liabilities Residual contractual final the on based groupings maturity relevant carryingthe segments below table The into liabilities financial and assets financial of value maturity). (residual maturity date Annual Report and Accounts 2017 Accounts and Report Annual

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Strategic Report Governance Business and Risk Report Financial Statements Other Information - 13 £m 127 413 Total 884 884 1,817 3,591 3,591 6,201 7,635 7,635 8,797 3,463 3,463 2,095 3,898 10,612 19,477 (3,478) 13,630 16,608 138,715 196,437 196,437 178,807 206,589 206,589

------£m Due Due 413 325 after after 299 more more years 2,241 2,241 1,034 1,034 1,200 4,818 8,263 8,263 2,298 6,366 (3,478) 18,026 18,026 133,008 151,034 151,034 141,803 141,803 than five - - - - - 7 8 25 62 £m Due Due 234 647 669 669 994 994 6,251 6,596 7,002 7,002 3,878 3,878 3,680 25,145 25,145 20,237 18,549 18,549 two and between five years (136,486) ------£m 114 114 Due Due 142 126 126 737 227 227 352 632 338 7,124 7,124 1,524 1,524 7,845 7,845 10,731 14,202 14,202 (6,357) one and between two years (143,082) ------19 (1) £m 30 65 84 Due Due 215 178 391 391 323 7,193 7,193 5,122 1,823 1,040 twelve 2,096 (5,097) months between nine and (136,725) ------1 1 17 41 33 £m Due Due 315 102 716 nine 345 1,810 1,930 1,930 2,238 8,297 4,608 six and (6,367) months between (131,628) - - - - - 1 5 six 14 23 43 £m Due Due 107 128 168 1,810 1,347 1,347 2,178 11,110 1,843 1,843 1,929 1,929 5,875 5,875 (8,932) months between (125,261) three and three continued - - - - - 2 9 15 15 19 continued 87 £m 151 Due Due 184 184

543 543 three three 1,524 1,524 1,392 1,392 1,632 1,256 2,478 2,478 6,259 6,259 (4,735) months one and between (116,329) - - 2 5 6 31 25 £m 65 122 1,637 3,179 1,658 1,658 8,797 2,825 3,563 2,549 2,549 month 14,837 14,837 13,630 (note ii) (note 112,801 Due less Due than one (111,594) (111,594) 103,296

The analysis excludes certain non-financial assets (including property, plant and equipment, intangible assets, investment property, other assets, deferred tax assets and other assets, deferred plant and equipment, intangible assets, investment property, non-financial assets (including property, certain The analysis excludes tax liabilities, current income, accruals and deferred for liabilities and charges, and non-financial liabilities (including provisions and expenses prepaid) accrued income benefit obligations). other liabilities and retirement on demand. less than one month includes amounts repayable Due hedged risk and investments in equityOther shares. for portfolio financial assets and liabilities include the fair value adjustments column. than five years subscribed capital is included within the due more undated The principal amount for the where mortgages on residential overpayments customer loan commitments, unrecognised on demand for include amounts payable Off-balance sheet commitments financial assets. acquire to the amount overpaid and commitments down draw is able to borrower Cumulative liquidity difference Net liquidity difference Off-balance sheet commitments Off-balance sheet commitments v) (note Total financial liabilities Total Subscribed capital (note iv) capital (note Subscribed Subordinated liabilities Subordinated Other financial liabilities (note iii) Other(note financial liabilities Derivative financial instruments Senior unsecured funding Senior unsecured Secured funding – ABS and Secured bonds covered Other deposits customers to Due Of which repo Financial liabilities Shares Deposits from banks Deposits from Total financial assets Total Derivative financial instruments iii) Other financial assets (note Loans and advances to customers to and advances Loans Available for sale investment for Available securities Loans and advances to banks to and advances Loans Financial assets Cash Residual maturity (note i) maturity (note Residual 2016 In practice, customer behaviours mean that liabilities are often retained for longer than their contractual maturities and assets are repaid faster. faster. repaid maturities and assets are longer than their contractual for retained often mean that liabilities are behaviours customer In practice, by ALCO. managed and monitored and risks are sheet structure sheet. The balance on Nationwide’s balance funding mismatches This gives rise to requirements. cash flow likely forecast of each asset and liability class to performance Nationwide uses judgement and past behavioural Notes: i. ii. iii. iv. v.

Financial risk – LiquidityFinancial risk and funding Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

113

Strategic Report Governance Business and Risk Report Financial Statements Other Information 99 £m 292 Total 3,712 8,787 2,378 3,259 2,935 3,358 6,466 15,784 22,324 20,829 (2,836) 145,153 213,299 209,941 229,083

- - - - 11 £m 272 223 Due Due after after more more (261) years 1,454 1,320 1,465 2,330 5,980 6,686 16,539 18,004 18,004 than five than five - - 11 45 42 £m 759 Due Due 862 987 804 (817) 5,516 6,022 4,020 27,103 27,907 27,907 10,505 two and two between between five years five - 11 13 14 15 56 43 £m 130 Due Due 422 435 (43) 1,720 2,051 9,943 13,927 14,362 14,362 one and between between two years two - 4 15 67 20 £m 137 122 201 Due Due 255 280 1,557 1,097 7,073 7,073 4,552 6,936 twelve twelve (1,082) months nine and between between - - 3 6 51 45 £m 171 177 106 108 337 Due Due 668 nine (100) 6,166 6,343 6,343 4,954 six and months between between - 4 4 25 64 six £m 142 146 Due Due 400 306 1,159 1,887 3,199 (396) 6,228 13,018 13,018 12,872 months between between three and three continued - - 1 5 25 continued £m 131 127 129 140 134 Due Due

(135) three three 1,733 1,079 2,457 5,687 5,553 5,687 months one and between between - - 1 2 60 60 (2) £m 346 896 1,818 2,882 2,499 month 15,784 (note i) (note 112,403 Due less Due 120,845 120,905 136,689 than one

Net settled derivative liabilities Gross settled derivatives – net flows settled derivatives Gross Gross settled derivative inflows derivative settled Gross Gross settled derivative outflows derivative settled Gross

Total financial liabilities Total including off-balance sheet commitments Off-balance sheet commitments Off-balance sheet commitments iii) (note Total derivative financial financial derivative Total liabilities Total financial liabilities Total Derivative financial liabilities: Subscribed capital (note ii) capital (note Subscribed Total non-derivative non-derivative Total financial liabilities Subordinated liabilities Subordinated Senior unsecured funding Senior unsecured Secured funding – ABS and Secured bonds covered Due to customers to Due Other deposits Deposits from banks Deposits from Shares (Audited) Gross contractual cash flows contractual Gross 2017

Financial risk – LiquidityFinancial risk and funding Business and Risk Report Financial liabilities – gross undiscounted contractual cash flows contractual undiscounted Financial liabilities – gross residual maturity as they include interest, the analysis of differtotals from cash flows. The contractual of gross an analysis The tables below provide sheet date. at the balance outstanding on the balances period until maturity, the average for rates accrued at current cash flows. maturity based on the timing of individual contractual band the relevant to allocated Amounts are Annual Report and Accounts 2017 Accounts and Report Annual

114

Strategic Report Governance Business and Risk Report Financial Statements Other Information £m 568 472 Total 3,282 5,602 3,850 6,216 2,236 7,646 7,646 2,095 13,630 (5,034) 17,956 17,956 214,455 20,905 196,975 139,449 139,449 200,825

- - - - 118 £m Due Due 362 after after 1,015 1,257 1,375 more more years (897) 17,215 1,704 1,369 1,369 5,336 8,444 8,444 18,590 18,590 18,590 18,590 than five - 7 67 25 £m 221 63 Due Due 840 233 1,061 2,079 7,683 7,683 18,757 6,387 6,387 4,292 4,292 (1,858) 19,818 19,818 two and between five years - - 22 133 £m 127 622 Due Due 212 489 737 854 1,221 1,832 14,650 15,272 15,272 (1,088) 10,866 10,866 one and between two years - 4 59 19 £m 170 49 229 Due Due 391 391 889 216 7,511 503 1,152 (830) 5,177 7,740 7,740 7,740 7,740 twelve months between nine and - - 7 13 27 41 £m 176 163 (14) Due Due 717 nine 332 347 8,401 2,282 8,577 8,577 4,675 4,675 six and months between - 4 13 six 101 £m 38 201 68 188 Due Due 169 169 (88) 1,351 11,201 1,769 1,769 1,846 1,846 5,956 11,402 11,402 11,402 11,402 months between three and three continued - - 5 10 continued 119 23 £m 129 244 Due Due 184 184

549 549 three three (234) 1,723 6,465 1,398 1,398 2,583 2,583 6,594 6,594 6,594 6,594 months one and between 1 - 1 57 26 56 70 £m (25) 1,657 1,638 3,563 2,550 month 13,630 (note i) (note 112,775 126,462 112,832 Due less Due than one 103,296

Due less than one month includes amounts repayable on demand. less than one month includes amounts repayable Due column. than five years subscribed capital is included within the due more undated The principal amount for the where mortgages on residential overpayments customer loan commitments, unrecognised on demand for include amounts payable Off-balance sheet commitments financial assets. acquire to the amount overpaid and commitments down draw is able to borrower Total financial liabilities Total including off-balance sheet commitments Off-balance sheet commitments Off-balance sheet commitments iii) (note Total financial liabilities Total Total derivative financial liabilities Total Derivative financial liabilities: Total non-derivative Total financial liabilities Subscribed capital (note ii) capital (note Subscribed Subordinated liabilities Subordinated Senior unsecured funding Senior unsecured Secured funding – ABS and Secured bonds covered Other deposits Shares Due to customers to Due Deposits from banks Deposits from (Audited) Gross contractual cash flows contractual Gross 2016 Asset encumbrance cannot be obligations and therefore funding and other collateralised against secured pledged as collateral assets are arises where Encumbrance Bond and the Covered collateralise pools to the use of prime mortgage arises from of asset encumbrance other purposes. The majority used for participation in the FLS and TFS. 16) and from (see note funding programmes secured Silverstone and cash and These include prime mortgages requirements. funding or meet collateral secure to available readily assets are unencumbered Certain of with a degree capable of being encumbered are assets, such as non-prime mortgages, Other unencumbered securities held in the liquidity buffer. classified as not being capable of being encumbered. are either of these categories further management action. Assets which do not fall into off-balance sheet assets is set out on the next page. The table excludes on-balance and unencumbered An analysis of Nationwide’s encumbered identify assets that would be to is not intended This disclosure re-use. to sheet assets, such as FLS treasury bills which Nationwide is permitted or bankruptcy. in the event of a resolution available ii. iii. Notes: i.

Financial risk – LiquidityFinancial risk and funding Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

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Strategic Report Governance Business and Risk Report Financial Statements Other Information £m £m 884 820 3,591 8,797 2,350 2,587 3,898 9,764 10,612 5,043 3,068 13,017

Total Total

178,807 187,371

221,670 208,939

Total Total £m £m 884 820 7,072 1,194 2,350 2,080 3,898 9,764 5,043 3,068 174,211 10,484 10,912

147,443

157,637

188,438

encumbered encumbered

- - - -

Cannot be be Cannot £m be Cannot £m 221 215 267 884 820

1,315

2,350 9,413 3,898 8,668 5,043 3,068

encumbered encumbered

------

are capable of being being of capable are

£m being of capable are £m

Other assets that that assets Other Other assets that that assets Other

48,744 48,744 49,229 49,229

encumbrance encumbrance

------

Readily available for for available Readily at the central bank at the central for available Readily £m £m at the central bank at the central Assets not positioned Assets not positioned 6,851 9,732 70,312 10,442 87,605 10,697 and unencumbered assets) and unencumbered 95,461 75,032

and unencumbered assets) and unencumbered

Other assets (comprising assets Other assets (comprising encumbered at the central bank at the central encumbered

plus encumbered) plus

Other assets (comprising assets Other assets (comprising encumbered) plus encumbered at the central bank at the central encumbered

------

central bank (i.e. prepositioned prepositioned (i.e. bank central

central bank (i.e. prepositioned prepositioned (i.e. bank central 42 32

£m £m 765 927

the at positioned Assets the at positioned Assets

29,194 28,387 33,376 34,335

Total Total ------£m £m 128 1,511 1,725

2,105 1,393

31,364 34,728 33,232 29,734

Other Other ------£m £m 128

1,511

1,639 1,393 1,393

As a result of securitisations of result a As As a result of securitisations of result a As ------continued £m £m 397 567

continued 12,765

12,368 10,412

10,979

As a result of covered bonds covered of result a As other than central banks other than central bonds covered of result a As ------other than central banks other than central £m £m Assets encumbered as a result as a result Assets encumbered Assets encumbered as a result as a result Assets encumbered 1,328 of transactions with counterparties with counterparties of transactions 1,538 20,324 18,996 19,322 of transactions with counterparties with counterparties of transactions 20,860

cover cash flow mismatches and fluctuations in funding cash flow mismatches cover public confidence retain meet financial obligations as they fall due, even during episodes of stress. Total Non-financial assets Total Other financial assets Non-financial assets Derivative financial instruments Other financial assets Loans and advances to customers to and advances Loans Derivative financial instruments Available for sale investment securities for Available Loans and advances to customers to and advances Loans Loans and advances to banks to and advances Loans Available for sale investment securities for Available Loans and advances to banks to and advances Loans Cash Cash Asset encumbrance 2016 Asset encumbrance Asset encumbrance 2017 Managing liquidity and funding risk sufficientto amount are liquid assets, both as that at all times there ensure Nationwide’s management of liquidity and funding risks aims to to: and quality, • • •

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Strategic Report Governance Business and Risk Report Financial Statements Other Information

Stable Outlook Negative Negative

3.7 4.5 £bn January 2017 January 2017 February 2017 Date of last rating of last rating Date action / confirmation a two notch downgrade notch a two A- Cumulative adjustment for Cumulative BBB Baa1 Tier 2 4.1 3.3 £bn F1 P-1 A-1 continued Short term continued

A A+ Aa3 a one notch downgrade a one notch Cumulative adjustment for Cumulative Long term Long Modelling assumptions used with no new deposits received. experienced outflows are Significant unexpected short term of certain wholesale funding and only partial rollover of maturing long term rollover Zero No new wholesale funding is received. downgrades. rating credit funding following downgrades. rating credit due to funding programmes secured to outflows occur in relation Contractual be met. to continue commitments Lending rates. adverse movements in market outflows arise due to Collateral basis. assessed on a behavioural loans are and commercial or retail mortgages Inflows from payments. outgoing pre-fund Liquidity is needed to assumed. conditions of the stressed in recognition reduced Asset values are

Standard & Poor’s Standard Credit ratings Credit Liquidity risk driver Moody’s Fitch Retail funding Retail Wholesale funding Off-balance sheet Intra-day Liquid assets 2017 2016 In January 2017, both Standard & Poor’s and Moody’s affirmed their long term and short term ratings and left negative outlook on Nationwide’s their term affirmed and Moody’s term and short & Poor’s their long both Standard In January 2017, action involving all UK banks and building societies. unchanged. This negative outlook is part of a sector-wide rating long term to made was upgrade A. The one notch A+ from to debt deposits and senior unsecured Nationwide’s long term upgraded Fitch In February 2017, in creditors for senior unsecured protection provide qualifying view that Nationwide’s Fitch’s junior debt buffer to sufficiently is now reflect large case of the Society’s failure. downgrade in the event of a one and two notch provide Nationwide would need to The table below sets out the amount of additional collateral agencies. rating credit by external At 4 April 2017, potential stressed net outflows under the most severe 30 business day stress test (a combined market-wide and Nationwide- and combined market-wide test (a stress 30 business day net outflows under the most severe stressed potential 2017, 4 April At modelled at were scenario) £22.1 billion specific stress (2016: net outflows of stressed £22.6 billion). The liquid asset buffer as a percentage 118% (2016: to equated 114%). ratings credit External at ratings credit The Society’s short and long term ratings. the Society’s credit agencies reviewed rating the year all of the major During 201722 as follows: May are

Financial risk – LiquidityFinancial risk and funding Business and Risk Report as escalation procedures and a range of actions that could be taken in response to ensure sufficient liquidity is maintained. The LCP is tested annually tested sufficientLCP is ensure liquidity is maintained. The to in response be taken could of actions that and a range as escalation procedures stress. extreme be utilised in a more could actions that Plan which describes potential also has a Recovery Nationwide robust. it remains ensure to testing Liquidity stress maintain a liquid asset buffer of at least 100% of by its business activities, Nationwide aims to liquiditygenerated and funding risks mitigate To LCR. regulatory-prescribed and the test scenarios stress outflows seen under internal the anticipated key with the range of liquidity risk drivers over 30 business days, a assessed across outflows are stress and behavioural contractual Potential assumptions are stress capacity is assessed. Internal against which LCP month assessment is also performed A three assumptions shown below. as part of the ILAAP. annually by the Board and approved by ALCO, with changes approved regularly reviewed This is achieved through the management and stress testing of business cash flows, and through the translation of Board risk appetite into into risk appetite of Board the translation business cash flows, and through of testing the management and stress This is achieved through sufficientmaturity a prudent funding mix and profile, levels of high quality liquid assets and appropriate risk limits. This ensures appropriate maintained. levels are encumbrance Liquidity Assessment Process Adequacy Internal as part of the annual by the Board is reviewed risk framework The Liquidity and Funding Plan, and its risks. This includes setting and including the Funding sheet structure, managing the balance for is responsible (ILAAP). ALCO in ALCO to support reviewed weekly and is maintained forecast cash flow limits. A consolidated limits within Board granular more monitoring metrics. risk key monitoring as well liquidity or funding stress indicating an emerging triggers for is maintained which describes early warning Plan (LCP) A Liquidity Contingency Annual Report and Accounts 2017 Accounts and Report Annual The contractually required cash outflow would not necessarily match the actual cash outflow as a result of management actions that could result of management actions that the actual cash outflow as a match cash outflow would not necessarily required The contractually the impact of the downgrades. reduce to be taken

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Summary and sufficientcycle a full economic to maintain sufficientto absorb losses throughout Solvency is the risk that Nationwide fails to risk capital cover inherent members, to protect Capital is held regulators. and members, the Board investors, prospective and of current maintain the confidence considered is risk appetite the adequacy In assessing of capital resources, business strategy. events and support the a buffer stress for risks, provide risks. manage those to required strategies is exposed and the appropriate which Nationwide risks to of the material in the context risk Managing solvency to with respect setting risk appetite for is responsible solvency support the management of risk. The Board employed to are A number of tools that it is minimum levels of capital, including leverage, and it defines statements, its risk appetite through solvency risk, which is articulated Assets and Liabilities Committee, Risk by the Board monitored metrics, which are specific risk into translated are with. These operate willing to management committees. and other internal (ALCO) Committee as well as meeting the requirements, meet minimum regulatory to that Nationwide continues ensure is managed to The capital structure both regulatory to relative targeted are capital ratios strong framework, As part of the risk appetite stakeholders. expectations of other key (such developments and other factors regulatory sheet, potential the balance banking peers. Any planned changes to and major requirements considered. are all sale reserve for outlook, movements in the available benefit pension deficit) and defined as trading With general appropriate. capital where by external supplemented earnings, retained through manage capital ratios is to The capital strategy requirements. to meet capital considering the ability when is an important factor profitability reserves of capital resources, the majority forming monitoring which is part of the performance capital requirements, based upon an allocation of overall is in place, on capital framework A return of Common the issuance earnings through supplement retained ability years, Nationwide’s to In recent segments. individual product activity for been significantly have portfolios and its non-core been demonstrated, Tier 1 and Tier 2 capital instruments has Tier 1 (CET1), Additional Equity deleveraged. to meet to hold capital firms risks. In addition, the PRA requires and market operational credit, for meet Pillar 1 requirements Capital is held to set by the PRA This is a point in time estimate, on an annual (ICG). Capital Guidance set out in the Individual which are Pillar 2A requirements, risk, and and operational concentration 1 such as credit by Pillar meet risks partly covered be held to to basis, of the amount of capital required risk. rate by Pillar 1 such as pension and interest risks not covered regulatory capital to subject firms are ICG), breaching (thereby Pillar 1 or Pillar 2A requirements against the risk of consuming protect to In order In addition, the PRA set a firm-specific buffer may based upon supervisory set out in CRD IV. buffers which are by the judgement informed systemic including leverage, other factors account and taking into resources, and requirements on a firm’s capital scenarios impact of stress procedures. and any weaknesses in firms’ risk management and governance importance be held the minimum amount of capital to (ICAAP) This considers is also undertaken. Assessment Process Capital Adequacy Internal A regular an risks in the banking book and pension risks. It also considers rate risks, interest risks, operational all risks including credit cover to in order assessment, the PRA of this internal can be absorbed. As a result but plausible stress that the impact of a severe ensure additional buffer to sets Nationwide’s Pillar 2 capital requirements. and how vulnerabilities the understanding of potential enhance its subsidiaries, to Nationwide and covering undertaken, are tests stress Regular and capital resources project tests developing. These stress conditions of stressed management actions might be deployed in the event and scenarios, or market-wide range of macro-economic cover a that but plausible scenarios over a five-year period, during severe requirements Risk Committee. the Board to reported are results test model. Stress the business particular risks to that test scenarios idiosyncratic or but plausible economic event of a severe in the ratios capital and leverage it would maintain strong be in a position where Nationwide aims to of regulatory in excess ratios main Financial risk – SolvencyFinancial risk Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

118

Strategic Report Governance Business and Risk Report Financial Statements Other Information % £m 26.1 23.2 30.9 2016 4.2% 4.4% 9,005 213,181 204,346 continued

% £m 36.1 25.4 28.4 2017 4.2% 4.4% 9,547 215,894 228,428 continued

The solvency ratios have been calculated under CRD IV on an end point basis. Transitional ratios can be found in the Pillar 3 Disclosure 2017 in the Pillar 3 Disclosure at nationwide.co.uk can be found ratios under CRD IV on an end point basis. Transitional been calculated have The solvency ratios bank reserves (PRA) eligible central Authority and excludes the Prudential Regulation by announced is shown on the basis of measurement ratio The UK leverage measure. exposure the leverage from and measure Act definition of the exposure and the Delegated for the capital amount using the CRR definition of Tier 1 is calculated ratio The CRR leverage on an end point basis. is reported Key capital ratios capital Key (note i) (note Solvency Total Tier 1 ratio Total capital ratio regulatory Total Leverage Common Equity Tier 1 (CET1) ratio Equity Common iii) (note exposure CRR leverage Tier 1 capital ratio UK leverage UK leverage exposure (note ii) (note exposure UK leverage ratio CRR leverage Capital position in force are This assumes that all CRD IV requirements on a CRD IV end point basis. reported are included in this report The capital disclosures basis, including all subsidiary (consolidated) on a Group are In addition, the disclosures permitted. provisions transitional during the period, with no entities, unless otherwise stated. Capital and leverage ratios have remained well in excess of regulatory requirements with a Common Equity Tier 1 (CET1) ratio of 25.4% (2016: of 25.4% Tier 1 (CET1) ratio Equity with a Common requirements of regulatory well in excess remained have ratios Capital and leverage (2016: of 4.4% 4.4%). ratio 23.2%) and a UK leverage for the period of tax after profit £757 million, in the defined benefit pension deficit reflecting offset by an increase has increased, The CET1 ratio and in profits 36.1% (2016: the increase to reserve by £255 30.9%) due to the general increased capital ratio The total million. which reduced debt. of $1.25 billion of qualifying Tier 2 subordinated the issuance CET1 basis at 4 April 2017 than the Group’s 25.6% (2016: was on an Individual (solo) consolidated greater The CET1 ratio 23.3%), marginally on an Individual Further detail on the capital position measured of cash flow hedge accounting. reserves as a result higher general due to ratio 2017 within the annual Pillar 3 Disclosure at nationwide.co.uk basis can be found consolidated regulatory The current requirements. to supplement risk-based capital ratio, a non-risk-based leverage to calculate firms CRD IV requires which forms ratio, of the leverage and reporting monitoring regular is managed through leverage is set at 3%. The risk of excessive threshold part of risk appetite. by the PRA 2016. in August announced on the basis of measurement ratio a UK leverage report permission to Nationwide has been granted (CRR) Regulation by the PRA using the Capital Requirements on this basis. It is calculated monitored are requirements Minimum leverage reserves. bank central excluding eligible measure, Act definition of the exposure for the capital amount and the Delegated definition of Tier 1 offset in both the broadly increases have stable as profits at 4 April 2017 has remained (2016: is 4.4% The ratio ratio 4.4%). The UK leverage balances. was mainly driven by higher mortgage which exposure, in UK leverage defined benefit pension deficit and the increase Act definition of the exposure for the capital amount and the Delegated using the same definition of Tier 1 is calculated ratio The CRR leverage offset deficit and the higher in the pension at 4.2% (2016: broadly the increase have remained 4.2%) as profits ratio The CRR leverage measure. in the contained and liquid assets (further details on liquid assets are balances mortgage driven by increased which was exposure, CRR leverage ‘Liquidity and funding risk’ section of this report). 2017 in the Pillar 3 Disclosure at nationwide.co.uk can be found details on leverage Further ii. iii. Notes: i.

Financial risk – SolvencyFinancial risk Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

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Strategic Report Governance Business and Risk Report Financial Statements Other Information 21 64 (2) (8) £m 531 (12) (42) 992 (55) 2016 1,628 8,921 8,013 (264) 1,649 9,005 (1,120) 10,654 (1,495) - 27 67 44 £m 531 (12) 992 (43) (23) 2017 (151) 9,316 2,582 2,555 9,547 8,555 12,129 (1,174) (1,403) continued

continued

Foreseeable distributions (note i) distributions (note Foreseeable Prudent valuation adjustment (note ii) Prudent valuation adjustment (note iii) valuation adjustments (note and debit Own credit Intangible assets (note iv) Intangible assets (note Goodwill (note iv) Goodwill (note Excess of regulatory expected losses over impairment provisions (note v) (note losses over impairment provisions expected of regulatory Excess

Foreseeable distributions in respect of CCDS and AT1 securities are deducted from CET1 capital under CRD IV. from deducted securities are and AT1 of CCDS distributions in respect Foreseeable capital rules. under regulatory of fair valued instruments as required is applied in respect A prudent valuation adjustment (PVA) changes in from sheet gains or losses of fair valued liabilities and derivatives that result balance remove applied to and debit valuation adjustments are Own credit with CRD IV rules. standing and risk, in accordance Nationwide’s own credit Intangible assets and goodwill do not qualify purposes. regulatory as capital for of tax. CET1 capital, gross from is deducted provisions impairment of accounting loss in excess capital expected The net regulatory included that are and discounts unamortised premiums adjustments for rates, interest changes in market to adjustments related debt includes fair value Subordinated than five years instruments with fewer rules for by regulatory sheet, and any amortisation of the capital value of Tier 2 instruments required balance in the consolidated maturity. to Available for sale reserve for Available and deductions: adjustments Regulatory Revaluation reserve Revaluation General reserve General (CCDS) shares capital deferred Core Total regulatory capital regulatory Total Common Equity Tier 1 capital Equity Common Tier 1 capital securities (AT1) Additional Total regulatory adjustments and deductions regulatory Total Tier 1 capital Total vi) debt (note subordinated Dated Tier 2 capital capital regulatory Total Collectively assessed impairment allowances Collectively CET1 capital resources have increased by £542 million. This is primarily the result of profit for the year, partly offset by a reduction in reserves partly offsetreduction in by a for the year, of profit by £542 million. This is primarily the result increased have CET1 capital resources regulatory reduced to provisions is also lower due losses over excess of expected in the defined benefit pension deficit. The an increase due to book. run-off of the continued of the commercial losses, mainly a result expected requirements, and Eligible Liabilities (MREL) Own Funds for meet pending Minimum Requirement in line with plans to Tier 2 capital has increased, debt. of $1.25 billion of qualifying Tier 2 subordinated the issuance following ii. iii. iv. v. vi. Notes: i.

Financial risk – SolvencyFinancial risk Business and Risk Report Nationwide’s latest Pillar 2A Individual Capital Guidance (ICG) was received in August 2016 following an ICAAP. It equates to circa £2.2 circa to billion, It equates an ICAAP. 2016 following August in received was (ICG) 2A Individual Capital Guidance Pillar Nationwide’s latest This amount is equivalent to ICG. the previous unchanged from £1.2 broadly capital, and was billion must be met by CET1 of which at least circa total assets 75% 76%) of (2016: risk weight, given that approximately 4 April 2017 as at average the low 6.6% of RWAs (2016: reflecting 6.4%), of which 81% (2016: prime. mortgages, 80%) are residential of secured in the form are on an end point basis and 2017 capital. Both regulatory been presented total 2016 have and reserves to the general The table below reconciles so do not include non-qualifying instruments. Annual Report and Accounts 2017 Accounts and Report Annual

120

Strategic Report Governance Business and Risk Report Financial Statements Other Information - £m 2016 1,635 5,621 1,296 1,039 6,194 4,604 29,871 34,475 14,086 continued

- £m 849 2017 1,221 5,641 1,566 4,865 5,636 33,641 28,776 13,863 continued

Retail mortgages Retail ii) Other (note Retail unsecured lending unsecured Retail Counterparty credit risk (note i) risk (note credit Counterparty Treasury Commercial loans Commercial

Relates to derivative financial instruments and repurchase agreements. repurchase financial instruments and derivative to Relates and other assets, including investments in equity shares. fixed to Relates of own funds. of 2% is below the threshold by the CRR, as exposure as permitted zero, set this to to Nationwide has elected Market risk (note iii) risk (note Market Total credit risk credit Total risk Operational assets risk weighted Total Risk weighted assets Risk weighted risk: Credit ii. iii. Notes: i.

Financial risk – SolvencyFinancial risk Business and Risk Report RWAs have reduced by £834 million since 4 April 2016, to £33,641 million. Commercial RWAs have continued to decrease, driven by continued driven by continued decrease, to continued have RWAs £33,641 million. Commercial 4 April 2016, to million since £834 by reduced have RWAs lower as the are RWAs mortgage Residential exposures. quality the remaining of in the credit book and improvements run-off of the commercial in exposures a reduction due to decreased have RWAs Treasury balances. mortgage has outweighed the increasing impact of rising house prices higher income. due to increased have Approach, the Standardised on calculated risk RWAs, banks. Operational to 2017 in the Pillar 3 Disclosure at nationwide.co.uk can be found calculated are Details on how RWAs developments Regulatory during the financial year regulatory announcements be finalised, yet to are requirements potential where a number of areas are Whilst there engaged in the development of the regulatory will remain Nationwide impact. However, visibility of the expected is better mean that there any change. for is prepared it ensure to approach be buffer of 3%, with a supplementary to of 0.35% ratio ratio leverage leverage maintain a minimum to required Nationwide is currently be 0%, but could buffer; this is currently leverage set a countercyclical has the ability to Committee The Financial Policy in 2019. implemented of a UK leverage with the introduction framework, ratio to the UK leverage a modification The PRA a maximum of 0.9%. has introduced set up to made by the recommendations This follows measure. exposure the leverage bank reserves from qualifying which excludes central measure ratio during 2017. framework ratio of the UK leverage a review undertake is due to Committee in 2016. The Financial Policy Committee Financial Policy assets framework, including the risk weighted Basel III to the reforms to finalising commitment reaffirm its to continues Committee The Basel certain IRB risk weights falling below a of an output floor (which will prevent and the introduction framework ratio the leverage framework, revised effective. on consulted The PRAto become has also likely level). It is not clear at this stage when these will be finalised and are in result to expected be effective in 2019. Whilst these amendments are to likely which are mortgages, residential IRB models for expectations for in Nationwide’s overall increase in a material result to not expected they are in the CET1 ratio, a reduction and therefore in RWAs an increase capital requirements. setting the MREL and has published its policy for authority, of England, in its capacity as the UK resolution the Bank As part of the BRRD, the minimum capital to hold twice requirement to a firms with indicative MREL. that Nationwide will be subject provided It is anticipated circa equal to are MREL resources total January applicable buffers, plus the 2020. Current from exposure), (i.e. 6% of UK leverage requirements January 2020, Nationwide has a strong be met over the period to in a small shortfall to While this results exposure. ratio 5.9% of UK leverage legislative changes, through available if it becomes of Tier 2 capital, or, issuance through meet MREL requirements which to from foundation debt instrument. a senior non-preferred Annual Report and Accounts 2017 Accounts and Report Annual Risk weighted assets Risk weighted by risk type: assets (RWAs) risk weighted of our breakdown The table below shows the

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Strategic Report Governance Business and Risk Report Financial Statements Other Information

• • • • • • risk option Product • • • • • • • • • • • • • risk Currency • • • risk Swap Swap spread Market risk Market • • • • • • • • • • • • • risk Basis • • • • • • • • • • • • • • Interest Interest rate risk rate 2.4 2.4 8.7 3.2 2.0 2.6 2.9 5.0 3.9 6.5 9.8 £bn 13.0 40.3 2017 187.4 187.4 221.7 144.5 210.5 continued

Represents assets or liabilities exposed to market risk, irrespective of materiality. risk, irrespective market assets or liabilities exposed to Represents Other liabilities include the defined benefit pension scheme. The scheme is exposed to equity risk (the risk of movements in share prices), interest rate risk and credit risk and rate interest prices), to equityOther risk (the risk of movements in share liabilities include the defined benefit pension scheme. The scheme is exposed risk’ section of this report. further details, see the ‘Pension For business operations. Nationwide’s core from risk is managed separately risk. Pension spread Assets Cash customers to and advances Loans Market risk linkage to the balance sheet the balance risk linkage to Market Loans and advances to banks to and advances Loans Derivative financial instruments Available for sale investment securities for Available Other assets assets Total Liabilities deposits) (customer Shares Deposits from banks Deposits from Other PEB deposits) deposits (including (including offshore deposits) customers to Due liabilities Subordinated i) Other liabilities (note Debt securities in issue Derivative financial instruments liabilities Total

Summary to the vote, with significant volatility seen prior referendum, primarily driven by the EU movements in the first half of the year were rate UK interest helped of England in August, by the Bank cut announced a rate including A package of measures, the result. following and a sharp fall immediately half of the year. stabilising in the second before in response rose rates and interest stabilise the market to to be dependent upon the path taken to movements likely volatile, with future and remains the referendum sharply after also weakened Sterling risk. currency to exposure Nationwide has limited achieve Brexit. in the an increase Despite of the global economy. the strength around with concerns uncertain landscape also remains economic The broader low in many parts of stay to likely low and are remain rates interest time, globally, Reserve a third for the US Federal from rates level of interest some time. the developed world for of base rate the timing and direction around uncertainty risk. The market rate interest market monitor at Risk (VaR) model is used to A Value also model. Earnings are by the VaR outside of those predicted of results the likelihood increase This could volatility. to changes contributes rates. to volatility in interest fluctuations due subject to positions, with the daily management of residual risk arising from market to exposure the potential restrict low to risk limits remain Internal (ALCO). the Assets and Liabilities Committee to risk metrics reported market relevant Book (IRRBB) in April 2016. Risk in the Banking Rate Interest Supervision for on Banking published the Standards Committee The Basel 2018. be applicable from to expected which are requirements, disclosure with these enhanced be fully compliant Nationwide expects to risk in November 2016. Included within this proposed market for capital requirements to a set of reforms proposed (EC) Commission The European calculation of own funds requirements instructions for granular IRRBB and more for Standards Disclosure elements of the Basel are set of reforms in anticipation readiness months and ensure book. Nationwide will assess the new guidelines over the coming risk in the non-trading market for 2019. be effective from to regulation expects the proposed The EC of adoption of the proposal. • Notes: i. Overview changes, or rate price of market because assets and liabilities is impacted arising from, that the net value of, or net income risk is the risk Market unless not taken risks are market cornerstone, to last’ strategic to Nationwide’s ‘built Aligned or equity prices. rates currency rates, specifically interest book. a trading stability of earnings. Nationwide does not have provide to designed activities, or they are business core essential to they are of materiality. irrespective in the table below, listed sheet assets and liabilities, are Nationwide’s balance to risks, linked The principal market Financial risk – Market risk risk – Market Financial Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

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continued Reporting measure Reporting at Risk sensitivity / Value Value Earnings sensitivity at Risk sensitivity / Value Value at Risk Value at Risk Value

The use of a 99% confidence level, by definition, does not take account of changes in value that might occur beyond this level of confidence. occur beyond this level of of changes in value that might account level, by definition, does not take The use of a 99% confidence the benefits of offsetting events. events and over-predict positions in those extreme of extreme the likelihood under-predict models often VaR the model will deliver calibrate moves beyond those used to market events. Extreme future predict data to model uses historical The VaR risks and in periods of low volatility it is market under-predict to volatility the model is likely example, in periods of heightened For exceptions. risks. market over-predict to likely the government interventions packages, which increase and stimulus arising from circumstances predict not adequately data may Historical difficulty of evaluating risks. Interest rate risk rate Interest risk Basis risk spread Swap risk Currency option risk Product Market risk exposure Market In addition, stress analysis is used to evaluate the impact of more extreme, but plausible events. These techniques are described below with a are plausible events. These techniques but extreme, the impact of more evaluate analysis is used to In addition, stress during the year. of the exposures review Sensitivity analysis shift in interest a one basis point (0.01%) parallel to example, the net exposure assess the change in value of, for Sensitivity analysis is used to risk. spread swap evaluate Sensitivity analysis is also used to daily by currency. is performed (PV01). This analysis rates Earnings sensitivity paid the rates shocks to apply rate techniques risks. These rate interest to and quantify exposure measure used to sensitivity metrics are Income detail. described below in more Both risks are the impact on earnings is calculated. earned on assets and the rates on liabilities and to at Risk (VaR) Value and prices, rates movements in market occur on risk positions because of future losses that could the potential that estimates is a technique VaR recorded series of and uses a behaviour market VaR is based on historic confidence. to a given level of statistical over a specified time horizon, are There and rates. markets between different inter-relationships This considers scenarios. derive plausible future to and prices rates market and currencies. rates interest models for separate and a 99% horizon A 10-day and correlations. volatilities and currency rate based on interest risk factors model used incorporates The VaR risks and is not and currency spread swap rate, interest to monitor VaR is used VaR monitoring. to day level is typically used in day confidence ongoing basis by on an monitored are outcomes daily by management. Actual reviewed against limits are Exposures model income. used to on the same basis as below are reported calculation. Values used in the VaR the validity of the assumptions and factors test management to those used internally. could mean that exposures may limitations which of the following be viewed in the context it needs to risk, is a valuable guide to Although VaR be higher than modelled: • • • •

Financial risk – Market risk risk risk – Market Financial Business and Risk Report Market risk management Market fixed risk arises from market to book. Most of the exposure a trading and Nationwide does not have risk only arises in the banking book Market risk on non-sterling currency amount of is a limited There value of the liquidity portfolio. and changes in the market or savings mortgages rate held. financial assets and liabilities used: measures with the types of risk reporting below together listed risks that affectNationwide are The principal market Annual Report and Accounts 2017 Accounts and Report Annual

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Strategic Report Governance Business and Risk Report Financial Statements Other Information Apr 17

Jan 17Jan Oct 16 ta retrn a a atetin eetion atetin a a retrn ta Key: continued

continued Jul 16 Jul

Apr 16 Product option risk for which Pillar 2 capital is held. which option risk for Product manage market liquidity to level of market an appropriate requires impact because, whilst Nationwide liquidity a limited risk – this has Market book. a trading a high ongoing dependency on it given that it does not operate risk, it does not have of the predictor 3 asset management – only a very data is not a reliable value Level of these assets is held and, whilst historic portfolio small Fair Adjustment). these assets as a Prudent Valuation is held for (capital the impact is limited future, or sensitivity analysis in the VaR not captured These are valuation adjustments (CVA/DVA). movements that can impact credit/debit rate Interest negligible. but are £m

1.00 0.75 0.25

0.50 0.00 VaR backtesting 99%/1-day backtesting VaR -1.00 -0.75 -0.25 -0.50 To seek to mitigate these limitations, backtesting of the VaR model is undertaken on a regular basis to ensure that the model is appropriate. that the model is appropriate. ensure basis to on a regular model is undertaken the VaR of these limitations, backtesting mitigate to seek To than the daily when a loss is greater is created numbers. An exception VaR against the estimated performance actual compares This process results of this backtesting. the any model deficiencies. The chart below shows did not highlight In 2016/17, the backtesting day. on any given VaR the EU followed two of which immediately on each of those days, rates significant movements in market due to were loss exceptions The three over the period. exceptions or fewer of four purposes regulatory for tolerance within acceptable remains The result referendum. Financial risk – Market risk risk risk – Market Financial Business and Risk Report VaR include: VaR • • • • analysis Stress VaR metric is of financial variables the standard but plausible events or movements in a set extreme impact of more the potential evaluate To analysis. with sensitivity and stress supported sensitivity of stressed by the production PV01 sensitivity analysis is supplemented the standard risk exposures, rate interest example, for For PV01; this sensitivity analysis is in a similar manner to is calculated rates 200 basis point (2.0%) shift severe in interest parallel A more measures. daily. and monitored generated known as PV200. PV200 numbers are It is environment. movements in a stressed market unfavourable loss arising from the potential estimate is used to VaR In addition, stressed a from basis but uses volatilities and correlations over a two year period and on a 99% 10-day calibrated VaR, as standard in the same way calculated period of significant financial stress. highlight potential designed to scenarios of stressed a range to also subjected positions are risk and currency rate interest the residual Each quarter, in which the circumstances insight into provide by management to reviewed are of these scenarios The results conditions. market losses in extreme occur. losses may events. on the crystallisation focusing option risks under stressed of product produced also regularly of metrics are A range risk rate Interest lending and from realised margin rate affect the interest rates movements in interest risk. Market rate is interest risk faced The main market activities. borrowing risks generated rate example, interest function. For by Nationwide’s Treasury undertaken the impact of such movements, hedging activities are reduce To is managed using derivatives, net exposure The remaining offset are against each other internally. customers deposits from and receiving by lending to set by ALCO. within parameters This is rates. interest the volatility of short term subject to are accounts bearing current the reserves and non-interest from contribution The income the volatility of earnings. reduce to hedging smoothed using structural The model is subject to an annual review process to ensure it continues to be appropriate for risk reporting. The types of risks not captured in The types of risks not captured risk reporting. for be appropriate to it continues ensure to process an annual review The model is subject to Annual Report and Accounts 2017 Accounts and Report Annual

124

Strategic Report Governance Business and Risk Report Financial Statements Other Information 0.1 £m Low (0.1) (10.8) 0.1 £m 0.8 19.3 High 2016 0.3 £m 0.0 6.9 Average 0.1 £m Low (9.3) (0.0) £m 108 230 (25) 2016 0.1 £m 2.4 19.3 High 2017 £m 117 250 (68) 2017 £m 0.5 4.0 0.0 Average continued

continued

impacts are calculated for a forward period of one year a forward for calculated impacts are sheet; all assets and liabilities maturing on a static balance based are only and illustrative sensitivities set out above are rate the interest products like for in like reinvest assumed to within the year are turning negative from rates to prevent at one basis point floored are the negative shift scenarios conditions, of maturing assets and liabilities, market such as the timing factors, sensitivities will vary several over time due to the reported performance of future predictive be considered sheet mix, and should not therefore the balance changes to and strategic behaviour customer the sensitivity analysis includes all financial assets and liabilities held account. any management actions into the model does not take Potential favourable/(adverse) impact on annual earnings favourable/(adverse) Potential (Audited) +200 basis points shift Interest rate risk rate Interest VaR (99%/10-day) (audited) VaR Sensitivityanalysis (PV01) (audited) at 1 basis point -25 basis points shift, floored Stress testing (PV200: all currencies) testing Stress +100 basis points shift

Financial risk – Market risk risk risk – Market Financial Business and Risk Report Basis risk Basis benchmarks. The primary rate differing interest short term to with reference assets and liabilities re-price variable rate where risk arises Basis between base Changes in the difference month Libor. and three of England base rate the Bank are that Nationwide is exposed to rates interest time will impact earnings. month Libor over and three rate by transacting necessary, where is mitigated, the net mismatch to or ‘basis’ type. Exposure rate, offsetAssets and liabilities are by a reference risk limits. agreed within internally Nationwide remains ensure to basis swaps Earnings sensitivity changes The sensitivityin of earnings to rates. interest is adversely affected by changes in interest the risk that income Earnings sensitivity measures scenarios. rate interest model and potential a forecasting monthly using is measured rates over a one year period: rates in interest rises and falls earnings to The table below sets out the sensitivity of future The table below highlights the limited amount to which Nationwide is exposed to interest rate risk. The risk is calculated each day and day each risk is calculated risk. The rate interest which Nationwide is exposed to amount to the limited The table below highlights year: summarised over the financial Annual Report and Accounts 2017 Accounts and Report Annual The following should be noted in relation to the above: to in relation should be noted The following • • • • • • may negative, margins fall further or become rates to manage earnings. If interest the flexibility can influence rates interest levels of The absolute changes. rate product or savings account can be fully offset current to borrowers through that the benefit because it is unlikely be constrained risk spread Swap swaps rate debt securities and interest sovereign rate fixed predominantly manage liquidity risk. These assets are is held to A liquidity portfolio with the possible movement in the risk associated a residual remains there risk on these assets. However, rate hedge the interest used to are can value of the liquidity portfolio the fact that the market risk’ reflects spread This ‘swap rates. debt yields and swap between sovereign spread ahead is cancelled if a bond is sold and the swap this risk is only realised terms, In economic rates. bond and swap movements in change due to of maturity. Exposures capital requirements. to limits linked via internal metrics and the risk is controlled VaR using stressed risk is monitored This market ALCO. monthly to reported daily and are monitored are

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Strategic Report Governance Business and Risk Report Financial Statements Other Information £m 0.0 Low 0.3 £m High 2016 0.1 £m Average £m 0.0 Low £m 0.2 High 2017 0.1 £m Average continued

continued

Currency risk Currency VaR (99%/10-day) VaR (Audited) Financial risk – Pension risk Financial risk – Pension Overview the risk that the value of the pension Pension risk is defined as defined benefit pension schemes. several Nationwide has funding obligations to Pension risk can adversely impact Nationwide’s capital position and may liabilities. schemes’ assets will be insufficientto meet the estimated the pension schemes. cash funding obligations to in increased result to new employees, although some employees Fund), which is closed Fund (the Pension The most significant pension scheme is the Nationwide assets the Group’s trust from held in a legally separate Fund are with UK legislation, the assets of the accrue benefits. In accordance to continue Fund. to the beneficiaries of the fiduciary who have responsibilities (the Trustee) of trustees by a board administered and are Risk factors impacting key risk factors deficit. The cause volatility the assets and the value of the liabilities in the Fund’s from in investment returns Volatility a positive or negative impact on the deficit. can have set out below; these factors the deficit are spreads and credit rates interest term Long in liabilities will liabilities. The increase on the Fund’s the value placed will increase spreads and/or credit rates interest in long term Decreases investments. bonds and credit be partially offset in the value of the Fund’s by an increase Inflation for most benefits, caps on the level to higher liabilities (although, lead to inflation. Higher inflation will linked of the pension benefits are The majority gilts (for example, index linked with inflation correlated are asset values inflation). Where Fund against extreme the of inflationary protect increases in the liabilities will be partially offset the increase by asset increases. and inflation swaps), Asset performance the bond yields, this will cause the net bond yields. If the assets underperform to set with reference rate using a discount calculated Liabilities are deteriorate. to position of the Fund return seeking assets are investments. Whilst return-seeking assets such as equities and credit of proportion also holds a significant The Fund The investment in return medium term. risk and volatility in the short to they create in the long term, the liabilities outperform to expected long term given the Fund’s appropriate it remains ensure and Nationwide to by both the Trustee seeking assets, such as equities, is monitored the accounts. 33 to set out in note the movement of assets are details on objectives. Further

Financial risk – Market risk risk risk – Market Financial Business and Risk Report Product option risk Product key The to hedging. changes require which can products rate within fixed options contained exercising risk also arises because of customers Market savings), and rate of fixed risk (early withdrawal access mortgages), rate of fixed or overpayment risk (early redemption prepayment risks are product scenarios using models range of stress quantified under a are These risk exposures mortgages). rate of fixed risk (higher or lower completions take-up risk measures These stressed then closely monitored. are impacts The potential rates. changes in interest to in response behaviour customer that predict within limits. necessary bring the exposures management actions where to along with proposed ALCO, to reported a set of limits and are subject to are option risks. product for capital requirements assess internal is also used to This approach Model risk to of business systems risk effectively as representations designed is highly dependent on effectiveManaging market models. The models are as a result. optimise decisions taken and to help describe the impact of various scenarios all significant models This requires Policy. the Model Validation and managed through risk models is controlled with market The risk associated and weaknesses, assesses the identifies model strengths process use. The validation prior to by an independent oversight team be validated via back is assessed regularly implementation, model performance mitigating actions. After impact of these and suggests appropriate potential for fit they remain ensure to at least annually, periodic review, thorough a more also subject to and sensitivity analysis. All models are testing model development. future inform used to assessment are of the model performance purpose. The results day to day monitoring made using the same models as those used for risk are rate interest for the capital requirements determine Calculations to risk. rate interest Currency risk Currency ALCO levels. acceptable to exposures reduce offset sheet or using derivatives to natural on the balance through is managed exposure Currency risk: currency to exposure of the residual extent limited The table below sets out the exposure. the net currency limits on sets and monitors Annual Report and Accounts 2017 Accounts and Report Annual

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Strategic Report Governance Business and Risk Report Financial Statements Other Information 42 (7) £m 107 (69) 2016 (213) (286) (5) £m 206 (64) (213) 2017 (423) (347) continued

continued

At 5 April At charge Pension 4 April At Changes in the present value of net defined benefit liability Changes in the present Net interest cost Net interest remeasurement Actuarial (including deficit contributions) Employer contributions The actuarial remeasurement quantifies the impact on the deficit from the updating of economic and demographic assumptions. Positive assumptions. economic and demographic from the updating of quantifies the impact on the deficit The actuarial remeasurement bond and increased returns equity price driven by strong of £951 million, were rate, of the discount assets in excess movements in the Fund’s partially offset conditions, by updating the longevity assumptions over the year (driven by market the change in actuarial valuations. However, resulted assets and than the positive movements in the Fund’s by £1,298 more million, which was in liabilities increasing assumptions) has resulted deficit. in the Fund’s in an increase investment risk and increase reduce the year £712 to assets and liabilityDuring matching credit into sold and reinvested million of equities were to inflation risk. These its exposure reduce to swaps inflation million of long-dated into £246 Fund entered assets. The Fund’s diversification of the conditions. partially offsetactivities have the impact of changes in market Outlook any management anticipate supports pension risk management and helps Nationwide to and monitoring of analysis, insight production Regular including the Executive committees, governance to reporting articulation and regular This includes risk appetite be required. actions that may and stress Risk Management Framework Nationwide’s Enterprise In addition, pension risk is embedded into Risk Committee. and Board Committee processes. testing broad ensure to Trustee Fund’s risk, and Nationwide actively engages with the the reduce significantly to intends the Trustee Over the long term, Investment by Nationwide at the Trustee’s by permanent representation alignment on investment objectives and implementation. This is supported consider to between Nationwide and the Trustee sharing management information and investment working groups, Committee and Funding specific risk management initiatives. the allocation to example further reducing adjusting the asset allocation (for to, not limited pension risk include, but are reduce initiatives to Potential inFund accrue levels and adjusting the level of benefits that members of the bonds), adjusting contribution the allocation to equities and increasing the future. Longevity (life expectancy) (life Longevity Fund to the risk of exposed Nationwide is Therefore, for life. paid are Fund by members of the received of pension benefits The majority its estimates periodically updates Nationwide for longer. pension benefits being paid as this would lead to expected, members living longer than by produced of mortality rates mortality data and projections date the most up to to regard having longevity of members of the Fund, of future Mortality Investigation. the Continuous Regulation pension liabilities the increase legislation, which could and pension environment regulatory changes in the potential Nationwide is exposed to capital position. and/or impact Nationwide’s or longevity assumptions) can rate, example, the discount actuarial assumptions (for key derive methodology used to In addition, a change in the benefits will depend on cost of providing the ultimate the deficit. However, of the liabilities and therefore in a change in the assessment result than assumptions made. events, rather actual future Summary contributions in are included in employer contributions paid. These deficit contributions were million of employer deficit £149 the year During contributions of benefit accrual during the period), with further annual deficit in respect with employer contributions the table below (together recovery plan. deficit years in line with the current over each of the next four million payable of £49 in future Employer contributions underway. is currently 2016, which has an effective of 31 March date triennial valuation of the Fund, The latest during 2017/18.Trustee with the to be agreed expected recovery plan, are years, including a new deficit £423 from million, to £213 sheet has increased million balance benefit obligation that appears within liabilities on the The retirement as set out below:

Financial risk – Pension risk risk – Pension Financial Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

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As part of the financial planning process Nationwide forecasts performance over a five year period with an updated earnings forecast forecast earnings over a five year period with an updated performance forecasts Nationwide As part of the financial planning process risks and sensitivities. the key consideration taking into by management monthly, reviewed of financial performance Monitoring and a variety of committees limits and triggers across forecasts, monthly against internal monitored of earnings are The various components earnings risks and possible mitigating actions. potential consider which forums, and sensitivity analysis testing Stress scenarios, such as the financial plan downside and upside management reporting as part of internal tested stress regularly Earnings are Concurrent under the PRA’s externally tested In addition, earnings are test. stress and reverse Assessment Process Capital Adequacy Internal and testing stress of possible against a range earnings is conducted sensitivity analysis of expected As a result, scenarios. Test Stress sensitivity scenarios. • • Outlook in which markets in the economic uncertainty risk of is an increased there environment and global economic Given the ongoing European This economic lower. margins driving mortgage market, in the mortgage competition is a risk of increased addition, there In Nationwide operates. conditions should economic Furthermore, margin. on Nationwide’s net interest maintain pressure to is expected context market and competitive the external monitor to earnings. Nationwide will continue impairments adversely impacting credit is a risk of increased there deteriorate earnings. achieving forecast to identify any threats and mitigate to environment economic Overview the risks with commensurate value that generate of income sources recurrent focusing on by sustainable profits that it can generate Nationwide ensures to changes in market, value due expected to add the continue to unable or value are of income is defined as the risk that sources Earnings risk taken. senior to reporting performance this risk as part of ongoing business The Society and monitors manages factors. or other environmental regulatory management and the Board. Strategy longevityto the and self-sufficiencykey of the business model. The aim of earnings risk is profitable remain to continues Ensuring that Nationwide and delivering membertrading risks maintain sufficient plausible capable of withstanding is to level of profit, earnings, and a minimum strategy into forecast, taking of Nationwide’s financial context risks within the trading plausible identifies and quantifies value. The earnings risk strategy aligned risk appetite, and Board assessed against management risks are These uncertainties. and market impact of economic the potential account members, investing in the between distributing value to of the right balance achievement which ensures Framework the Financial Performance to business and maintaining financial strength. such as: of measures a range through Earnings risk is managed and mitigated • Financial forecasting Financial risk – Earnings risk risk – Earnings Financial Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

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Strategic Report Governance Business and Risk Report Financial Statements Other Information % % 9.1 0.1 1.0 1.6 3.8 0.4 0.5 0.5 0.6 6.9 11.6 71.7 77.7 14.5 100.0 100.0 2016 (note ii) 2016 (note 2016 (note ii) 2016 (note % % 6.1 3.4 0.2 0.4 0.3 0.3 0.5 0.5 0.0 9.8 9.8 11.8 77.4 79.5 2017 2017 100.0 100.0 continued

Risk events with losses over £5,000; multiple losses relating to the same event are only counted once. only counted the same event are Risk events with losses over £5,000; to multiple losses relating classification methodology. the current align to data and to include additional historic to been restated have Comparatives claims. insurance protection ongoing payment to in relation redress of customer Includes the costs Execution, delivery and process management deliveryExecution, and process fraud Internal failure disruption and system Business Operational risk events by Basel risk category (note i) % of total events by number by events risk category i) % of total Basel by (note risk events Operational Operational risk events by Basel risk category (note i) % of total events by value by events risk category i) % of total Basel by (note risk events Operational Clients, products and business practices (note iii) (note and business practices Clients, products fraud External physical assets to Damage safety and workplace Employment practices and business practices Clients, products fraud External management deliveryExecution, process and Total fraud Internal Business disruption and system failure system disruption and Business physical assets to Damage safety and workplace Employment practices Total ii. iii. Notes: i. Operational risk profile Operational events. external or from people and systems, processes, or failed internal inadequate resulting from risk as the risk of loss Nationwide defines operational business security, and resilience IT cover cyber, of which the most significant a number of sub-categories, risk across Nationwide manages operational and fraud. payments continuity, managementreview and challenge by both the business, and by across by risk assessments from is informed risk profile Nationwide’s operational and when activities its normal day-to-day in and the Risk Oversight function. Risk Oversightmanaging the risks it faces supports the business in of expanding the use framework, risk and embed the operational strengthen to Nationwide continues implementing change programmes. decision optimise risk-based and to risks future and the understanding of current support to analysis and ‘war-gaming’ such as scenario techniques the business. making across that require understand those exposures better to occurred, risk events that have on the operational and reports Risk Oversight also monitors an operational arises from a financial loss only those where risk events include operational report, the purposes of this For management attention. risk categories them against the operational as well as reporting risk events against causal categories, operational risk incident. Nationwide records with its peer group. risk experience Supervisioncomparison of operational Banking on Basel II. This allows Committee in Basel defined by the risk experience Operational Business & ‘Clients, Products Basel categories: of the against three recorded been events have risk Nationwide’s operational of A significant majority of number, 99.1% by value, and 95.3% by for account These categories Management’. Delivery and ‘Execution, and Process Fraud’ ‘External Practices’, by number). risk events (2016: by value and 93.1% Nationwide’s operational 98.4% of low volume a relatively Nationwide typically experiences category, Practice and Business against the Clients, Products Whilst the highest losses are of events is observed, a higher volume where though with lower individual losses. In event category, Fraud with the External these events. This contrasts events, primarily in the number of low value fraud increase continued Nationwide has seen a in the financial services sector, trends line with continuing fraud. not present’ ‘card through Operational risk Operational Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

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Adherence to changing legislation, specifically in relation to data in the form of General Data Protection Regulations (GDPR), and payments Regulations (GDPR), and payments Data Protection form of General to data in the relation changing legislation, specifically in to Adherence 2. Services Directive of Payment in the form and with the enablement of Open Banking. environment of change, particularly in a digital The scale and pace cyber security sophisticated threats. and the increasingly IT resilience maintain and develop appropriate to invest in this area to party continues partners. Nationwide third on strategic reliance The continued managed within appetite. are risk exposures that residual ensure to controls

Operational risk risk Operational Business and Risk Report IT and operations. risk People control risk and a strong to operate first class service, and and provide deliver its strategy people to and dedicated on talented Nationwide relies and strategy refreshed deliver the itself to and closely manage the impact on its people as it structures monitor to Nationwide continues framework. maintained. levels of skill, knowledge and engagement are that the required ensure to want, that customers services and experience the products, environment of change in a digital Pace the varied and evolving needs to respond business model puts it in a good position to of Nationwide’s nature Whilst the member-focused of change can create of channels. The scale and pace a range through transact making it easier to to Nationwide is committed of customers, and negatively impact the service environment operating disrupt Nationwide’s delivery to the potential challenges have challenges. Such governance on service focus management, transformation a strong managed through risks are These operational by customers. experienced management disciplines. and programme banking services regularly updating the mobile and internet and enabling new payment Nationwide invests significantly in its digital channels, of the Mobile out of the next generation with the roll improve to and staff continues customers in branches for The experience technologies. incident during the year, Nationwide had one significant operational branches. transform to commitment application and the strategic Banking prevent to been taken have Actions days. application over three version of the Mobile Banking the previous to access in restricted which resulted reoccurrence. Outlook risk are The drivers of operational and on its strategy. in which Nationwide operates on the environment risk outlook focuses The operational main themes: with four consistent, broadly remain to expected • • • • Current environment Current expectations in customers’ increase stable. The continued relatively risks has remained operational of portfolio the overall of the year, Over the course on delivering of change and focus with the high pace coupled as cyber-security risks such IT resilience, and inherent the management of key towards in order and dependable secure is on being safe, focus Nationwide’s and monitoring. control by increased been matched have strategy, a refreshed protected. data are servicecustomer and availability ensure to as follows: risk are The main drivers of operational security and data protection Cyber attacks in the by a number of recent been highlighted and have increase to cyber-crime continue The maturity and sophistication of organised result of As a of cyber-threats. awareness the public have also increased payment services. Such attacks including sectors, financial and non-financial or any threats to and respond detect prevent, to pace keep needed to have cyber-crime, security controls from threat increasing the continued and data loss, data integrity fraud, with external impacts the existing risks associated posed by a cyber attack directly threat attacks. The constant on the business and its customers. have cyber attack could a successful the impact Nationwide recognises availability. with ongoing investment responsibilities effectively, Nationwide’s cyber risk management focused on discharging to be continues Significant effort The cyber security control safeguarded. are customers importantly, more and, that operations This ensures and processes. technology in appropriate that effective cyber ensure is managed effectively risk ensure and is designed to to and controls policies processes, includes systems, framework impact be an indirect may there at Nationwide or at other parties, where any attacks, whether aimed directly to respond to in place are approaches and of its customers the awareness on improving focus to a high priority will continue and Nationwide security remains Cyber on its customers. cyber attacks. to and its resilience its defences build its understanding of the developing threats, to employees, as well as continuing resilience IT and operational a level of of legacy introduces systems, alongside the maintenance and processes, infrastructures Nationwide’s implementation of new systems, of service disruption. tolerance rising, with a significantly lower expectations are digital world, customer In an increasingly complexity. operational in data Meanwhile the exponential rise and processes. business systems IT, resilient service available and widely requires Ensuring a highly reliable a dedicated Nationwide operates In response, and effectively. of managing data securely and cost the complexity used in digital services increases sourced and externally service with both internal expectations for levels associated it meets customer ensure to Function Resilience Operational Annual Report and Accounts 2017 Accounts and Report Annual

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In March 2016, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) introduced the Senior Managers introduced (FCA) Authority (PRA) Authority Financial Conduct and the 2016, the Prudential Regulation In March for their actions in and hold individuals accountable individual accountability to strengthen Rules, Conduct Regime and Certification Regime, ancillary for all employees except These rules capture force. came into Rules the Conduct 2017, activities. On 7 March regulated to relation these changes. implemented Nationwide has successfully roles. counter to processes enhance aims to 2017, in June force into which comes Anti-Money Laundering Directive, Union’s Fourth The European money and detects deters a business that prevents, to operating committed financing. Nationwide is money laundering and terrorist and industry in line with the new directive guidance. required any changes financing, and will introduce laundering and terrorist on 3 January the provision 2018. It sets out the rules for force into comes and Regulation) Directive in Financial Instruments MIFID II (the Markets of investment services and activities in complex financial instruments, increased customer and client protection standards, rules for trading venues for trading rules standards, and client protection customer financial instruments, increased of investment services and activities in complex the changes necessary meet the requirements. to make underway to currently are projects Two reporting. transaction for and new standards by the implementation deadline. be fully compliant to is expected and Nationwide independently validated, been have The approaches the in January into service UK law 2018 and will bring new payment providers into 2 (PSD2) will be transposed Services Directive Payment security and authentication enhanced parties, and require authorised third through accounts payment to open up access of regulation, scope making the necessary The Society is currently changes to and IT infrastructure. changes in processes substantial It will require measures. meet the requirements. detailed than personal data. Its definition is more 2018 and applies to in May force into (GDPR) comes Regulation Protection Data The General It applies can be personal data. e.g. an IP address, such as an online identifier, it clear that information and makes (DPA) Act Protection the Data This is wider than to specific criteria. according personal data is accessible where manual filing systems personal data and to both automated to of programme containing personal data. A significant records sets of manual ordered could include chronologically definition and the DPA’s the changes necessary meet the requirements. to make to work is in place complaints. (PPI) Insurance Protection Payment August 2019 on a deadline of 29 to place finalised plans the FCA 2017, On 2 March Ltd’ Personal Finance Paragon Court ruling on ‘Plevin v Supreme to the response in to take also detailed the actions it expects firms The FCA that will manage and oversee the impacts of the of activity in place programme impact some PPI cases. Nationwide has a redress which may the accounts. 30 to in note is provided redress PPI and other customer for on provisions information ruling. Further Court Supreme

• • Conduct and compliance risk profile risk profile and compliance Conduct of its business in the execution errors judgement or makes inappropriate risk is the risk that Nationwide exercises and compliance Conduct for being created outcome being undermined, or an unfair integrity or legislation, market with regulation non-compliance activities, leading to the management of conduct to the approach assess and mature continually of activity is underway to programme A members and customers. Nationwide. risk across and compliance environment Current as regulators being embedded, and new regimes changes regulatory with a variety challenging, of complex remains environment The regulatory Nationwide is supportive in the UK financial services markets. trust and confidence rebuilding to drive an agenda committed to continue of these developments. The activity by a set of internal is underpinned of focus. be an area to Nationwide continues risk management across The embedding of conduct This supports the markets. and protect outcomes support fair customer to designed Statements, Outcomes principles, known as the Conduct and regulators. which enables effective meets the expectations of customers risk management and culture’, of a ‘risk aware strengthening the same time, At its strategy. clearly align to within Nationwide, ensuring that values and behaviours the culture is attached to importance Great is appropriately that risk exposure ensures environment and compliance assessment of new and existing risks in the conduct continual service and change. cyber regulatory changes and crime, product uses of new technology, to: not limited managed. These risks include but are below: listed Nationwide are to relevant regulatory industry; change impacting the a significant volume of key items is currently some of the There • Conduct and compliance risk and compliance Conduct • • • Outlook risk exposure, and compliance conduct of innovation can increase the pace where and digital environment, In an ever demanding regulatory will be done in a prudent This the needs of members and customers. and services aligned to delivering products to committed Nationwide remains purpose. core and with its strategy in accordance values and manages those opportunities, risks and threats that supports Nationwide’s way in 2018. As the report expected 2016, with the final launched in December was sector in the Mortgage study on competition market The FCA’s and communications on this subject will be monitored Ongoing this will be of significant interest. provider, mortgage largest UK’s second appropriate. where will be implemented proposition the current to enhancements and dependable a secure provide to changes and will continue regulatory these complex to respond to continue to Nationwide is well placed meet the needs of members and customers. to designed and servicesvariety which are of products Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

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Nationwide defines strategic risk as the risk of significant loss or damage arising from business decisions that impact the long term interests of the term interests that impact the long from business decisions loss or damage arising risk as the risk of significant Nationwide defines strategic Nationwide’s issue for a material become risks that could encompasses developments. It external adapt to an inability to membership, or from their own risks, management of strategic managing for responsible are business areas initiatives. Whilst all strategic business model or arise from Committee. of the Executive risk is primarily the responsibility these affect address materially the delivery and aims to risks that may consider of its strategy to environment external Nationwide assesses the of review and the regular processes testing risk include stress the management of strategic support activities to Key risks in developing its plans. to the potential risks have and emerging Some of the top Committee. and Executive Board data by the and risk reporting business performance to crystallise within the if these were a significant impact on the business model same have and could than one risk category, affect more risk. under strategic monitored therefore and are timeframe, members. and future current for both benefit the potential to with regard evaluated investments are risk, strategic In managing strategic personal financial services, business with participation in other non-member UK retail mainstream around centred Nationwide’s activities are for its members. return capabilities, diversify risks, and earn a premium core fit with these activities activities only where changes are be adapted to the strategy require risks that could the business model. The key risks to strategic to respond to is designed The strategy all are These environment. rate low interest and the continuing operates in which Nationwide environment the competitive behaviour, in customer (CST) and will provide activity, Test Stress part of the 2017forms which Concurrent Scenario, Biennial Exploratory latest in the PRA’s noted margins. to the impact stress Nationwide with the opportunity to increase. service to for use of digital channels and their expectations and quality availability will continue greater make to expected are Customers alter by competitors offered or that new propositions quickly than anticipated, more is adopted is a risk that new technology there However, plans. current a change to expectations. Both would require customer The existing and new competitors. due to competitive highly will remain in which Nationwide operates markets that the core It is expected business models that with substantially different potentially of new competitors, in the emergence result could implementation of Open Banking this risk. mitigate support members’ needs and to solutions to in developing Open Banking Nationwide is investing this environment. alter materially or zero a move to expected, Although not closely. is monitored particularly on margins, environment, rate low interest The impact of the continued impacting Nationwide’s business model. This risk is managed potentially savings, attitudes to in changing customer result could negative rates delivers the service that Nationwide that ensure activities, to as well as prioritising investment propositions, pricing of product appropriate through expect and maintains a sustainable business model. members and customers Strategic risk Strategic Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

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Risk and control reporting enables the Board to ensure that risk management and internal control control that risk management and internal ensure to enables the Board reporting Risk and control risk appetite. being managed within and that risks are adequately operating are systems Governance and assurance describes the risk committee structures and mandates, and ensures that and ensures and mandates, structures describes the risk committee and assurance Governance model. lines of defence within the Society’s three clear and operate are and responsibilities roles pages. is included on the following information Further Local management of risk is the process of identifying, assessing, managing, monitoring and of identifying, assessing, managing, monitoring the process management of risk is Local that risks which ensure risks. Risk management activity is carried out by all employees to reporting As part of this, the Society identified and controlled. properly jobs are part of their day-to-day are resilient that it understands and remains ensure analysis to and scenario testing stress undertakes can be found testing details of stress risks. Further severe, but potentially the impact of remote, to in the ‘Liquidity and funding risk’ and the ‘Solvency risk’ sections of this report. The Board approves the risk management strategies and control frameworks that management frameworks and control the risk management strategies approves The Board risk. for appetite within Board risks remain that major ensure use to Board appetite for risk defines how much risk the Board is prepared to take in pursuit of the take to is prepared risk defines how much risk the Board for appetite Board by metrics and decision making. It is supported for Society’s goals, and establishes a framework for appetite Board be effectively reported. to against appetite limits which enable performance Nationwide’s strategy. and informs, by, risk is informed Having the right culture supports risk management activity across the business. Nationwide’s culture supports risk management activity across the right culture Having put at the heart of its approach safety and security are that members’ interests, and PRIDE values ensure risk management. to Nationwide’s core purpose sets its ambitions and informs its strategy and attitude to risks. and attitude to its strategy and informs purpose sets its ambitions Nationwide’s core Nationwide’s risk management agenda is shaped by external environmental factors including but factors environmental Nationwide’s risk management agenda is shaped by external in the diagram. those listed to not limited 7 8

Risk and control reporting Risk and control Governance and assurance Governance Local management of risk Local Risk strategies and Risk strategies frameworks control Board appetite for risk for appetite Board Culture Building society, nationwide Building society, External environment External

8 7 6 5 4 3 2 1 Effective risk management is at the heart of the business, supporting the delivery of Nationwide’s strategy by ensuring it continues to be safe be safe Effective to delivery is at the heart of the business, supporting the risk management it continues by ensuring of Nationwide’s strategy underpinned framework risk management The Society adopts an enterprise-wide interests. members’ protecting and sustainable and ultimately manage risks effectively. model to lines of defence by the three (ERMF) framework risk management Enterprise below and in the table below. the management of all risks, as shown for and requirements standards policy, The ERMF sets out the high-level Managing risk Managing Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

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Strategic Report Governance Business and Risk Report Financial Statements Other Information Performing independent audits of Performing the effectiveness line risk and of first line risk oversight, and second control support and challenge the to a risk-based approach Taking of audit work programme an annual opinion on Preparing the risk management and controls the Audit to present to framework Committee Third line – Third Assurance Specific accountabilities include: Specific accountabilities • • •

continued

Providing expert advice on business expert advice Providing initiatives Advising the Board on setting risk the Board Advising appetite Reporting aggregate enterprise level enterprise aggregate Reporting the Board risks to Conducting independent and risk- Conducting based assurance Interpreting material regulatory change regulatory material Interpreting Setting the risk management policies and associated framework Identifying future threats and risks threats Identifying future Second line – Second Support and Challenge Oversight, Specific accountabilities include: Specific accountabilities • • • • • • • continued

Setting business objectives Defining management risk appetite Identifying, owning and managing risks Defining, operating and Defining, operating controls testing Implementing and maintaining compliance regulatory Adhering to the minimum standards the minimum standards to Adhering set out in the risk management policies and associated framework Identifying future threats and risks threats Identifying future

First line – Ownership Risk and Control Specific accountabilities include: Specific accountabilities • • • • • • •

Managing risk Managing Business and Risk Report Nationwide’s three lines of defence model lines of defence Nationwide’s three (first line), oversight, support ownership between risk and control model, ensuring clear separation lines of defence a three Nationwide operates outlined below: model are defence lines of within the three line). Accountabilities (third and audit assurance line), and challenge (second Annual Report and Accounts 2017 Accounts and Report Annual

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Strategic Report Governance Business and Risk Report Financial Statements Other Information Credit Credit Committee Audit Committee Audit Determine the attitude Determine lending risk. to Manage Nationwide’s lending risk profile. Tebboth Chair: James Officer Chief Credit • • Monitor the integrity of the financial statements. of the financial the integrity Monitor the adequacy and effectivenessReview of and risk management systems. controls internal the effectiveness of the Compliance Monitor Oversight function. and bribery the adequacy of fraud Review procedures. prevention the effectiveness of the Internal Monitor function. Audit Chair: Kevin Parry Chair: Kevin • • • • • Committee Assets and Liabilities Determine the attitude Determine financial risk. to Manage Nationwide’s financial risk profile. Chair: Mark Rennison • • Board Board Risk Committee Board continued Executive Risk Committee Executive

Provide oversight and advice to the Board on the Board to oversight and advice Provide risk exposures. and emerging current and supporting metrics. the risk appetite Review manage the effectiveness of the ERMF to Review risk. and mitigate Chair: Tim Tookey • • • Committee Determine the attitude to risk. the attitude to Determine Nationwide. risk across controlling for responsibility Exercise risk exposures. and review Monitor Operational Risk Operational Chair: Julia Dunn Chair: Julia • • • First line – risk and control ownership First line – risk and control

Determine the attitude Determine risk. operational to Manage Nationwide’s risk profile. operational Ensure maintenance of sound system of internal control and risk management. control of internal of sound system maintenance Ensure support its to processes the effectiveness of the risk and control Review and objectives. strategy documents regulatory ERMF and key the risk appetite, Approve and Individual Assessment Process Capital Adequacy (such as Internal Liquidity Assessment). Adequacy Chair: Debra Bailey Chair: Debra • • Chair: David Roberts Chair: David • • • Additional specialist risk sub-committees and forums beneath provide specialist advice beneath provide and forums specialist risk sub-committees Additional continued Information flow Information Committee

Conduct and Compliance and Compliance Conduct Determine the attitude to the attitude to Determine risk. and compliance conduct Manage Nationwide’s conduct risk profile. and compliance

Chair: Tom Anderson, Chair: Tom Officer Chief Compliance • • IT Strategy and Resilience Committee and Resilience IT Strategy Oversight of the IT strategy, architecture, delivery architecture, Oversight of the IT strategy, controls. governance and architectural roadmap and framework strategy Oversight of IT resilience and controls. of IT systems portfolio investments Oversight of the strategic programmes. transformation and material

Chair: Mitchel Lenson Chair: Mitchel • • • Executive Executive committees Board Board committees Risk committee structure Risk committee ensures Risk Committee The Executive Board. the to oversight and advice provide to continue Committee and Audit Risk Committee The Board diagram. in the following is represented structure The risk committee categories. all risk across management approach a co-ordinated Managing risk Managing Business and Risk Report Annual Report and Accounts 2017 Accounts and Report Annual

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Note 28 – Intangible assets Note Note 29 – Property, plant 29 – Property, Note and equipment Note 30 – Provisions for liabilities for 30 – Provisions Note and charges Note 31 – Capital and leasing Note commitments Note 32 – Contingent liabilities 32 – Contingent Note 33 – Retirement Note benefit obligations capital deferred – Core 34 Note (CCDS) shares Note 35 – Other equityNote instruments Note 36 – Investments in 36 – Investments Note undertakings Group Note 37 – Structured entities 37 – Structured Note Note 38 – Related party transactions 38 – Related Note Note 39 – Notes to the cash to – Notes 39 Note flow statements Note 40 – Capital management Note Note 41 – Registered office 41 – Registered Note Other assets and investments • • Accruals, Accruals, provisions, liabilities and other contingent legal proceedings • • • • Employee benefits Employee • Capital instruments, equity and reserves • Scope of consolidation Scope • • Other disclosure matters Other disclosure • • • •

Note 13 – Classification and Note measurement Note 14 – Available for sale for – Available 14 Note investment securities Note 15 – Investments in Note equity shares and advances 16 – Loans Note customers to Note 17Note – Derivative financial instruments Note 18 – Deposits from banks 18 – Deposits from Note Note 19 – Other deposits Note Note 20 – Due to customers to 20 – Due Note Note 21Note – Debt securities in issue Note 22 – Subordinated liabilities 22 – Subordinated Note Note 23 – Subscribed capital 23 – Subscribed Note value hierarchy – Fair 24 Note of financial assets and liabilities held at fair value Note 25 – Fair value of financial 25 – Fair Note assets and liabilities held at fair 3 portfolio value – Level Note 26 – Fair value of financial value of – Fair 26 Note assets and liabilities measured at amortised cost Note 27 – OffsettingNote financial assets and financial liabilities Financial assets and liabilities • • • • • • • • • • • • • • •

Statements Note 1 – Statement of 1 – Statement Note policies accounting Note 2 – Judgements in applying 2 – Judgements Note policies and critical accounting estimates accounting receivable 3 – Interest Note and similar income Note 4 – Interest expense and 4 – Interest Note similar charges and commission 5 – Fee Note and expense income – Other operating income 6 – Other operating Note Note 7 – Gains from derivatives 7 – Gains from Note and hedge accounting Note 8 – Administrative expenses 8 – Administrative Note Note 9 – Employees Note Note 10 – Impairment provisions on 10 – Impairment provisions Note customers to loans and advances Note 11 – Taxation Note Note 12 – Operating segments 12 – Operating Note

Statements of movements in of movements Statements and equity members’ interests statements Cash flow the accounts to Notes • Statements of comprehensive of comprehensive Statements income sheets Balance • Independent auditors’ report Independent auditors’ statements Income Performance/Return • • • • • • • • • •

151 152 148 149

137 146 147 Financial Statements

Financial Annual Report and Accounts 2017 Accounts and Report Annual

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whether the accounting policies are appropriate and to the the Group’s Society’s circumstances and have been consistently applied and disclosed; adequately the reasonableness of significant accounting estimates made by thedirectors; and the overall presentation of the financial statements. give a true and fair view of the state of and the of the Group’s Society’s affairs as at 4 April 2017 and of and the the Group’s Society’s profit and cash flows for the year then ended; have been properly prepared accordance in with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; and have been prepared accordance in with the requirements of the Building Societies Act 1986 and, as regards the Group financial statements, Article 4 of the IAS Regulation. the Group and Society balance sheets as at 4 April 2017; the Group and Society income statements and the statements of comprehensive income for the year then ended; the Group and Society cash flow statements for the year then ended; the Group and Society statements of movements members’ in interests and equity for the year then ended; and the notes the to financial statements, whichinclude a summary significantof accounting policies and other explanatory information.

• • I primarily focused my work these in areas by assessing the directors’ judgements against available evidence, forming my own judgements and evaluating the disclosures the in financial statements. My team and I tested and examined information using sampling and other auditing techniques, to the extent I considered necessary to provide a reasonable basis for me form to my own judgements. obtained We audit evidence by testing the effectiveness of controls, substantive procedures or a combination of both. In addition, I read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that apparently is materially incorrect, or materially inconsistent with, the knowledge acquired by me in the course of performing the audit. I obtained this knowledge by attending all Audit Committee meetings and also meeting with senior management. I also met privately with the non executive directors and other stakeholders, key includingthe regulators of the Group. What an audit of financial statements involves An audit has an important role providing in confidencein the financial statements that are provided by organisations to their members. The audit opinion does not provide assurance over any particular number or disclosure, but over the financial statements as a taken whole. is It thedirectors’ responsibility to prepare the financial statements andto be satisfied that they give a true andfair view. The scope of an audit sometimes is not fully understood. I believe that important it is that you understand the scope order in to understand the assurance that my opinion provides. My responsibility to undertake is my work and express my opinion accordance in with applicable law and the International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”) as issued by the Financial Reporting Council of the United Kingdom. These standards also require me to comply with the Auditing Practices Board’s Ethical Standards for Auditors. A description of the scope of an audit provided is on the Financial Reporting website Council’s at www.frc.org.uk; I recommend that you read this description carefully. It also is important that you understand the inherent limitations of the audit which are disclosed this in description, for example the possibility that an approach based upon sampling and other audit techniques may not identify all issues. My audit involves obtaining evidence about the amounts and disclosures the in financial statements sufficient to give reasonable assurance that the financial statements are free from materialmisstatement, whether caused by fraud includes This or error. an assessment of: • • • The purpose and scope of the audit What we have audited The financial statements,included within the Annual Report and “AnnualAccounts Report”),(the comprise: • • • • • Certain required disclosures have been presented elsewhere the in Annual Report, rather than the in notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. The financial reporting framework that has been appliedin the preparation of the financial statements is IFRSs as adopted by the EuropeanUnion, and applicable law. Our opinion Our In our opinion, Nationwide Building Society’s Group financial statements and Society financial statements (the “financial statements”): • Report on the financial statements Report

to the members of Nationwide Building Society Building Nationwide of members the to Independent auditors’ report Annual Report and Accounts 2017 Accounts and Report Annual

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continued

continued £52 (2016: million £50 million). tax. before 5% of profit performance, when assessing the Group’s considerations tax is one of the principal before Profit auditing benchmark. accepted and is a generally

Impairment of retail loans and advances customers; to Provisions for customer redress; and Hedge accounting. benefit obligations; Retirement Impairment of computer software; and management. access Privileged How we determined it determined we How benchmark applied for Rationale Overall Group materiality Group Overall Areas of focus Based on our understanding of the business, changes the in economic environment and our discussions with the Audit Committee, we performed a risk assessment to determine the higher risk areas. I presented those identifiedhigher audit risk areas during the Audit Committee meeting October in 2016. Throughout our plan was the refreshed year, and revised to address changes the in external and internal environment. The areas of highest audit risk, where we focused most effort and resources, were: • • • Other areas which we considered areas of focus due to changes environment, in business or other findings were: • • • This not is a complete list of all risks identified, but these are the areas where we performed the most testing overSome the of year. them are common to major UK financialinstitutions, some are specific to the Group. In the table I below, have included an explanation of each area of focus, how the audit approach was tailored to address the risk and what I have discussed with the Audit Committee. Audit scope tailoredWe the scope of the audit to ensure that enough work was performed to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry which in the Group operates. The Group structured is into three segments: Retail, Commercial and Head Office functions. Each of the segments comprises a number of product offerings or service functions. defined We the audit scope at a product and service function level. The consolidated financial statements are a consolidation of the different products and service functions within each segment. For products that we considered individually financiallysignificant in the context ofconsolidated the Group’s financial statements, weaudited their financialinformation. We then considered theindividual financialsignificance of other products in relation toprimary statement account balances and the presence of any significant audit risks and other qualitative factors (includinghistory misstatementsof through fraud or error). These products were subject to specific audit procedures over those account balances or to address thesignificant auditrisks or qualitative factors. Inconsequential components (defined as products that,in did our not representview, a risk of materialmisstatement either individually were or aggregate) in eliminated from further consideration for specific audit procedures although they were subject to analytical review procedures. I agreed with the Audit Committee that we would report to them misstatements identified during our audit above million £2.6 (2016: £2.5 as well as any misstatements million) below that amount which, my warranted in view, reporting for qualitative reasons.

Report on the financial statements financial statements on the Report Independent auditors’ report Materiality designedWe the audit by determining materiality based on quantitative thresholds. This together with qualitative considerations helped us to determine the scope of the audit and audit procedures, and to evaluate the effect of misstatements, both individually and on the financial statements as a whole. determinedWe materiality for the financial statements as a whole as follows: There have been a number of matters we considered when determining the audit strategy this year. Change Nationwide in strategy The Group announced a new strategy during the year which set is out the in Annual Report. tailored We our audit approach to be responsive to changes the in Group where they impacted financial reporting and we also considered the risk of changein the continuity of control. External factors alsoWe considered the current macroeconomic environment and regulatory developments assessed We during the year. these changes and considered them specifically when auditingimpairment the Group’s of retail loans and advancesto customers and provisions for customer redress. Further detail set is out the in areas of focus section below. Factors my team and considered I in setting the audit strategy On commencement of the audit, my team and I considered both internal and external factors which could influence how we audit the Group. Annual Report and Accounts 2017 Accounts and Report Annual

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Strategic Report Governance Business and Risk Report Financial Statements Other Information Matters discussed with Audit Committee with Audit discussed Matters the methodology, of the provisioning discussed the appropriateness We appropriateness models during the year and the adjustments made to environment. economic in the current of the provision management’s of we discussed the appropriateness In particular, only interest repay to assumptions of the ability of customers loan and the adequacy of retail of their term at the end mortgages environment. rate low interest in the current provisioning continued

continued

We identified and tested the design and operating effectiveness of key controls over the impairment models. We determined that these determined We over the impairment models. controls effectiveness of key the design and operating identified and tested We the purpose of our audit. upon for be relied effective and could were controls changes Where appropriate. data where historical them to assumptions in the impairment calculation and also agreed the key tested We why changes had taken the reasons models had been made, we understood to had been made in model assumptions, or new overlays the changes considered We of such changes. appropriateness the evaluate and used our industry to place knowledge and experience be reasonable. and explanations given to a sample of models using rebuild the impairment, including using our specialists to calculate of models used to the operation tested We in these tests. differences no material found management’s assumptions. We in these tests. differences no material found We of underlying data used in the impairment models. and completeness the accuracy tested We data used and the logic applied, the source the adjustment, the basis for including considering all significant model overlays, tested We and supportable. be reasonable to these overlays found We assumptions adopted. the key of the industry risks given our own assessment latent identified for of overlays and economic the completeness also considered We by management. risks not considered did not identify latent any additional material We environment.

Impairment of retail loans and advances to customers to loans and advances Impairment of retail of focus of area Nature is an area customers to loans and advances Impairment of retail the applied in determining a high level of judgement is where of any impairment. the size and then estimating for necessity each for on a modelled basis impairment is calculated Retail primarily based on the models are of loans. Inputs to portfolio data. historical number of a again adjusted management year, In the current of period a prolonged account into take modelled assumptions to with maturing interest and the risks associated rates low interest the our work on testing focused therefore We only mortgages. assumptions. to model adjustments and updates Procedures performed to support our discussions and conclusions to performed Procedures • • • • • • data used within the models and that the impairment model assumptions, we obtained, we determined evidence on the Based standards. with accounting is in accordance estimate and the resulting reasonable assumptions were to refinements 2017 and Accounts in the Annual Report reference Relevant 170. on pages 168 to the financial statements 10 to See note

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Strategic Report Governance Business and Risk Report Financial Statements Other Information Matters discussed with Audit Committee with Audit discussed Matters and with the accuracy discussed the risk associated We The discussion provisions. redress of customer completeness assumptions complaint future to primarily on revisions focused on PPI. policy statement the finalisation of the FCA’s due to required continued

continued

For significant customer redress provisions, we tested the accuracy and completeness of the data used and re-performed the of the data used and re-performed and completeness the accuracy we tested provisions, redress significant customer For in these tests. differences no material found calculations. We industry based on our broader knowledge and traced reasonableness for provisions in the estimated assessed the assumptions used We data without exception. historical to date to and costs the actual claims experience were understand whether there to with the customers correspondence related by reading complaints a sample of customer tested We did not identify This testing any exceptions. recorded. with the outcome inconsistent that were of issues being present indicators actual address models and assumptions to their provisioning how management updated we tested provisioning, PPI for Specifically, requirements. policy flow and the new FCA statement complaints

Provisions for customer redress customer for Provisions of focus of area Nature the in assessing and measuring uncertainty is inherent There and matters regulatory ongoing from resulting obligations potential Protection including mis-selling of Payment past salespractices, credit with consumer (“PPI”) and non-compliance Insurance of the timing and volume of specifically in respect regulations, volumes. complaints future the to related impacting estimation uncertainty factor A key 17/3 policy statement issued (“FCA”) Authority’s Financial Conduct consumer for set a time-bar The policy statement during the year. than 2019, which is later be finalised by August to PPI complaints share of profit the inclusion and confirmed originally anticipated, their PPI to updates make Management had to Plevin cases. for the impact of this. reflect methodology to provisioning Procedures performed to support our discussions and conclusions to performed Procedures • • • • within an acceptable and are calculated been reasonably have that the provisions we obtained, we determined evidence on the Based outcomes. of expected range whether the we considered and their judgemental nature, provisions redress in the calculation of customer uncertainty Given the inherent with customer associated the uncertainties reflected adequately in estimating the provisions of the application of judgement disclosures that they did. and determined redress identified were in the financial statements or disclosure either provision issues that would require redress customer No additional material of the audit work performed. as a result 2017 and Accounts in the Annual Report reference Relevant 197. on pages 196 to the financial statements 30 to See note

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Strategic Report Governance Business and Risk Report Financial Statements Other Information Matters discussed with Audit Committee with Audit discussed Matters the due to with hedge accounting discussed the risks associated We on manual processes reliance involved and continued complexity the automate to whilst a new treasury is being implemented system processes. hedge accounting continued

continued

We understood and tested the design and operating effectiveness of key controls over the designation and monitoring of hedge relationships, of hedge relationships, over the designation and monitoring controls effectiveness of key design and operating the and tested understood We from resulting over amortisation of balances controls hedge adjustments, as well as the hedge effectiveness and the resulting testing the purposes of our audit. for on these controls reliance place that we could determined We hedge relationships. de-designated including of IAS 39, with the requirements assess whether it complied a sample of hedges, we examined hedge documentation to For a samplemanagement’s assessment of hedge effectiveness flow hedge relationships, of fair value and cash For at the time of designation. and the modelled the underlying systems data, to inputs, including historical effectiveness the hedge by agreeing testing we re-performed in these tests. differences material no found calculations. We that the adjustments and found the hedge accounting generate calculations used to and manual a sample of automated recalculated We used and spreadsheets systems between the underlying source year-end reconciliations key tested We accurate. materially adjustments were fair value sheet for and balance statement of hedge adjustments in the income of hedge effectiveness and recording testing, results evaluate to the cash flow hedge reserve to a sample of manual adjustments posted we tested cash flow hedge relationships, For hedge relationships. hedge effectiveness. to relating

Hedge accounting of focus of area Nature under flow hedge accounting applies fair value and cash The Group to and Measurement” Recognition “Financial Instruments: IAS 39 and rate interest volatility due to mainly arising manage accounting risks. exchange foreign must criteria certain under IAS 39, qualify hedge accounting for To the and purpose of the nature be met, including documenting effectiveness over its testing and appropriately hedge, performing hedging results. the for accounting and involves manual complex is inherently Hedge accounting of error. risk a heightened which present processes Procedures performed to support our discussions and conclusions to performed Procedures • • • in the accounting. errors in the hedge documentation or material did not identify discrepancies testing any material Our 2017 and Accounts in the Annual Report reference Relevant on page 165. the financial statements 7 to See note

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Strategic Report Governance Business and Risk Report Financial Statements Other Information Matters discussed with Audit Committee discussed with Audit Matters and complete discussed whether the impairment is reasonable We software. computer the impaired for available based on the evidence of impairment on the indicators for also discussed our testing We software. computer non-impaired Matters discussed with Audit Committee with Audit discussed Matters actuarial assumptions of the key discussed the appropriateness We assisted deficit. The discussion was used in arriving at the pension those we assumptions to actuarial the key by our benchmarking of observe commonly the market. in continued

continued

For the impaired computer software identified by management, we tested whether the level of recognised impairment is sufficient. whether the level of recognised identified by management, we tested software computer the impaired For idle or whether these assets had become considered impairment. We of indicators for software computer a sample of non-impaired tested We such as digital change in the industry risk factors IT and the ongoing also considered We the purpose intended. no longer being used for were program. replacement infrastructure of impairment. We identify indicators to that management has in place effectiveness of the control the design and operating tested We the purposes of our audit. on it for reliance place we could and therefore effectively, designed and operated was that the control determined We involved our actuarial experts and met with management to understand the judgements made in determining key economic economic key made in determining understand the judgements met with management to involved our actuarial experts and We our own to comparing of those assumptions by assessed the reasonableness We assumptions used in the calculation of the liability. reasonable. by management were that the assumptions used benchmarks and agreed independently determined over the process of management’s review testing and performed party actuarial reports third inputs to management’s agreed We and objective. competent they were actuarial experts and found also assessed the Group’s of assumptions. We appropriateness that we could determined over pension assets. We controls effectiveness of key design and operating the and tested understood We a parties and independently performed assets with third confirmed the purposes of our audit. We for these controls on reliance place a sample of assets. for revaluation of curtailments, the treatment we also considered material, the employee data used in calculating the obligation. Where tested We were No exceptions obligations during the year. and any other amendments made to and measurements, settlements, past service costs these tests. from noted

Impairment of computer software Impairment of computer of focus of area Nature to software, amount on computer has spent a considerable The Group and to processes internal automate to requirements, meet regulatory offerings. product customer develop digital capability for and industry of regulatory elements As a result developments, certain not yielded have obsolete, become have software of computer uptake not had the customer or have initially aimed for, the result led have These impairment indicators originally planned for. rate carrymanagement to in accordance out impairment assessments an impairment. recognise with IAS 36 “Impairment of Assets” and to Procedures performed to support our discussions and conclusions to performed Procedures • • • that no management determined those assets where For be reasonable. impairment to the recorded of our work, we consider As a result assumptions. based upon reasonable made by management were that the assessments we found required, impairment was 2017 and Accounts in the Annual Report reference Relevant on page 194. the financial statements 28 to See note Retirement benefit obligations Retirement of focus of area Nature benefit pension schemes. Our has a number of defined The Group has scheme which Fund Pension on the Nationwide focused testing of the majority obligation and is where the most significant funding funding deficit lies. the Group’s at 4 April 2017 million deficit of £423 had increased The overall judgement in is inherent There significantly during the year. the actuarial assumptions when measuring selecting appropriate on our testing focused therefore We pension scheme liabilities. of inflation rate rate, these assumptions which include the discount of the scheme, small changes the size to Due and mortality rates. impact on the financial a significant in these assumptions can have statements. Procedures performed to support our discussions and conclusions to performed Procedures • • • • benefit retirement for that the assumptions used by management in the actuarial valuations obtained, we found evidence on the Based be reasonable. to we consider within a range obligations are them to and found of the assumptions, including disclosures made in the financial statements, and assessed the disclosures also read We be adequate. 2017 and Accounts in the Annual Report reference Relevant 202. on pages 199 to statements the financial 33 to See note

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Strategic Report Governance Business and Risk Report Financial Statements Other Information Matters discussed with Audit Committee with Audit discussed Matters the due to with privileged access discussed the risks associated We applications. that support key of the IT systems complexity we needed to where Committee the Audit to also highlighted We required improvements of the as a result amend our audit approach controls. privileged access the to continued

continued

New access requests for joiners were properly reviewed and authorised; reviewed properly joiners were for requests New access on a timely basis when an individual left or moved role; removed rights were Application user access and appropriateness; for periodically monitored applications were rights to Access personnel. appropriate to restricted was Highly privileged access possible, obtained additional evidence and, where of the access, the nature identified, we understood was access inappropriate Where impacted. on the systems controls additional logging and monitoring of the activities by testing on the appropriateness by staff not logged into during the audit period. were accounts that system confirm to additional substantive testing performed We and ledger reconciliations, reconciliations such as payments controls compensating on other business additional testing performed We systems. within impacted and balances reports of key as well as substantive testing

Privileged access management Privileged access of focus of area Nature significant the due to technology is highly dependent on The Group the As a result, daily. processed that are number of transactions we test and therefore controls on automated relies audit approach over IT systems. controls access as they ensure important rights are privileged access over Controls in authorised and made and data are applications that changes to Ensuring that staff appropriate only have manner. an appropriate mitigate to key is is monitored, and that the access access, an to of a change as a result misuse or error for the potential application or underlying data. We controls. privileged access to required are Improvements satisfy being no material to ourselves of there our testing focused technology. to access inappropriate arising from misstatement Procedures performed to support our discussions and conclusions to performed Procedures that: we tested Specifically, financial reporting. upon for relied rights over the various aspects of technology access tested We • • • • applications and over changes to controls policies, security configurations, assessed included password that we independently Other areas change applications, the to access support did not have that business users, developers and production ensure to databases and controls environment. or databases in the production system operating additional procedures: and performed be improved need to controls privileged access where identified areas We • • • on system rely and enabled us to satisfactorily concluded were controls of compensating and testing substantive testing additional Our the purpose of our audit. for information generated 2017 and Accounts in the Annual Report reference Relevant impact on the financial statements. has an indirect which testing IT controls to This risk relates

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Strategic Report Governance Business and Risk Report Financial Statements Other Information We have no exceptions no exceptions have We from arising report to this responsibility. We have nothing have We add or to to material to. attention draw We have no exceptions no exceptions have We report. to In our opinion, the Annual Business gives true Statement of the representation in information matters, Report the Director’s with is consistent and records accounting financial statements; been and both have in accordance prepared with the Building 1986. Societies Act Reporting continued

proper accounting records have not been by kept the Society; or the Society financial statements are in not agreement with the accounting records; or we have not received all the information and explanations and access documents to we require for our audit. the directors’ confirmation on pages 41 to 42 of the Annual Report, in accordance Report, in accordance to 42 of the Annual on pages 41 confirmation the directors’ assessment of carried out a robust they have that C.2.1 of the Code, with provision its business including those that would threaten the principal risks facing the Group, solvency or liquidity. performance, model, future that describe those risks and explain how they in the Annual Report the disclosures being managed or mitigated. are in accordance 42 of the Annual Report, to explanation on pages 41 the directors’ of the assessed the prospects how they have as to C.2.2 of the Code, with provision be that period to done so and why they consider over what period they have Group, expectation a reasonable whether they have as to and their statement appropriate, and meet its liabilities as they fall in operation continue will be able to that the Group drawing disclosures due over the period of their assessment, including any related any necessary to qualifications or assumptions. attention materially inconsistent with the information in the audited financial statements; in the audited with the information inconsistent materially with, our inconsistent or materially based on, incorrect materially apparently our audit; of performing in the course and Society acquired knowledge of the Group or otherwise misleading. C.1.1 of with provision on page 42 in accordance given by the directors the statement balanced be fair, as a whole to taken Annual Report the that they consider the Code, assess necessary information the members to for and understandable and provides is business model and strategy, and Society’s position and performance, the Group’s in the and Society acquired with our knowledge of the Group inconsistent materially our audit. of performing course C.3.8 of by provision as required 57, on pages 53 to the section of the Annual Report address does not appropriately Committee describing the work of the Audit the Code, Committee. the Audit by us to communicated matters Whether the Annual Business Statement and the Directors’ Report have been have Report and the Directors’ Statement Whether the Annual Business 1986; Societies Act of the Building with the requirements in accordance prepared for which year the financial for Report given in the Directors’ Whether the information and the records with the accounting consistent is prepared are the financial statements and financial statements; (other than the Statement given in the Annual Business Whether the information of gives a true representation report) to not required which we are upon information of which it is given. in respect the matters Under the Building Societies Act 1986 we are required to report to you our in if, opinion: • • • As a result of the directors’ voluntary reporting on how they have applied the Code, voluntary applied the Code, on how they have reporting of the directors’ As a result anything you if we have material to report to required we are under ISAs (UK & Ireland) to: in relation to attention draw add or to to • • • We are required to report to you if, in our opinion, information in the Annual Report is: in the Annual Report you if, in our opinion, information to report to required are We • • • voluntary applied the UK how they have on reporting of the directors’ As a result to required we are Ireland) under ISAs (UK & (the “Code”), Code Governance Corporate you if, in our opinion: to report • • We are required to report: to required are We • • • Responsibility

Propriety of accounting of accounting Propriety and information records and explanations received The directors’ The directors’ assessment of the of the Group prospects and of the principal risks that would the solvency or threaten liquidity of the Group Consistency of Consistency other information and compliance with applicable requirements: ISAs (UK & Ireland) reporting Other required reporting Other required of Consistency other information and compliance with applicable requirements: Opinions on other by prescribed matters Societies the Buildings 1986 Act Area of Annual Report Area

Other reporting Independent auditors’ report The Annual Report also contains a considerable amount of other information that is required by various regulators, standard setters or setters standard by various regulators, that is required information amount of other a considerable also contains The Annual Report set out in the table below. are and reporting our responsibility of this information, legislation. In respect Annual Report and Accounts 2017 Accounts and Report Annual

144

Strategic Report Governance Business and Risk Report Financial Statements Other Information We have nothing have We having report to review. our performed nothing have We add or to to material to. attention draw As part of our audit we that concluded have use of the the directors’ basis is going concern However, appropriate. because not all future events or conditions these can be predicted, not a are statements the as to guarantee and Society’s Group’s as a continue ability to going concern. We have nothing have We having report to review. our performed In our opinion, the part of the Report on of the directors’ be to remuneration has been audited in prepared properly with the accordance of the requirements 2006. Act Companies Reporting continued

The directors have voluntarily complied with of Listing the FCA Rule 9.8.6(R)(3)(a) and provided a statement relation in to going concern, set out on page required 41, for companies with a premiumlisting on the London Stock Exchange. The directors have requested that we review the statement on going concern as if the Society were a premiumlisted company. The directors have chosen to voluntarily report how they have applied the Code as if the Society were a premium listed company. Under ISAs (UK & Ireland) we are required to report to you if we have anything material add to or draw to attention to relationin to the directors’ statement about whether they considered it appropriate to adopt the going concern basis preparing in the financial statements. As noted the in Directors’ report the directors have concluded that appropriate it is to adopt the going concern basis preparing in the financial statements. The going concern basis presumes that the Group and Society have adequate resources to remain operation, in and that the directors intend them do to so, for at least one year from the date the financial statements weresigned. The Society prepares a Corporate Governance Statement accordance in with the Disclosure and Guidance the Rules Conduct Transparency of Financial Authority (“FCA”) and has chosen voluntarily to comply with the Code. The directors have requested that we review the parts ofthe Corporate Governance Statement relating to the Society’s compliance with the ten provisions of the Code specified for auditor review by the Listing Rules of the Financial Conduct Authority as if the Society were a premium listed company. The Society voluntarily prepares a Report of the directors on remuneration in accordance with the provisions of the Companies Act 2006. The directors have requested that we audit the part of the Report of the directors on remuneration specified by the Companies Act 2006 to be audited as if the Society were a quoted company. Responsibility continued

Going concern Going concern Corporate Governance Governance Corporate (pages 43 Statement 65) to Other voluntary additional disclosures – Opinion on reporting of the directors Report on remuneration 79) (pages 66 to Area of Annual Report Area Hemione Hudson (Senior Hudson StatutoryHemione Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 22 May 2017 Use of this report This report, including the opinions, has been prepared for and only for the Society’s members as a body accordance in with Section 78 of the Building Societies Act 1986 and for no other purpose. do not, We giving in these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report shown is or into whose hands it may come save where expressly agreed by our prior writing. in consent

Other reporting Other reporting Independent auditors’ report Annual Report and Accounts 2017 Accounts and Report Annual

145

Strategic Report Governance Business and Risk Report Financial Statements Other Information 8 8 13 £m 129 421 691 919 (55) 2016 (173) (189) 2,576 (228) 4,943 2,958 (1,819) (2,367) - Society (9) £m 69 671 100 442 465 (66) 2017 (221) (136) 4,724 (206) 2,870 2,480 (2,244) (1,988) 8 3 8 £m 39 (81) 428 985 2016 (173) (192) 1,279 3,372 (294) 5,294 3,086 (1,847) (2,208) - Group (9) £m 66 757 100 446 2017 (221) (136) 3,351 1,054 (131) (297) 5,050 2,960 (2,021) (2,090)

7 3 5 5 4 6 8 11 14 10 30 Notes

For the year ended 4 April 2017 the year For Interest receivable and similar income receivable Interest Interest expense and similar charges Interest Net interest income Net interest Fee and commission income and commission Fee expense and commission Fee Income from investments from Income Other operating income Other operating Gains from derivatives and hedge accounting derivatives and hedge Gains from Total income Total Administrative expenses Administrative Impairment losses on loans and advances to customers to Impairment losses on loans and advances Impairment (losses)/recoveries on investment securities Impairment (losses)/recoveries Profit before tax before Profit Provisions for liabilities and charges for Provisions Taxation Taxation

Profit after tax after Profit Income statements Annual Report and Accounts 2017 Accounts and Report Annual The notes on pages 152 to 209 form part of these Accounts.

146

Strategic Report Governance Business and Risk Report Financial Statements Other Information - 7 4 4 9 19 10 (1) 51 48 (5) 18 42 £m (3) (7) (34) 691 (60) 709 2016 - 1 2 3 71 18 Society 56 £m 92 176 (16) 217 (54) 465 2017 (143) (104) (250) (253) (248) (345) 7 4 9 19 (1) 47 51 42 £m 301 (3) (7) 314 (34) (60) 985 2016 (132) 2,099 1,299 (1,666) 1 Group 2 3 52 (1) £m 92 101 176 (18) 757 309 2017 1,671 (106) (247) (253) (448) (255) (347) (2,019)

11 11 11 11 11 33 29 Notes

Other comprehensive (expense)/income Other comprehensive

Taxation Taxation income comprehensive Total Amount transferred to income statement income to Amount transferred

Taxation sale reserve: for Available equity and members’ interests to value movements taken Fair For the year ended 4 April 2017 the year For Other items recognised through the general reserve, the general through recognised Other items change tax rate including effect of corporation that may subsequently be reclassified Items statement the income to Cash flow hedge reserve: and equity members’ interests to movements taken value Fair Profit after tax after Profit statement income to Amount transferred Other comprehensive (expense)/income: Other comprehensive that will not be reclassified Items statement the income to benefit obligations: of retirement Remeasurements tax before benefit remeasurements Retirement Taxation Revaluation of property: Revaluation tax before Revaluation Taxation The notes on pages 152 to 209 form part of these Accounts.

comprehensive income Statements of Annual Report and Accounts 2017 Accounts and Report Annual

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8 13 27 £m 43 83 64 (2) 211 (7) 127 126 531 413 421 821 287 756 340 992 2016 1,179 1,373 3,515 9,132 1,823 7,554 6,201 8,797 4,910 8,797 3,542 4,760 10,612 31,402 30,521 207,622 138,715 207,622 146,289 198,490

8 8 Society 67 67 26 44 49 98 £m 531 746 419 276 332 992 386 849 689 (56) 2017 1,311 1,218 2,910 2,376 2,567 7,563 3,186 9,764 7,660 4,022 9,243 4,802 8,028 13,017 31,757 35,872 210,770 144,542 220,013 220,013 153,900

- 8 13 35 £m 64 (8) 213 126 531 129 413 128 414 166 186 756 343 823 992 430 288 2016 1,191 1,817 3,591 6,201 7,635 8,921 8,797 3,463 2,095 3,898 10,612 10,930 36,085 138,715 178,807 208,939 198,009 208,939 -

8 8 Group 67 67 82 44 £m 191 531 103 851 391 746 183 276 100 387 692 333 423 992 2017 1,230 3,182 2,376 2,587 9,316 9,764 8,734 2,905 6,459 5,043 11,133 13,017 40,339 187,371 221,670 210,537 221,670 144,542

21 11 11 17 17 14 15 21 16 19 18 22 23 33 35 29 34 28 36 30 Notes Chief Executive Officer, M M Rennison Officer Financial Chief J D Garner D J

At 4 April 2017At Assets Cash banks to and advances Loans Available for sale investment securities for Available Derivative financial instruments hedged risk portfolio adjustment for value Fair Investments in equity shares Investments in equity shares Loans and advances to customers to and advances Loans Property, plant and equipment Property, Investments in Group undertakings Investments in Group Intangible assets Investment properties Accrued income and expenses prepaid income Accrued Deferred tax Deferred Other assets Total assets Total Liabilities Shares Deposits from banks Deposits from Other deposits Due to customers to Due Fair value adjustment for portfolio hedged risk portfolio adjustment for value Fair Derivative financial instruments Other liabilities Debt securities in issue Provisions for liabilities and charges for Provisions Subscribed capital Subscribed Accruals and deferred income and deferred Accruals Deferred tax Deferred Subordinated liabilities Subordinated Current tax liabilities Current Total liabilities Total Members’ interests and equity Members’ interests Retirement benefit obligations Retirement Core capital deferred shares capital deferred Core Other equity instruments General reserve General Revaluation reserve Revaluation Cash flow hedge reserve Total members’ interests and equity members’ interests Total Available for sale reserve for Available

Total members’ interests, equity and liabilities members’ interests, Total Balance sheets Annual Report and Accounts 2017 Accounts and Report Annual The notes on pages 152 to 209 form part of these Accounts. Approved by the board of directors on 22 May 2017. D L Roberts Chairman,

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- 3 51 (1) 52 (1) (3) £m £m 301 757 985 (54) (34) (56) 309 (50) (56) Total 9,741 Total 1,299 (247) (255) 11,133 10,930 10,930

------26 52 52 44 (8) (8) £m £m (34) (34) for sale for reserve reserve for sale for Available Available Available Available ------£m £m 129 301 301 183 430 430 (247) (247) hedge hedge reserve reserve Cash flow Cash flow Cash flow ------3 3 (1) 67 (4) 64 64 68 (3) £m £m reserve reserve Revaluation Revaluation Revaluation Revaluation

------1 51 (1) (1) £m £m 757 501 985 (54) (56) (50) (56) 1,036 8,921 8,921 7,995 (255) 9,316 reserve General General reserve General General

------£m £m 992 992 992 992 Other Other equity equity instruments instruments

------£m £m 531 531 531 531 Core Core Core Core shares capital shares capital deferred deferred deferred deferred

The distribution to the holders of Additional Tier 1 capital is shown net of an associated tax credit of £18 million (2016: £14 million).

At 4 April 2016 At Distribution to the holders of the holders of Distribution to i) (note Tier 1 capital Additional Distribution to the holders of the holders of Distribution to shares capital deferred core Effect of tax rate change on other Effect of tax rate reserve the general through items Net movement in cash flow hedge reserve for Net movement in available sale reserve income comprehensive Total Reserve transfer Net revaluation of property Net revaluation Profit for the year for Profit of retirement Net remeasurements benefit obligations At 5 April 2015 At Profit for the year for Profit of retirement Net remeasurements benefit obligations Distribution to the holders of Distribution to shares capital deferred core the holders Distribution to i) Tier 1 capital (note of Additional 2017 4 April At Net movement in available for for Net movement in available sale reserve income comprehensive Total Effect of tax rate change on other Effect of tax rate reserve the general through items Net movement in cash flow hedge reserve Net revaluation of property Net revaluation At 5 April 2016 At For the year ended 4 April 2016 the year For For the year ended 4 April 2017 the year For The notes on pages 152 to 209 form part of these Accounts. Note: i.

in members’ interests and equity and interests members’ in Groupstatement of movements Annual Report and Accounts 2017 Accounts and Report Annual

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- 4 3 51 56 (3) £m £m 691 217 709 (54) (34) (56) 465 (54) (50) (56) Total Total 9,132 9,132 8,533 (253) 9,243

------27 56 56 49 (7) (7) £m £m (34) (34) for sale for reserve reserve for sale for Available Available Available Available ------4 4 (2) (2) (6) £m £m (54) (54) (56) hedge hedge reserve reserve Cash flow Cash flow Cash flow ------3 3 (1) 67 (4) 64 64 68 (3) £m £m reserve reserve Revaluation Revaluation Revaluation Revaluation

------1 51 £m £m 743 691 212 (54) (56) 465 (50) (56) 7,554 7,554 6,921 (253) 7,660 reserve General General reserve General General

------£m £m 992 992 992 992 Other Other equity equity instruments instruments

------£m £m 531 531 531 531 Core Core Core Core shares capital shares capital deferred deferred deferred deferred

The distribution to the holders of Additional Tier 1 capital is shown net of an associated tax credit of £18 million (2016: £14 million).

At 4 April 2016 At Net movement in available for for Net movement in available sale reserve income comprehensive Total the holders of Distribution to i) (note Tier 1 capital Additional Reserve transfer Net movement in cash flow hedge reserve the holders of Distribution to shares capital deferred core Net revaluation of property Net revaluation Profit for the year for Profit of retirement Net remeasurements benefit obligations At 5 April 2015 At Net remeasurements of retirement of retirement Net remeasurements benefit obligations Profit for the year for Profit At 5 April 2016 At Net movement in cash flow hedge reserve for Net movement in available sale reserve income comprehensive Total Net revaluation of property Net revaluation the holders of Distribution to shares capital deferred core the holders of Distribution to i) Tier 1 capital (note Additional 2017 4 April At For the year ended 4 April 2016 the year For For the year ended 4 April 2017 the year For The notes on pages 152 to 209 form part of these Accounts. Note: i.

in members’ interests and equity and interests members’ in Society statement of movements Annual Report and Accounts 2017 Accounts and Report Annual

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3 14 161 £m 919 252 (26) (56) (68) 2016 7,215 (134) (178) (102) (334) 6,071 (406) 4,799 4,905 12,014 (1,524) 34,367 (4,202) (2,298) (27,766) - –

10 Society £m 671 922 504 949 (22) (56) (68) 2017 (117) (212) (140) (276) (198) 3,209 3,840 6,668 12,014 15,223 28,437 (1,553) (5,282) (2,377) (25,282) - -

3 14 £m 252 240 (26) (56) (68) 2016 (134) (102) 1,279 (334) (254) 7,250 4,813 (406) 5,837 4,905 (1,276) 12,063 (2,413) 35,350 (4,202) (28,983) - –

Group 10 £m 537 922 949 (22) (56) (68) 2017 (117) (172) (140) (276) (198) 1,504 (297) 3,180 2,430 6,668 15,243 12,063 28,437 (1,327) (5,282) (26,692) 39 39 39 Notes

Interest paid on subscribed capital Interest Interest paid on subordinated liabilities paid on subordinated Interest Changes in operating assets and liabilities Changes in operating Non-cash items included in profit before tax before included in profit Non-cash items

For the year ended 4 April 2017 the year For Cash flows generated from/(used in) operating activities in) operating from/(used generated Cash flows Purchase of investment securities Purchase Profit before tax before Profit Taxation Sale and maturity of investment securities Cash flows (used in)/generated from investing activities investing from (used in)/generated Cash flows Adjustments for: Adjustments activities used in operating Net cash flows Purchase of property, plant and equipment plant and equipment of property, Purchase Sale of property, plant and equipment plant and Sale of property, Purchase of intangible assets Purchase Distributions paid to the holders of core capital deferred shares capital deferred the holders of core Distributions paid to Dividends received from non-Group entities non-Group from Dividends received Distributions paid to the holders of Additional Tier 1 capital Tier the holders of Additional Distributions paid to Cash flows (used in)/generated from financing activities from (used in)/generated Cash flows Net cash flows generated from investing activities investing from generated Net cash flows Issue of debt securities in issue of debt securities Redemption Issue of subordinated liabilities Issue of subordinated Redemption of subordinated liabilities of subordinated Redemption Net increase in cash and cash equivalents Net increase Net cash flows generated from financing activities from generated Net cash flows Redemption of subscribed capital Redemption Cash and cash equivalents at end of year

Cash and cash equivalents at start of year Cash flow statements flow Cash Annual Report and Accounts 2017 Accounts and Report Annual The notes on pages 152 to 209 form part of these Accounts.

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Strategic Report Governance Business and Risk Report Financial Statements Other Information Effective date Accounting periods Accounting beginning on or after 1 January 2018 periods Accounting beginning on or after 1 January 2018 Nature of change Nature IFRS 15 was endorsed by the EU in September 2016. The standard 2016. The standard endorsed by the EU in September IFRS 15 was financial but does not apply to with customers all contracts applies to non- and certain contracts insurance instruments, lease contracts, monetary exchanges. revenue for a principles-based approach IFRS 15 provides for revenue of recognising the concept and introduces recognition, retrospective requires satisfied. The standard obligations as they are expedients available. practical application, with certain it is assessing the impact of this standard; is currently The Group types of certain in the earlier recognition that it will result expected income. and commission of fee IFRS 9 was endorsed by the EU in November 2016. The standard endorsed by the EU in November 2016. The standard IFRS 9 was financial for in the accounting substantial changes will lead to below. provided are details instruments. Further

Pronouncement IFRS 15 Revenue from from IFRS 15 Revenue with Customers Contracts IFRS 9 Financial Instruments IFRS 9 Financial Instruments Financial IFRS 9 IFRS 9 will be implemented the in financial statements for the year ending 4 April 2019 and will replace IAS 39 Financial Instruments: Recognition and Measurement. It includes requirements for the classification and measurement of financial instruments, impairment assets financial of and hedge accounting. Future accounting developments accounting Future The following pronouncements, relevant to the Group, have been adopted by the EU but are not effective at4 April 2017 and have therefore not been applied preparing in these financial statements: Adoption of new and revised IFRSs Minor amendments IAS to Property, 16 Plant and Equipment, IAS 38 Intangible Assets and IAS 1 Presentation of Financial Statements were adopted with effect from 5 April 2016, together with the annual improvements to the IFRSs 2012-2014 cycle. The adoption of these amendments and improvements had no significantimpact for the Group. Basis of preparation of Basis These financial statements have been preparedin accordance with International Financial ReportingStandards (IFRS) andinterpretations (IFRICs) issued by the Interpretations Committee, as published by the International Accounting Standards Board (IASB), and adopted by the European Union, and with those parts of the Building Societies (Accounts and Related Regulations Provisions) amended) 1998 (as applicable to organisations reporting under IFRS. The financial statements have been prepared under thehistorical cost convention as modified by the revaluation of investment properties, branches and non-specialised buildings, available for sale assets, derivatives, certain mortgage commitments for which a fair value election made,is certain investments equity in shares and certain other deposits. As stated the in Directors’ report, the directors consider that appropriateit is continue to to adopt the going concern basis preparing in the accounts. A summary of accounting the Group’s policies set is out below. The accounting policies have been consistently applied. As stated the in Group’s Interim Results for the period ended 30 September 2016, the derivatives and hedge accounting policy includes additional wording respect in of the classification of cash collateral. The policy now clarifies the treatment of situations where collateral is received from, or givento, counterparties other than banks. There no is impact on prior year comparatives as a result of this change. The preparation of financial statementsin conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. Further details on critical accounting estimates are given note in 2. 1. Statement of accounting policies of accounting 1. Statement Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

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estimates credit losses on certain assets over their full life on an expected credit loss basis, rather than the current incurred loss basis, and takes account of forward-looking economic scenarios and will capture potential downside economic risks that are not explicitly included the in current methodology. a net present value. The estimation of ECL should be unbiased and probability weighted, taking into account all reasonable and supportable information, including forward looking economic assumptions and a range of possible outcomes. IFRS 9 has the effect of bringing forward recognition of impairment losses relative to IAS 39 which requires provisions be to recognised only when there objective is evidence of credit impairment. On initial recognition, and for financial assets where there has not beensignificant a increase in creditsincerisk the date of advance, IFRS 9 provisions will be made for expected credit default events within the next 12 months. featureA key of IFRS 9 compared with existing approaches under IAS 39 that is where a loan has experienced a significantincrease in credit risk since initial recognition, even though this may not lead to a conclusion that the loan credit is impaired, provisions will be made based on the expected credit losses over the full life of the loan. This change to lifetime loss provisions for significantly credit deteriorated assetsis expected to lead to increases impairment in provisions, and to increased volatility provisions, in although the of the size change will depend on a number of factors, including the composition of asset portfolios and the view of the economic outlook at the date of implementation. For assets where there evidence is of credit impairment, provisions will be made under IFRS 9 on the basis of lifetime expected credit losses, taking account of forward looking economic assumptions and a range of possible outcomes. Under IAS 39 provisions are based on the asset’s carrying value and the present value of the estimated future cash flows. IAS 39 does not explicitly take account of a range of possible economic outcomes including forecasts of any downturn of the economic cycle. Expected credit losses are based on an assessment of the probability of default, loss given default and exposure at default, discounted to

1. Statement of accounting policies of accounting 1. Statement Notes to the accounts • • • Hedge accounting The hedge accounting requirements of IFRS 9 are designed to create a stronger with link financial risk management. A separate financial reporting standard will be developed on accounting for dynamic risk management hedge (macro accounting) and IFRS 9 allows the option continue to to apply the existing hedge accounting requirements of IAS 39 until this implemented. is Therefore, no changes are currently being implemented to hedge accounting policies and methodologies. Implementation strategy The implementation Group’s strategy for IFRS based 9 is on an integrated solution using common systems, tools and data to assess credit risk and account for ECLs. This consistent is with guidance issued by the Basel Committee on Banking Supervision (BCBS) which sets an expectation of a qualityhigh strategic implementation, and will entail changes the to governance, controls, models and business processes relating credit to loss provisioning. An extensive period of dual running of internal management information and processes taking is place during the 2017/18 financial The design andyear. build phases of the programme have been completed and test activities are progressing line with in implementation plans. Responsibilities and accountabilities The Group has an established IFRS 9 implementation programme with formal governance reporting to the Chief Financial Officer and Chief Risk Officer. Progressis reported regularly to the Audit Committee. includes This oversight of the new IFRSECL 9 calculations ahead of the application of the new accounting policy from 5 April 2018. Impact of IFRS 9 The financial reportingimpact of IFRS 9 will be quantified once models and systems allow the Group to provide reliable estimates; atthis stage our expectation that is IFRS 9 will lead to an increase provisions in held against loans and advances customers, to so in far as it: • • The Group does not expect restate to comparatives on the initial adoption of IFRS 9 but will provide detailed transitional disclosures. The Group monitoringis the current BCBS consultation discussions on the regulatory treatment of accounting provisions for capital purposes, including the transitional arrangements for phasing of in additional IFRS 9 provisions. Assessment of the capital planning impact of IFRS 9 will require a deeper understanding of the effect of stressed conditions on ECL projections and consideration of this against these new requirements, when published, and any additional specific implementationUK for guidance. IRB However, portfolios theimpact of anyincreases in accounting provisions under IFRS 9 will be mitigated by the current deductions for excess regulatory expected losses (EL) within the CET1 calculation. The principal requirements of IFRS 9 are as follows: and measurement Classification The classification of financial assetswill be based on the objectives of businessthe Group’s model and the contractual cash flow characteristics of the instruments. Financial assets will then be classified as held at amortised cost, at fair value through other comprehensiveincome (FVOCI), or at fair value through profit or loss (FVTPL). The changes from the accounting treatment under IAS 39 are not expected to be significant for the Group. There arelimited a number of financial assets with contractual cash flow characteristics that will result in a reclassification from amortised cost to FVTPL. The only changes to the classification and measurement of financial liabilities are liabilities for elected to be measured at fair value, where changes valuation in relating to changes the in entity’s own credit risk will be presented separately otherin comprehensive income rather than the in income statement. Impairment of financialassets IFRS 9 changes the basis of recognition of impairment on financial assets fromincurred an loss to an expected credit loss (ECL) approach for amortised cost and FVOCI financial assets. introduces This a number of new concepts and changesto the approach to provisioning compared with the current methodology under IAS 39: • Annual Report and Accounts 2017 Accounts and Report Annual

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IFRS 1 First-time Adoption of International Financial of International IFRS 1 First-time Adoption Standards Reporting in Other Entities Interests of IFRS 12 Disclosure Ventures. and Joint IAS 28 Investments in Associates Nature of change Nature The initiative amends IAS 7 Statement of Cash Flows to clarify of Cash Flows to The initiative amends IAS 7 Statement users of financial that enable disclosures that entities shall provide financing changes in liabilities arising from evaluate to statements activities. expects has assessed the impact of this amendment and The Group with the amended requirements. comply to clarify to In January Taxes 2016, the IASB amended IAS 12 Income losses. of unrealised tax assets in respect of deferred the recognition a significant impact have to The amendment is not expected the Group. for standards: three been made to Amendments have - - - significant impact a have to not expected These amendments are the Group. for clarify 2016 to amended in June was Payment IFRS 2 Share-based transactions payment cash-settled share-based for the accounting the classification of share- condition, that include a performance and the with net settlement features, transactions based payment transactions payment modifications of share-based for accounting equity-settled. cash-settled to from of this amendment. assessing the impact is currently The Group which exchange regarding sets out requirements This interpretation (such as transactions currency foreign use in reporting to rate in advance. is made or received when payment transactions) revenue assessing the impact of this interpretation. is currently The Group clarify that an entity 2016 to amended in December IAS 40 was when, investment property or from, to, a property shall transfer of a change in use. A change is evidence and only when, there meet, the definition to meets, or ceases of use occurs if property of investment property. a significant impact have to The amendment is not expected the Group. for IAS 17 In January Leases. replace 2016, the IASB IFRS issued 16 to substantially leases will remain finance for Under IFRS 16, accounting the same. the sheet through on-balance leases will be brought Operating rights of use and the contractual of assets representing recognition This may payments. the contractual for liabilities will be recognised of expenses on leased assets. impact the timing of the recognition expense on the lease liability and interest will recognise Lessees on the right-of-use asset. charge a depreciation assessing the impact of this standard. is currently The Group

Pronouncement Disclosure Initiative Disclosure IAS 7)(Amendments to Assets Tax of Deferred Recognition Losses Unrealised for IAS 12) (Amendments to to Annual Improvements – 2016 Cycle 2014 IFRS Standards of Classification and Measurement Transactions Payment Share-based IFRS 2) (Amendments to Transactions Currency IFRIC 22 Foreign Consideration and Advance of Investment Property Transfers IAS 40) (Amendments to IFRS 16 Leases

1. Statement of accounting policies of accounting 1. Statement Notes to the accounts Other pronouncements There are a number of pronouncements relevant to the Group that are neither adopted by the EU nor effective at 4 April 2017 and have therefore not been applied preparing in these financial statements. Details of these pronouncements and impacttheir are providedin the table below. Annual Report and Accounts 2017 Accounts and Report Annual

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continued continued

1. Statement of accounting policies of accounting 1. Statement Notes to the accounts Segmental reporting Segmental Operating segments are reported a manner in consistent with the internal reporting provided to the Executive Committee. The Executive Committee, which responsible is for allocating resources and assessing performance of operating segments, has been identified as the chief operating Further decision information maker. included is note in 12. No segmental analysis presented is on geographical lines as substantially all of activities the Group’s are the in United Kingdom, with limited deposit taking operations the in Isle of Man and the Republic of Ireland. Fees and commissions Fees and commissions not directly attributable to generating a financialinstrument are recognised on the accruals basis as services are provided, or on the performance of a significant act. Interest receivable and interest expense interest and receivable Interest For instruments measured at amortised cost the effective interest rate method used is to measure the carrying value of a financial asset or liability and to allocate associated interest income or expense over the relevant period. The effective interest rate the is rate that exactly discounts estimated future cash payments or receipts through the expected life of the financialinstrument when appropriate, or, a shorter period the to net carrying amount of the financial asset or financialliability. In calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, early redemption penalty and charges) anticipated customer behaviour but does not consider future credit losses. The calculation includes all fees received and paid and costs borne that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts above or below market rates. Interest income on available for sale assets, derivatives and other financial assets at fair value through theincome statementincludedis in interest receivable and income. similar Once a financial asset or a group similar financialof assets has been written down as a result of an impairment loss, interest income recognised is using the rate of interest used discount to the future cash flows for the purpose of measuring the impairment loss. Securitisation transactionsSecuritisation The Group has securitised certain mortgage loans by the transfer of the loans to structured entities controlled by the Group. The securitisation enables a subsequent issuance of debt, either by the Society or the structured entities, to investors who the gain security of the underlying assets as collateral. Those structured entities are fully consolidated into the Group accounts. The transfers of the mortgage loans to the structured entities are not treated as sales by the Society. The Society continues to recognise the mortgage loans on its own balance sheet after the transfer because it retains their risks and rewards through the receipt of substantially all of the profits or losses of the structured entities. In the accounts of the Society, the proceeds received from the transfer are accounted for as a deemed loan repayable to the structured entities. As explained note in the 16, Group has also entered into self issuances of debt to be used as collateral for repurchase (‘repo’) and similar transactions. Investments self in issued debt and the equivalent deemed loan, together with the related income, expenditure and cash flows, are not recognised the in Society’s financial or Group’s statements. This avoids‘grossing-up’ the of the financial statements that would otherwise arise. manage interestTo rate risk, the Society enters into derivative transactionswith the structured entities, receiving a rate of interest based on the securitised mortgages and paying a rate inherent the in debt issuances. In accordance with IAS these 39, internal derivatives are treated as part of the deemed loan and not separately fair valued because the relevant mortgage loans are not derecognised. All other derivatives relating to securitisations are treated as explained the in derivatives and hedge accounting policy below. Basis of consolidation The assets, liabilities and results of the Society and its undertakings, which include subsidiaries and structured entities, are included the in financial statements on the basis of accounts made up to the reporting date. The Group consolidates an entity from the date on which the Group: (i) has power over the entity; (ii) exposed is or to, has rights to variable returns from its involvement with the entity; and has (iii) the ability to affect those returns through the exercise of itsThe assessment power. of control based is on all facts and circumstances. The Group reassesses whether it controls an entity if facts and circumstances indicate that there are changes to one or more of the three elements of control. The Group deconsolidates subsidiaries from the date that control ceases. A structured entity an entity is which in voting or rights similar are not the dominant factor deciding in control. Structured entities are consolidated when the substance of the relationship indicates control. The Group considers factors such as the purpose and design of the andentity, exposure size to variability of returns and nature of the relationship. Upon consolidation, intra-Group transactions, balances and unrealised gains are eliminated. Investments subsidiary in undertakings are stated the in Society accounts atcost less provisions for any impairment value. in The directors consider it appropriate for administrative and commercial reasons that subsidiary undertakings have financial years ending on 31 March. Certain structured entities have year ends other than 31 March and are therefore consolidated using internal management accounts prepared to that date. Adjustment made is for individually significant transactions arising between 31 March and the Society’s year end. Annual Report and Accounts 2017 Accounts and Report Annual

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1. Statement of accounting policies of accounting 1. Statement Notes to the accounts Property, plant and equipment equipment and plant Property, Freehold and long leasehold properties comprise mainly branches and office buildings. Branches and non-specialised buildings are stated at revalued amounts, being the fair value, determined by market based evidence at the date of the valuation, less any subsequent accumulated depreciation and subsequent impairment. Valuations are completed as annually, at 4 April, by external, independent and qualified surveyors who have recent experiencein the location and type of properties.Valuations are performedin accordance with the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards and are performed on a vacant possession basis, usingcomparative a method of valuation with reference sales to prices and observable market rents for properties similar locations. similar in Increases the in valuations of branches and non-specialised buildings are credited to other comprehensive income except where they reverse decreases for the sameasset previously recognised the in income statement, which in case the increase the in valuation recognised is the in income statement. Decreases valuations in are recognised the in income statement except where they reverse amounts previously credited to other comprehensive income for the same asset, which in case the decrease valuation in recognised is other in comprehensive income. Other property, plant and equipment, including specialised administration buildings and short leasehold buildings, are included at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that directly is attributable to the acquisition of the items, major alterations and refurbishments. Taxation including deferred tax deferred including Taxation Current tax payable on profits, based on the applicable tax lawin each jurisdiction,is recognised as an expensein the periodin which profits arise. The tax effects of tax losses available for carry forward are recognised as an asset when probable it is that future taxable profits will be available against which these losses can be utilised. Deferred tax provided is full, in using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts the in financial statements. Deferred taxis determined using tax rates and laws that have been enacted or substantially enacted by the balance sheet date and are expected apply to when the related deferred tax asset realised is or the deferred tax liability is settled. Deferred tax assets are recognised where probable it is that future taxable profits will be available against which the temporarydifferences can be utilised. Deferred tax provided is on temporary differences arising from investments subsidiaries, in except where the timing of the reversal of the temporary difference controlled is by the Group and probable it is that the difference will not reverse the in foreseeable future. Deferred tax assets and liabilities are offset where there a legally is enforceable right offset to current tax assets against current tax liabilities and where the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there an intention is to settle on a net basis. related to the fairTax value remeasurement of available for sale assets, which charged is or credited to other comprehensive income, also is credited or charged to other comprehensive income and subsequently is reclassified from other comprehensiveincome to theincome statement together with the deferred loss or gain. related to movementsTax the in fair value of derivatives that are subject to cash flow hedge accounting, which are charged or creditedto other comprehensive income and accumulated the in cash flow hedge reserve,is also credited or charged to other comprehensiveincome andis subsequently reclassified from other comprehensiveincome to theincome statementtogether with the associated deferred loss or gain from cash flow hedge accounting. related to movementsTax the in valuation of property, which are charged or credited to other comprehensive income and accumulated the in revaluation reserve, also is credited or charged to other comprehensive income and accumulated the in revaluation reserve. related to remeasurementsTax of retirement benefit obligations, which are charged or credited to other comprehensiveincome, is also credited or charged to other comprehensive income. Leases The Group has entered into operating leases for land and buildings. Operating leases are leases that do not transfer substantially all the risks and rewards incidental to ownership to the lessee. Operating lease payments and receipts are charged or credited to the income statement on a straight line basis over the life of the lease. Intangible assets Intangible Intangible assets held by the Group consist primarily of externally acquired and internally developed computer software which held is at cost less accumulated amortisation and impairment. In accordance with IAS 38 Intangible Assets, software development costs are capitalised if probable it is that the asset created will generate future economic benefits. Costsincurred to establish technological feasibility or to maintain existing levels of performance are recognised as an expense. development Web costs are capitalised where the expenditure incurred is on developing an income generating website. Where applicable, directly attributable borrowing costs incurred the in construction of qualifying assets are capitalised. Computer software intangible assets are amortised using the straight line method over their estimated useful lives of between 3 and 10 years. Amortisation commences when the assets are ready for their intended use. Estimated useful lives are reviewed annually and adjusted, if appropriate, the in of light technological developments, usage and other relevant factors. Computer software reviewed is for impairment whenever events or changes circumstances in indicate that the carrying amount may not be recoverable. Where the carrying amount not is recoverable the asset written is down immediately to the estimated recoverable amount, based on value use in calculations. Annual Report and Accounts 2017 Accounts and Report Annual

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Branchesand non-specialised buildings Specialised administration buildings Short leasehold buildings Plant and machinery Equipment, fixtures, fittings and vehicles The Group operates a number of defined benefit and defined contribution pension arrangements. A defined benefit plan is one that defines the benefit an employeewill receive on retirement, depending on such factors as age, length of service and salary. The liability recognised on the balance sheet respect in of the defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The defined benefit obligation is calculated by independent actuaries using the projected unit credit method and assumptions agreed with the Group. The present value of the defined benefit obligation is determined by discounting the estimated future cash flowsinterest using rates high of quality corporate bonds that have termsto maturity approximating to the terms of the related pension liability. Actuarial remeasurements arise from experience adjustments (the effects of differences between previous actuarial assumptions and what has actually occurred) and changes forward in looking actuarial assumptions. Actuarial remeasurements are recognised full, in the in otheryear in they comprehensive occur, income. The Group also operates defined contribution arrangements. A defined contribution arrangement is one intowhich the Group and the employee pay fixed contributions, without any further obligation to pay additional contributions. Payments to defined contribution schemes are charged the to income statement as they fall due. Past service costs are recognised immediately the in income statement. Other post retirement obligations The Group provides post retirement healthcare to a small number of former employees. The Group recognises this obligation and the actuarial remeasurement manner a similar in to the defined benefit pension plans. Other long term employee benefits The cost of bonuses payable 12 months or more after the end of the year which in they areearned recognised is the in year which in the employees render the related service and when there an obligation is to pay a bonus under the terms of the scheme. Short term employee benefits The cost of short term employee benefits,including wages and salaries, social security costs and healthcare for current employees, recognisedis the in year of service.

1. Statement of accounting policies of accounting 1. Statement Notes to the accounts Where applicable, directly attributable borrowing costs incurred the in construction of qualifying assets are capitalised. Land not is depreciated. The depreciation of other assets commences when the assets are ready for their intended use and calculated is using the straight line method to allocate their cost or valuation over the following estimated useful lives: • Annual Report and Accounts 2017 Accounts and Report Annual • • • • Employee benefits Employee Pensions (a) (b) (c) (d) Provisions A provision recognised is where there a present is obligation as a result of a past event, probable it is that the obligation will be settled and it can be reliably estimated. This includes management’s best estimate of amounts payable for customer redress. The Group has an obligation to contribute the to Financial Services Compensation Scheme (FSCS) to enable the FSCS to meet compensation claims from, particular, in retail depositors of failed banks. A provision recognised, is to the extent that it can be reliably estimated, when the Group has an obligation accordance in with IAS 37 and the levy legally is enforceable, line with in IFRIC 21 Levies. The amount provided based is on information received from the FSCS, forecast future interest rates and historic the Group’s share of industry protected deposits. Investment properties Investment Investment properties, which comprise properties held for rental, are stated at fair value, determined by market based evidence at the date of the valuation. Valuations are completed as annually, at 4 April, by independent surveyors. Changes fair in value are included the in income statement. Depreciation not is charged on investment properties. Estimated useful lives and residual values are reviewed annually and adjusted, if appropriate, the in of light technological developments, usage and other relevantfactors. Assets are reviewed for impairment whenever events or changes circumstances in indicate that the carrying amount may not be recoverable. Where the carrying amount not is recoverable the asset written is down immediately to the estimated recoverable amount. Gains and losses on disposals are included other in operating income the in income statement.

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indications that the borrower or group of borrowers experiencing is significant financial difficulty default or delinquency interest in or principal payments debt being restructured to reduce the burden on the borrower. Financial assets at fair value through the income statement This category consists of derivative financial assets used for risk management purposes and other financial assets that are designated atfair value through the income statement by the Group. Assets this in category are carried at fair value. The fair values of derivative instruments are calculated by discounted cash flow models using yield curves that are based on observable market data or are based on valuations obtained from third parties. Gains and losses arising from the changes the in fair values are recognised the in income statement. The Group recognises the fair value of certain mortgage commitments on the balance sheet alleviate to an accounting mismatch which would otherwise arise from recognising only the movementsthe in fair value of associated derivatives. The fair value of mortgage commitments is included within other assets or other liabilities. Movements the in fair value are included within gains/losses from derivatives and hedge accounting the in income statement, to offset the fair value movements of the derivatives. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The residential Group’s and commercial mortgage loans, unsecured lending, loans and advances to banks and cash are classified as loans and receivables. Loans are recognised when the funds are advanced to customers. Loans and receivables are carried at amortised cost using the effective interest rate method less provisions for impairment. Loans and receivables acquired through a business combination or portfolio acquisition are recognised at fair value at the acquisition date. The fair value at acquisition becomes the new amortised cost for acquired loans and receivables. value adjustments Fair are madeto reflect both credit and interest rate risk associated with the acquired loan assets. Available for sale assets Available for sale assets are non-derivative financial assets that are not classified eitherinto of the two categories above. Themajority of available for sale assets are measured at fair value using, the in majority of cases, where market prices markets or, have become inactive, prices obtained from market participants. In sourcing valuations, the Group makes use of a consensus pricing service, line with in standard industry practice. In cases where market prices or prices obtained from market participants are not available, discounted cash flow models are used.Further information provided is and notes in 25. 24 Investments equities in that do not have a quoted market price an active in market and whose value cannot be reliably measured are recognised at cost. Interest on available for sale assets recognised is using the effective interest rate method. Unrealised gains and losses arising from changes values in are recognised otherin comprehensive income, except for amounts relating to impairment losses and foreign exchange gains and losses, which are recognised the in income statement. Gains and losses arising on the sale of available for sale assets are recognised the in income statement, including any cumulative gains or losses previously recognised other in comprehensive income, which are reclassified to theincome statement. Held to maturity Held to maturity assets are non-derivative financial assets with fixed or determinable payments andfixed maturity dates that the Group has the positive intention and ability to hold maturity. to Held to maturity assets are initially recognised at fair value including directly related transaction costs. They are measured subsequently at amortised cost using the effective interest ratemethod, less provisions for impairment. For the financial years ended 4 April 2017 and 4 April 2016, the Group has not classified any financial assetsinto the held to maturity category and has not reclassified any financial assets between categories. Assets carried at amortised cost The Group assesses at each balance sheet as date a result whether, ofone or more events that occurred after initial recognition, there objective is evidence that a financial asset or group of financial assets is impaired. Evidence of impairment may include: i) ii) iii) The Group first assesses whether objective evidence impairmentof existseither individually for assets that are separatelysignificant or individually or collectively for assets that are not separately significant. If thereis no objective evidence impairmentof forindividually an assessed assetis it included a group in of assets with credit similar risk characteristics and collectively assessed for impairment. If there objective is evidence that an impairment loss has been incurred, the amount of the loss measured is as the difference between theasset’s carrying amount and the present value of estimated future cash flowsdiscounted at the asset’s original effectiveinterest rate. For loansin a hedge relationship, the effective interest rate used for discounting calculated is using the carrying value of the loan including the hedge adjustment. The resultant provisions are deducted from the appropriate asset values on the balance sheet.

1. Statement of accounting policies of accounting 1. Statement Notes to the accounts (b) Financial assets Financial Financial assets are recognised initially at fairvalue. Purchases and sales of financial assets are accounted for at trade date. Financial assets are derecognised when the rights to receive cash flows have expired or where the assets have been transferred and substantially all of the risks and rewards of ownership have been transferred. The impact of hedging on the measurement of financial assetsis detailedin the derivatives and hedge accounting policy below. The Group classifies its financial assets at inception into the following four categories: (a) (c) (c) (d) assets financial of Impairment (a) Annual Report and Accounts 2017 Accounts and Report Annual

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exposure to the customer based on the number of days arrears in at the balance sheet date, the likelihood that a loan will progress through the various stages of delinquency and ultimately be written off the amount and timing of expected receipts and recoveries the realisable value of any security at the estimated date of sale the deduction likely of any costs involved the in recovery of amounts outstanding. contractually due payments exceeding 30 days arrears in high loanhigh to value or low interest cover ratio other covenant breaches loss of significant tenants or other decreasesin tenant quality the probability of the borrower entering bankruptcy restructuring of the debt relating to the borrower’s financialdifficulties (‘forbearance’) local economic conditions example, (for where this impacts on the value of underlying collateral). aggregate exposure to the customer the viability of the customer’s business model and their capacity trade to successfully out of financialdifficulties and generate sufficient cash flows to service debt obligations the amount and timing of expected receipts and recoveries of collateral the dividend likely available on liquidation or bankruptcy the extent of other creditors’ claims ranking ahead of the and Group’s, the likelihood of other creditors continuing to support the borrower the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to which legal and insurance uncertainties are evident the realisable value of security at the expected date of sale the deduction likely of any costs involved recovery in of amounts outstanding when available, the secondary market price of the debt. size of thesize loan arrears status historical loss experience for (adjusted current market conditions) the estimated period between impairment occurring and the loss being identified (’emergence period’). i) ii) iii) iii) iv) v) i) ii) iii) iv) v) vi) vii) i) ii) iii) iii) iv) v) vi) vii) viii) ix) i) ii) iii) iv) Available for sale assets The Group assesses at each balance sheet date whether there objective is evidence that a financial asset or a group of financial assets is impaired. If any such evidence exists for available for sale assets, the cumulative loss, measured as the difference between the current amortised cost and the current fair value, less any impairment loss on that asset previously recognised, recognised is impairment in losses/recoveries on investment securities the in income statement.

1. Statement of accounting policies of accounting 1. Statement Notes to the accounts The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Groupto reduce anydifferences between loss estimates and actual loss experience. a subsequent in If, period, the amount of impairment loss changes, the provision adjusted is and the amount of additional provision or reversal recognised is the in income statement. Loans remain on the balance sheet net of associated provisions until they are deemed no longer recoverable. Where a loan not is recoverable, it writtenis off against the related provision for loan impairment once all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded the in statement. income Retail loans For retail loans cash flows are estimated based on past experience combined with viewthe of Group’s the futureconsidering the following factors: Annual Report and Accounts 2017 Accounts and Report Annual

The provision Group’s methodology recognises previous arrears as a driver of future possible default and therefore accounts which have either capitalised arrears or have been arrears in the in last 12 months typically attract a higher provision level. Commercial loans In assessing objective evidence of a loss event for commercial loans, the following indicators key are considered:

Where there objective is evidence of impairment, cash flows are assessed on a case by case consideringbasis the following factors:

Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing review to determine whether they remain impaired or are considered to be past due. Where a loan renegotiated is on different terms such that substantially it is a different loan, the loan derecognised is and a new loan recognisedis at its fair value. For those loans, for which no individual impairment recognised, is a collective impairment assessment made, is taking account of the following factors:

(b)

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continued continued

1. Statement of accounting policies of accounting 1. Statement Notes to the accounts A subsequent decline the in fair value of an available for sale asset recognised is the in income statement when there further is objective evidence of impairment as a result of further decreases the in estimated future cash flows of the financial asset. Where there is no further objective evidence of impairment, the decline the in fair value of the financial assetis recognisedin other comprehensiveincome. If the fair value of an available for sale asset increases a subsequent in period, andthe increase can be objectively related to an event occurring after the impairment loss was recognised the in income statement, the impairment loss reversed is through the income statement to the extent it reverses the previously recognised impairment. Any fair in gain value excess in of the original impairment recognised is other in comprehensive income. On disposal, where sales proceeds exceed the carrying amount of an impaired asset, the proportion of the which gain offsets the previously recognised impairment loss recognised is as a credit impairment in losses/recoveries on investment securities the in statement. income Impairment lossesrecognised the in income statement on available for sale equity shares are not reversed through the income statement. Financial liabilities Borrowings, including shares, deposits, debt securities issue in and subordinated liabilities are recognised initially at fair value, being the issue proceeds net of premiums, discounts and transaction costs incurred. With the exception of deposits relating to the sale of protected equity bonds which (PEBs), are measured at fair value, all borrowings are subsequently measured at amortised cost using the effective interest ratemethod. Amortised cost adjusted is for the amortisation of any premiums, discounts and transaction costs. The amortisation recognised is interest in expense and charges similar using the effective interest rate method. Derivative financialliabilities are classified asfair value through the income statement. Permanent interest bearing capital) shares (subscribed liabilities. classified are financial as Financial liabilities are derecognised when the obligation discharged, is cancelled or has expired. Borrowings that are designated as hedged items are subject to measurement under the hedge accounting requirements described the in derivatives and hedge accounting policy below. The financialliabilities of dormant shares and deposit accounts are extinguished when balances have been transferred to the Government backed unclaimed asset scheme under the terms of the Dormant Accounts and Building Society Accounts Act 2008 with no impact on the statement. income Fair value of assets and liabilities IFRS 13 requires an entity to classify assets and liabilities held at fair value and those not measured at fair valuebut for which the fair value is disclosed according to a hierarchy that reflects thesignificance of observable market inputs in calculating thosefair values. The three levels of the fair value hierarchy are defined below: Level 1 – Valuation quoted using market prices Assets and liabilities are classified as Level 1 if their valueis observablein an active market. Suchinstruments are valued by referenceto unadjusted quoted prices for identical assets or liabilities active in markets where the quoted price readily is available, and the price reflects actual and regularly occurring market transactions length on an arm’s basis. An active market one is which in transactions occur with sufficient volume and frequency to provide pricinginformation on an ongoing basis. Level 2 – Valuationtechnique observable using inputs Assets and liabilities classified as Level 2 have been valued using models whoseinputs are observablein an active market.Valuations based on observable inputs include derivative financialinstruments such as swaps and forward rate agreements which are valued using market standard pricing techniques, and options that are commonly traded markets in where all the inputs to the market standard pricing models are observable. They also include investment securities valued using consensus pricing or other observable market prices. Level 3 – Valuationtechnique significant using unobservableinputs Assets and liabilities are classified as Level 3 if their valuationincorporates significant inputs that are not based on observable market data (‘unobservable inputs’). A valuation input considered is observable if it can be directly observed from transactions an active in market, or if there compelling is external evidence demonstrating an executable exit price. An input deemed is significant is if shownit to contribute more than 10% to the valuation of a financialinstrument. Unob Annual Report and Accounts 2017 Accounts and Report Annual

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it is evidentit is from testing that a derivative not, is or has ceased to be, highly effective as a hedge the derivative expires, or sold, is terminated or exercised the underlying item matures or sold is or repaid the forecast transactions are no longer deemed to be highly probable.

i) ii) iii) iv)

Hedge accounting When transactions meet the criteria specifiedin IAS the 39, Group can apply two types of hedge accounting:either hedges of the changes fairin value of the financial asset liabilityor or hedges of the variabilityin cash flows of the financial asset liability: or value hedgeFair accounting In a micro hedge relationship, the carrying value of the underlying asset or liability (‘the hedged item’) adjusted is to reflect changesin fair value attributable the to risk being hedged. This creates an offset the to fair value movement of the derivative (‘the hedging instrument’). In the case of a portfolio hedge, this fair value adjustment recorded is at a portfolio level the in fair value adjustment for portfolio hedged risk category on the balance sheet. Changes the in fair value of hedged items and hedging instruments are recorded the in income statement. Cash flow hedge accounting In a cash flow hedge accounting relationship, the portion of the derivative’s fair value movement thatis deemed to be an effective hedge deferredis to the cash flow hedge reserve,instead of immediately being recognisedin theincome statement. Theineffective portion of the derivative fair value movement recognised is immediately the in income statement. Amounts deferred to the cash flow hedge reserve are subsequently recycled to the income statement. This recycling occurs when the underlying asset or liability being hedged impacts the income statement, for example when interest payments are recognised. qualify forTo hedge accounting the hedge relationship must be clearly documented at inception and the derivative must be expected to be highly effective offsetting in the hedged risk. Prospective andretrospective effectiveness must be tested throughout the life of the hedge relationship. of hedgeTermination accounting when: hedge accounting The discontinues Group The Group may also decide to cease hedge accounting even though the hedge relationship continues to be highly effective by ceasing to designate the financialinstrument as a hedge. Derivativeinstruments financial Derivatives are carried at fair value with movements fair in values recorded the in income statement. Derivative financialinstruments are principally valued by discounted cash flow models using yield curves that are based on observable market data or are based on valuations obtained from third parties. For collateralised positions the Group uses discount curves based on overnight indexed swap rates, and for non-collateralised positions the Group uses discount curves based on term Libor rates. In the firstinstance fair values are calculated usingmid prices. With the exception of derivatives hedgingliabilities relating to the sale of PEBs, an adjustment then is made to derivative assets and liabilities to value them onbid a and offer basis respectively. The bid-offer adjustmentcalculated is on a portfolio basis and reflects the costs that would incurredbe if substantially all residual net portfolio market risks were closed out using available hedging instruments or by disposing of or unwinding actual positions. The methodology for determining the bid-offer adjustments involves netting between long and short positions and the grouping of risk by type, accordance in with hedging strategy. Bid-offer spreads are derived from market sources such as broker data and are reviewed periodically. The derivatives hedging PEBs are not traded an active in market and are therefore valued at mid price. In measuring fair value, separate credit valuation and debit valuation adjustments are made for counterparty or own credit risk the to extent not already included the in valuation. All derivatives are classified as assets where their fair valueis positive andliabilities where their fair valueis negative. Where thereis the legal right and intention to settle net, then the derivative classified is as a net asset as liability, appropriate.or Where cash collateral received, is mitigate to the risk inherent amounts in due to the Group, included it is as a liability within either deposits from banks or other deposits, depending on the counterparty. where Similarly, cash collateral given, is to mitigate the risk inherent amounts in due from the Group, included it is as an asseteither in loans and advances to banks or loans and advances to customers. Where securities collateral received is the securities are not recognised the in accounts as the Group does not obtain the risks and rewards of the securities. Where securities collateral given, is the securities have not been derecognised as the Group has retained substantially all the risks and rewards of ownership. Embedded derivatives A number of complex contracts contain both a derivative and a non-derivative component, which in case the derivative termed is an embedded derivative. If the economic characteristics and risks of embedded derivatives are not closely related those to of the host contract, and the overallcontract itself not is carried at fair value, the embedded derivative accounted is for separately and reported at fair value with gains and losses being recognised the in income statement.

(b) (c)

1. Statement of accounting policies of accounting 1. Statement Notes to the accounts Derivatives and hedge accounting hedge and Derivatives Derivatives are entered into to reduce exposures to fluctuationsinterestin rates, exchange rates, marketindices and credit risk, and are not purposes. speculative for used (a) Annual Report and Accounts 2017 Accounts and Report Annual

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continued continued

1. Statement of accounting policies of accounting 1. Statement Notes to the accounts In fair value hedge accounting relationships, if the derivative no longer meets the criteria for hedge accounting, the cumulative fair value hedge adjustment amortised is over the period to maturity of thepreviously designated hedge relationship. If the underlying item sold is or repaid, the unamortised fair value adjustment immediately is recognised thein income statement. In cash flow hedge accounting relationships, if the derivative no longer meets the criteria for hedge accounting, the cumulative gain or loss from the effective portion of the movement the in fair value of the derivative remains other in comprehensive income until the cash flows from the underlying hedged item are recognised the in income statement. If the underlying item sold is or repaid, the cumulative or gain loss in other comprehensive income immediately is recognised the in income statement. instruments Offsettingfinancial Financial assets and liabilities are offset and the net amount reported on the balance sheet and if, only there if, a currently is enforceable legal right to set off the recognised amounts and there an intentionis to settle on a net basis, or realise to an asset and settle the liability simultaneously. swaps return total collateralised and lending) and borrowing securities (including agreements repurchase and Sale Investment and other securities may be lent or sold subject to a commitment repurchase to them at a pre-determined or a right repo) price (a to continue to receive all future cash flows and changesin capital value on collateral pledged total(a return Suchswap). securities are retained on the balance sheet when substantially all the risks and rewards of ownership (typically, the interest rate risk and credit risk on the asset) remain within the Group, and the counterparty liability included is separately on the balance sheet as appropriate. whereSimilarly, the Group borrows or purchases securities subject a commitment to to resell reverse them or (a settle repo) all future cash flows and changesin capital value to a third party on collateral(a reverse held total return butswap) does not acquire the risks and rewards of ownership, the transactions are treated as collateralised loans, and the securities are not included on the balance sheet. The difference between sale and repurchase price accrued is over the life of the agreements using the effective interest rate method. instrumentsEquity Issued financialinstruments are classified as equity instruments where the contractual arrangement with the holder does not result in the Group having a present obligation to deliver cash, another financial asset or a variable number of equityinstruments. Where the Group does have a present obligation, the instrument classified is as a financialliability. The proceeds of the issuance of equity instruments are included equity. in Costs incurred that are incremental and directly attributable to the issuance are deducted from the proceeds of applicable (net tax). Distributions to holders of equity instruments are recognised when they become irrevocable and are deducted, net of tax where applicable, from the general reserve. currency translation Foreign The consolidated financial statements are presentedin sterling, whichis the functional currency of the Society. Itemsincluded in the financial statements of each of entities the Group’s are measured using their functional currency. Foreign currency transactions are translated into sterling using the exchange rates prevailing at the dates of the transactions. Monetary items denominated foreign in currencies are retranslated at the rate prevailing at the balance sheet date. Foreign exchange gains and losses resulting from the retranslation and settlement of these items are recognised the in income statement as disclosed note in 7. Cash flow hedge accountingis applied to derivatives which are economically hedging foreign currency items. equivalents cash and Cash For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, included within cash and loans and advances to banks on the balance sheet. liabilities Contingent Contingent liabilities are possible obligations whose existence dependent is on the outcome of uncertain future events, or those where the outflow of resourcesis uncertain or cannot be measured reliably. During the ordinary course of business the Group subject is to threatened or actual legalproceedings. All such material cases are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of incurring The a liability. Group does not disclose amou Annual Report and Accounts 2017 Accounts and Report Annual

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7 33 26 £m £m 99 98 576 592 855 403 820 2016 2016 1,577 3,818 2,367 (986) (608) 4,943

5 Society Society 74 £m £m 34 59 128 753 901 370 454 2017 2017 686 (527) 1,390 4,724 2,244 (998) 3,639

- - 7 33 26 £m £m 99 577 835 403 690 2016 2016 1,577 (768) (986) 5,294 2,208 5,009 10 33 30 Note

- - Group Group 5 £m £m 34 59 767 128 774 372 450 2017 2017 1,390 (684) (998) 5,050 2,090 4,843 continued

Connected undertakings Connected Other Subordinated liabilities Subordinated Connected undertakings Connected Other

Area of significant judgement and estimate of significant judgement Area Impairment provisions on loans and advances advances on loans and Impairment provisions redress customer for Provisions obligations (pensions) benefit Retirement On shares held by individuals On shares On other loans: On residential mortgages On residential On subscribed capital On deposits and other borrowings: On other liquid assets On investment securities Net expense on financial instruments hedging assets Total On debt securities in issue Net income on financial instruments hedging liabilities Net income Interest on net defined benefit pension liability (note 33) pension liability on net defined benefit (note Interest Total 4. Interest expense and similar charges expense and similar charges 4. Interest 3. Interest receivable and similar income similar income and receivable 3. Interest

2. Judgements in applying accounting policies and critical accounting estimates and critical accounting policies accounting in applying 2. Judgements Notes to the accounts The Group has judgements to make applying in its accounting policies which affect the amounts recognised thein accounts. In addition, estimates and assumptions are made that could affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported future in periods may be based upon amounts which differ from those estimates. The most significant areas where judgements and estimates are made are disclosed the in following notes: Annual Report and Accounts 2017 Accounts and Report Annual Included within interest receivable and income similar interest is income on impaired financial assets of £33in million the Group and £16 the in million Society (2016: Group million, Society £41 £23 million). Interest on deposits and other borrowings includes an expense of £327 relation in (2016: million to the million) redemption £439 and maturity of Protected Equity Bond (PEB) deposits which have returns to the linked performance of specified stock marketindices. The PEBs are economically hedged using equity-linked derivatives. Net income on financialinstruments hedgingliabilities includes income of £308million (2016: £398 relation in to the million) associated derivatives. Further details are included note in 25.

163

Strategic Report Governance Business and Risk Report Financial Statements Other Information 17 13 10 10 73 73 73 73 78 78 £m £m Net Net 232 (15) (15) 236 - 8 8 £m 2016 - - - - - £m £m (3) (27) (27) (36) (36) (126) (126) (192) (189) 2016 2016 Expense Expense - Society £m 100 100 2017 12 12 13 73 73 78 78 20 £m £m 46 46 421 199 199 428 Income Income - 8 8 £m 2016 6 10 81 81 £m £m 73 73 78 78 (5) (5) 225 221 Net Net (12) (12) ------Group £m £m £m 100 100 (42) (42) 2017 (23) (23) (221) (221) (156) (156) 2017 2017 Expense Expense 11 6 11 10 81 81 37 37 £m £m 78 78 446 229 229 442 Income Income continued

Fee and commission Fee Fee and commission Fee Current account and savings and savings account Current and savings account Current Group insurance General Society insurance General card Credit Protection and investments Protection Mortgage card Credit and investments Protection Mortgage Other fees and commissions Other and commissions fees Other fees and commissions Other and commissions fees Gain on disposal of investment in Visa Europe Limited Gain on disposal of investment in Visa Europe Other income Other income Total On 21 June 2016, the Group disposed of its share Visa in Europe Limited, resulting on a gain in disposal of £100 million. Further information includedis note in 15. Other income includes the net amount of rental income, profits or losses on the sale of property, plant and equipment andincreases or of branchesvaluations the decreasesin and non-specialised buildings which are not recognised other in comprehensive income. 6. Other operating income 6. Other operating

5. Fee and commission income and expense income and commission 5. Fee Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

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- 5 71 15 27 141 77 £m (5) 129 (46) (61) (64) 2016

8 Society 72 £m 33 50 83 69 179 2017 (43) (25) (29) (101) (129)

1 15 39 36 £m 85 123 (46) (37) (38) (61) 434 2016 (433)

Group 8 61 £m 20 33 66 (4) 161 348 (19) 2017 (25) (100) (352) continued

the relationship passed all the monthly effectiveness tests but the fair value movement of the derivative was not exactly offset passed all the monthly effectiveness but the fair value movement of the derivative was tests by the change in fair value of the asset or the relationship as hedge ineffectiveness); or to liability being hedged (sometimes referred the relationship failed a monthly effectiveness test which, for that month, disallows recognition of the change in fair value of the underlying asset or liability being hedged that month, disallows failed a monthly effectiveness recognition for which, test the relationship sheet positions. the amortisation of existing balance months leads to and in following

Gains or losses from fair value hedges can arise where there is an IFRS hedge accounting relationship in place and either: in place relationship is an IFRS hedge accounting there fair value hedges can arise where Gains or losses from • • In cash flow hedge accounting the effective portion of the fair value movement of designated derivatives is deferred to the cash flow hedge reserve.to the cash flow hedge The fair value the effective derivatives is deferred portion of the fair value movement of designated In cash flow hedge accounting statement. in the income recognised the underlying hedged asset or liability are to when amounts relating statement the income to movement is subsequently recycled statement. in the income immediately The ineffective portion of the fair value movement is recognised hedge these commitments. used to are caused when derivatives mismatch the accounting reduce to in order commitments mortgage value certain fair elects to The Group in place. is not currently accounting because hedge relationship hedge accounting not in an IAS 39 hedging but which are economic those used for Other derivatives are Gains of £61 (2016: million from £85 fair value million) hedge accounting. This includes (2016: million from gains of £47 macro £66 million) hedges, due to hedge ineffectiveness and the amortisation of existing balance sheet amounts. In addition, further gains of £14 relate million to micro hedges (2016: due £19 to a combination million) of hedge ineffectiveness, maturities and disposals. Gains of £8 (2016: million losses relating to the of million) £46 mortgage pipeline. The income statement includes the full fair value movement of forward starting interest rate swaps economically hedging the pipeline; however the Group only elects to fair value certain underlying mortgage business within the pipeline. Losses of £19 (2016: million £37 from valuation million) adjustments and volatility on other derivatives which are not currently an IAS in 39 relationship. hedge accounting Gains of £20 (2016: million £36 from the million) retranslation of foreign currency monetary items not subject effective to hedge accounting, against a backdrop of significant sterling depreciation. Derivatives designated as fair value hedges Derivatives designated Fair value movement attributable to hedged risk to value movement attributable Fair Gains from fair value hedge accounting (note i) (note fair value hedge accounting Gains from Derivatives designated as cash flow hedges Derivatives designated Deferral to cash flow hedge reserve cash flow hedge to Deferral Ineffectiveness from cash flow hedge accounting (note ii) (note cash flow hedge accounting Ineffectiveness from Derivatives economically hedging mortgage commitments hedging mortgage Derivatives economically commitments mortgage movement attributable to value Fair Net gain/(loss) from mortgage pipeline (note iii) pipeline (note mortgage Net gain/(loss) from Fair value (losses)/gains from other derivatives (note iv) other derivatives (note (losses)/gains from value Fair differences exchange Foreign Total • • • The overall impact of derivatives will remain volatile from period period to as new derivative transactions replace those which mature to ensure that interest rate and other market risks are continually managed. Although the Group only uses derivatives for the hedging of risks, income statement volatility can still arise due hedge to accounting ineffectiveness or because hedge accounting either is not currently applied or not is currently achievable. This volatility does not reflect the economic reality of hedging the Group’s strategy. Includedwithin the of gain £66 (2016: million £39 was the million) impact of the following: • Notes: i.

7. Gains from derivatives and hedge accounting and hedge derivatives Gains from 7. Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

iii. iv. ii.

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41 76 76 33 52 35 55 43 £m 68 115 118 174 129 725 325 725 728 479 2016 1,819 1,494

Society 75 £m 78 42 59 43 39 64 83 40 511 177 125 120 136 764 764 786 396 2017 1,592 1,988

41 76 76 33 35 53 55 £m 44 68 131 131 119 174 745 745 325 736 486 2016 1,522 1,847

Group 75 £m 78 42 59 43 39 64 83 40 137 517 177 126 145 793 790 790 396 2017 2,021 1,625 continued

Employee costs: Wages and salaries Wages Bonuses Social security costs Pension costs (note 33) (note costs Pension Other administrative expenses Other administrative levyBank 30) (note Depreciation, amortisation and impairment Depreciation, Total Other administrative expenses include: Other administrative Property operating lease rental operating Property Other property costs Other property Postage and communications Postage Computer costs Computer Marketing and advertising Marketing Money transmission and other bank costs Money transmission Legal, professional and consultancy professional Legal, Training, education and other staff related costs education and other staff related Training, Other Total

8. Administrative expenses 8. Administrative Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual The bonus expense within employee costs the in above table includes elements of long term bonuses which will be paid more than one year from the balance sheet date of £5 (2016: million In accordance £8 million). with accounting standards, some elements of deferred bonuses will be recognised future in periods. Executive directors and certain senior executives are entitled bonus to payments under two schemes, the Directors’ Performance Award and Performancethe Medium Term Pay Plan (MTPPP).

166

Strategic Report Governance Business and Risk Report Financial Statements Other Information - - - 0.1 0.1 £m

Expected 2023/24 - - -

- 0.2 0.2 £m 1.1 £m 4.1 2.3 0.7 3.0 2016 Expected 2022/23 - -

0.2 £m 0.4 0.6

- Society £m 2021/22 1.3 2.2 3.5 0.5 4.0 Expected 2017 - 1.1 £m 0.2 0.3 0.6 2020/21 Expected

- 1.1 £m 1.7 2.3 3.3 0.7 £m 1.0 0.3 4.4 0.2 0.5 2016 Expected 2019/20 - 1.1 Group and Society Group 1.4 £m 2.9 0.4

Group £m 1.3 2.2 4.3 0.3 0.5 3.8 2018/19 2017 Expected - 1.5 £m 1.0 3.5 6.0 2017/18 Expected - £m 1.7 3.7 8.8 14.2 Actual Actual (note ii) (note 2016/17 continued -

4.1 £m 9.1 9.7 22.9 Actual (note ii) (note 2015/16 continued

Audit of Group subsidiaries of Group Audit Audit-related assurance services assurance Audit-related The amount expected is an estimate based on past performance together with current assumptions of future leaver rates and future CCDS performance. From 2016/17 From performance. the CCDS and future rates leaver assumptions of future with current together based on past performance is an estimate The amount expected to seven years. five period from the bonus deferral based on a change to extended was statement in the income recognised period over which bonuses are This payment based payments. share to linked awards to in relation statement in the income £5 recognised million) was million (2016:In the year ended 4 April 2017, £4 sheet. on the balance income included in accruals and deferred and therefore is deferred

External auditors’ remuneration auditors’ External Income statement charge for long term bonuses long term for charge statement Income Audit fees for the Group and Society statutory the Group audit for fees Audit Fees payable for other services: for payable Fees Medium Term Performance Pay Plan: Pay Performance Medium Term 2013-2016 Total audit and audit-related assurance services assurance audit and audit-related Total Other non-audit services Total Directors’ Performance Award: (note i) (note Award: Performance Directors’ 2014/15 2015/16 2016/17 Income statement statement Income bonuses long term for charge Directors’ emoluments, including details of the bonus scheme, are shown as part of the Report of the directors on remuneration accordance in with Schedule 10A, paragraphs 9 of 1 to the Building Societies Act 1986. The remuneration of the external auditors, PricewaterhouseCoopers set is out below: LLP, Notes: Notes: i. ii. of the 2014/15, 2015/16 and 2016/17 scheme years, and MTPPP bonuses for the final 2013-2016 cycle: The Directors’ Performance Award (previously Directors’ Performance Pay for executive Plan) directors and certain senior executives, which combines the annual and long term elements under a single scheme, was introduced the in year ended 4 April 2015. Under this scheme, awards are based on current year results but are paid over a period of up to seven years, with part of the awards to the linked value of Nationwide’s core capital deferred shares (CCDS). The payment of deferredelements remains subject to further discretion by the Remuneration Committee. These bonuses are recognised the in income statement over the period from the start of the performance year until all relevant criteria have been met. Up until the year ended 4 April 2014, executive directors and certain senior executives were entitled to MTPPP bonuses based on results over the preceding three year performance cycle. MTPPP bonuses were recognised the in income statement the in final year of the three year performance cycle. The payment of deferred elements of MTPPP remains subject to further discretion by the Remuneration Committee. MTPPP deferred bonuses are awarded cash. in The MTPPP scheme has now been discontinued and the final bonus expense under the MTPPP was recognisedin theincome statementin the year ended 4 April elements 2016. However, of historic MTPPP awards under the 2013-2016 award cycle remain due for payment until June 2017. The table below shows actual and expected charges to the income statement respect in of all Directors’ Performance Award bonuses respect in 8. Administrative expenses expenses 8. Administrative Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

167

Strategic Report Governance Business and Risk Report Financial Statements Other Information 81 42 20 (6) £m £m (13) 652 443 131 438 443 (319) Total (150) Total - 2016 7,629 3,905 18,021 18,021 14,116 10,392 - - - - - 1 1 4 1 - (4) (1) £m £m Other Other lending lending - Society 2017 7,519 3 4,002 11,154 20 59 25 18,673 18,673 (1) 14,671 (7) £m 59 £m 322 (5) (31) (34) (242) lending lending Commercial Commercial Commercial Commercial 88 2016 18 15 (5) 3,919 96 7,629 (4) £m £m 78 281 216 18,109 18,109 10,392 281 (44) 269 14,190 (101) banking banking Consumer Consumer Consumer Consumer - Group 1 3 88 10 77 (1) 88 77 £m £m 47 110 (23) 2017 (15) 7,519 4,015 11,154 18,761 18,761 14,746 Specialist residential Specialist residential - 1 1 8 25 11 34 (1) (6) 22 25 (2) £m £m Prime Prime residential residential continued

continued

Full time Full time Part Central administration Central Branches

2016 2017 The average number of persons employed during the year was: number of persons employed during the year was: The average Group Group Society: Total At 5 April 2016 At At 5 April 2015 At Subsidiaries Charge for the year for Charge the year during Amounts recovered At 4 April 2016 At Total Amounts written offAmounts written during the year offAmounts written during the year Unwind of discount Charge for the year for Charge Amounts recovered during the year during Amounts recovered Unwind of discount Unwind of discount At 4 April 2017At 10. Impairment provisions on loans and advances to customers customers to on loans and advances 10. Impairment provisions The following provisions have been deducted from the appropriate asset values the in Group balance sheet: 9. Employees

8. Administrative expenses expenses 8. Administrative Audit-related assurance services for the Group and Society include (2016: million £0.7 £nil) respect in of preliminary work performed relation in to the implementation of IFRS 9 Financial Instruments the in year ending 4 April 2019. The policy Group’s relation in to the use of its auditors on non-audit engagements sets out the types of services they are generally precluded from performing. All non-audit services, where the fee expected is to exceed limit, a de minimis are subject to pre-approval by the Audit Committee. Fees relation in non-audit to ‘other services’ above relate primarily to work undertaken relation in IT to the operational Group’s resilience and regulatory projects. Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual Central administration employee numbers include employees engaged direct in customer facing operations administrative in centres.

168

Strategic Report Governance Business and Risk Report Financial Statements Other Information 71 19 39 £m £m 84 (6) (12) 563 365 365 328 Total Total (134) (296) ------1 - 3 £m £m (4) Other Other lending lending 3 25 (1) 20 £m 59 59 £m (7) (5) continued (31) 322 (34) (242) lending lending Commercial Commercial Commercial Commercial 15 18 (4) £m £m 78 (5) 96 281 281 216 269 (44) (101) banking banking Consumer Consumer Consumer Consumer 1 - 1 8 11 34 (1) 22 25 25 (2) £m £m (6) Prime Prime residential residential continued

2016 2017 Society Society At 5 April 2015 5 April At At 5 April 2016 5 April At Amounts recovered during the year Amounts recovered 4 April 2016 At Charge for the year for Charge offAmounts written during the year Charge for the year for Charge Unwind of discount Unwind of discount Amounts recovered during the year Amounts recovered Amounts written offAmounts written during the year Unwind of discount Unwind of discount At 4 April 2017 4 April At The Group impairment provision at million 4 April of £438 2017 (2016: comprises £443 million) individual provisions million of £45 (2016: £75 and collective million) provisions of £393 (2016: million £368 million). The impairment provision charges for prime and specialist residential loans include (2016:million £45 £27 relation in to million) enhancements to provisioning methodology and assumptions to ensure that provisions continue to reflect appropriately theincurred losses within the portfolio. Consumer banking provision assumptions relation in to upto date accounts have also been reviewed and updated, resulting additional in provisions of £7 (2016: million £29 million). The decrease impairment in provisions held against commercial lending primarily is driven by the continued reduction of the commercial realestate portfolio. The Society’s impairment provisions on loans and advances to customers are shown the in table below: 10. Impairment provisions on loans and advances to customers customers to loans and advances on provisions 10. Impairment Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual The Society impairment provision of £328 at million 4 April 2017 (2016: £365 comprises million) individual provisions of £28 million (2016: £58 and collective million) provisions of £300 (2016: million £307 million). In addition to the Society’s impairment loss on loans and advances to customers shown above, the Society’s income statement charge includes an £18 (2016: million provision £16 release million) relation in to a loan to a subsidiary undertaking. Further details are included note in 36.

169

Strategic Report Governance Business and Risk Report Financial Statements Other Information - 3 8 (1) (7) £m (12) 229 236 228 2016 3 Society (5) (2) (2) £m 221 (11) 223 (15) 206 2017 - 2 5 (8) continued £m 322 330 294 (35) (28) 2016 - - 3 Group (1) (2) (3) £m 297 297 300 2017 continued

Critical accounting estimates and judgements advances and loans on provisions Impairment Impairmentmeasured is as the difference between an asset’s carrying amount and the present value of management’s estimate of future cash flows. In determining the required level impairmentof provisions, the Group uses outputs from statistical models combined with management judgement. Key assumptions included thein measurement of impairment include the probability of default and the amount of eventual loss given default. Assumptions are based on observed historical data and updated as management considers appropriate to reflect current conditions. The accuracy of the impairment provisionwill therefore be affected by unexpected changes these in assumptions. For prime and specialist residential mortgages, the estimate of future house price index (HPI) movements assumption a key is in estimating the eventual loss. The Group does not take account of projected future HPI increases establishing in provisions, other than in relation to the future maturity of interest only mortgages. If no HPI growth assumed is for interest only mortgages provisions would increase million. by £6 If a 10% HPI decrease assumed is for all residential mortgages, including interest only mortgages, provisions would further increase by an estimated £20 million. Provisions are held relation in up to to date accounts where a loss event has occurred but not is yet identified through evidence of arrears, based on an emergence period. The emergence period represents the estimated period of time between a loss event occurring and an account entering arrears. If this period increased is by one month the provision would increase by an estimated £1 for million prime and specialist residential mortgages, and an estimated for million £6 consumer banking. For consumer banking, the estimate of future recoveries assumption a key is estimating in the eventual loss. The Group uses a combination of both historical data and management judgement estimating in the level and timing of future recoveries. A 10% change expectedin future recoveries would result an estimated in £15 change million the in provision. In calculating the provisions for commercial loans, estimates of discounted cash flows are made on the basis of the planned strategy for each loan. These estimates include assumptions regarding future expected cash flowsin respect of property collateral held. If the property values decreased by 10% the provision would increase by an estimated £3 million. Corporation tax – adjustment in respect of prior years tax – adjustment in respect Corporation UK corporation tax UK corporation Current year credit Current Adjustment in respect of prior years of prior in respect Adjustment

Tax charge in the income statement the income in charge Tax Current tax: Current Total current tax current Total Deferred tax: Deferred Effect of corporation tax rate change tax rate Effect of corporation Effect of banking surcharge on deferred tax balances on deferred Effect of banking surcharge Total deferred taxation deferred Total Tax charge Tax 11. Taxation

10. Impairment provisions on loans and advances to customers customers to loans and advances on provisions 10. Impairment Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

170

Strategic Report Governance Business and Risk Report Financial Statements Other Information - - - 1 1 7 7 4 8 8 (2) (9) (8) (7) 22 £m £m (4) 228 184 919 2016 2016 - - - 1 8 1 16 19 Society Society (2) (5) (2) £m £m 62 (12) 206 (18) 134 671 (92) (96) 2017 2017 - - - 1 1 1 7 7 2 8 (9) (7) 22 £m £m 124 132 (3) 294 256 2016 2016 1,279 - - - -

- 1 Group Group 8 19 18 £m £m 62 (1) (2) (2) 297 211 (92) 2017 2017 (176) (101) 1,054 continued

continued

Depreciation on non-qualifying assets Depreciation Non-taxable dividends received Bank levyBank Effect of results of LLP structured entity (note i) entity (note of LLP structured Effect of results redress Customer Other The Society is liable for tax on the results of Nationwide Covered Bonds LLP, the profit or loss of which is reported within that entity. within that entity. reported or loss of which is the profit Bonds LLP, of Nationwide Covered tax on the results The Society is liable for

Cash flow hedges Tax charge/(credit) on items through other comprehensive income other comprehensive through on items charge/(credit) Tax Reconciliation of tax charge of tax Reconciliation Retirement benefit obligations Retirement Profit before tax before Profit sale investment securities for Available revaluation Property Tax calculated at a tax rate of 20% at a tax rate calculated Tax not taxable): tax purposes/(income Expenses not deductible for Other items through the general reserve, including effect the general through Other items change tax rate of corporation Adjustments in respect of prior years of prior in respect Adjustments Banking surcharge Banking Total Effect of corporation tax rate change tax rate Effect of corporation Effect of banking surcharge on deferred tax balances on deferred Effect of banking surcharge Tax charge Tax The tax on items through other comprehensive income as follows: is Note: i. The actual tax charge differs from the theoretical amount that would arise using the standard rate of corporation tax the in UK as follows: 11. Taxation 11. Taxation Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual The Group tax charge through the available for sale reserve of £18 (2016: million £7 credit) million made is up of a charge of £14 million (2016: credit of £35 through current million) tax and a charge (2016: million of £4 through £28 deferred million) tax. taxation Deferred Deferred tax determined is using tax rates and laws that are expected to apply the in period when the deferred tax asset realised is or deferred tax liability settled is based on rates enacted or substantively enacted at the balance sheet date, including the banking surcharge applicable. where The Finance (No. Act 2) 2015 introduced a surcharge of 8% on banking profits from 1 January 2016 and reduced the corporation tax rate from 20% to 19% with effect from The 1 April Finance 2017. Act 2016 was enacted on 15 September 2016 and reduces the corporation tax rate from 19% 17% to from 1 April 2020.

171

Strategic Report Governance Business and Risk Report Financial Statements Other Information - -

- - - - 1 1 2 4 9 11 15 27 (1) (1) £m £m 58 (8) (14) (14) (16) (16) (43) (45) (32) (20) (29) 2016 2016

- - - - - 2 5 8 14 Society Society 11 14 15 19 £m £m 72 72 73 22 112 42 98 (16) (23) (12) (21) (14) (19) 2017 2017 (26) - - 1

3 - - 1 17 58 (1) 35 28 30 £m £m (2) (6) (45) (15) (14) (14) (43) (20) 2016 2016 (86) (151) (151) (164) (186) (166) - 1

- - 1 Group Group 2 5 3 3 14 14 (2) 19 £m £m 70 42 42 (6) 112 154 103 (23) (12) (21) (19) 2017 2017 (82) (151) (100) continued

continued

Deferred tax assets and liabilities tax assets and Deferred Movements in deferred taxation in deferred Movements At 5 April At tax assets Deferred Accelerated capital allowances capital allowances Accelerated Property revaluation Property Income statement (charge)/credit statement Income Income statement effect of corporation tax rate change tax rate effect statement of corporation Income sale investment securities for Available Cash flow hedges Retirement benefit obligations Retirement Income statement effect of banking surcharge effect statement of banking surcharge Income Taxation on items through the income statement the income through on items Taxation Provisions for loan impairment for Provisions Available for sale investment securities for Available Cash flow hedges Other provisions Other provisions Property revaluation Property benefit obligations Retirement Deferred tax liabilities Deferred Effect of corporation tax rate change in other comprehensive income change in other comprehensive tax rate Effect of corporation Property revaluation Property Effect of banking surcharge in other comprehensive income in other comprehensive Effect of banking surcharge Cash flow hedges Taxation on items through other comprehensive income other comprehensive through on items Taxation 4 April At Other provisions Net deferred tax asset/(liability) Net deferred

11. Taxation 11. Taxation Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual The movements on the deferred tax account are as follows: The majority of deferred tax assets are anticipated be to recoverable after The Group one year. considers that there will be sufficient future trading profitsin excess of profits arising from the reversal of existing taxable temporary differences to utilise the deferred tax assets. Deferred tax assets and liabilities are attributable to the following items:

172

Strategic Report Governance Business and Risk Report Financial Statements Other Information - 6 8 (1) £m (2) (13) 2016 - 5 Society £m (5) (2) (13) (15) 2017 - 2 36 116 £m £m (2) 254 330 294 (13) (15) (28) 2016 2016 (192) 3 - - - Group Group 15 £m £m 137 (2) 297 297 (13) 300 2017 2017 (140) continued

continued

Retail Commercial Head office functions

Current tax liability Current Prior year payments the end of the year due after year tax payments Current statement cash flow paid per consolidated Tax Income statement tax charge statement Income adjustments tax and prior year Deferred Deferred tax charge in the income statement in the income tax charge Deferred Accelerated capital allowances Accelerated Provisions for loan impairment for Provisions Effect of corporation tax rate change tax rate Effect of corporation Effect of banking surcharge on deferred tax balances on deferred Effect of banking surcharge Other Total For management reporting purposes, Nationwide organised is into the following business streams: • • • These business streams reflect how management assesses performance and makes decisions on allocating resources to the business. Retail Retail functions include prime residential lending, specialist residential lending, consumer banking, savings, commercial deposits which are managed by the retail business, insurance and investments. The distribution channels supporting these products are also included this in segment. Commercial This segment comprises the commercial lending business, including commercial real estate lending, lending to housing associations and project finance lending. Head office functions Head office functionsinclude treasury operational activities, head office and central support functions, commercial deposits received and managed by the Treasury function and the result arising from the fundstransfer pricing methodology relating the to funding of other segments. Head office and central support functionsinclude executive management, legal and secretariat services, human resources, strategic planning and external relations, finance, risk management, property services andinternal audit. Certain interest costs and centralised administrative expenses are not allocated to other segments and are instead held centrally within the segment. office functions Head 12. Operating segments 12. Operating Tax transparency Tax The table below reconciles the corporation tax charge the in income statement to the taxation paid the in consolidated cash flow statement: The deferred tax charge the in income statement comprises the following temporary differences: 11. Taxation 11. Taxation Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

173

Strategic Report Governance Business and Risk Report Financial Statements Other Information

- 66 £m 757 325 (42) Total (276) 1,054 (297) 1,030 3,285 2,960 2,960 (1,979) 210,537 221,670 66 (9) £m (42) (22) (59) (37) (176) (152) (108) 1,086 (1,123) 34,304 60,564 functions Head office - - 12 72 72 (5) £m 114 102 403 (37) (301) 3,055 12,555 Commercial - - £m 335 1,134 1,134 (262) (785) Retail 3,230 2,895 3,680 (1,834) 174,811 146,918 continued

continued

2017 Net income/(expense) from external customers external from Net income/(expense) other segments from (Charge)/revenue Net interest income Net interest i) (note Other income revenue Total Impairment and other provisions (note iii) (note Impairment and other provisions tax before Underlying profit/(loss) Administrative expenses (note ii) expenses (note Administrative Bank levyBank derivatives and hedge accounting Gains from Profit/(loss) before tax before Profit/(loss) Total liabilities Total Taxation tax after Profit iv) assets (note Total

12. Operating segments segments 12. Operating Notes to the accounts product groups and business segments to derive individual product margins and net interest receivable. Under methodology, the Group’s a single cost of funds representing the weighted average marginal cost of retail and wholesale funding allocated is across the Group, and reviewed is monthly to ensure that the marginal cost of funding, and the relative performance of the different business segments, are based on current market cost of funds. within theHowever, commercial segment, the transfer price charged to long term social housing and project finance lendingis set to reflect the lower average historic cost of wholesale funding which was available when these loans were originated. This reflects the nature of this lending which notdid envisage the current marginal cost of funding, with the additional interest cost reported within the Head office functions segment. All other assets the in commercial segment will continuebe to charged the weighted average marginal cost of retail and wholesale funding, line with in other assets. The retail and commercial business segments are charged for the benefit of free capital as part of the funds transfer pricing mechanism, based upon regulatory capital metrics. Segmental results are as follows: Funds transfer pricing methodology pricing transfer Funds Funds transfer pricing the is mechanism by which the Group recognises the internal cost of funds andallocates this cost between different Annual Report and Accounts 2017 Accounts and Report Annual

174

Strategic Report Governance Business and Risk Report Financial Statements Other Information - 39 £m (41) 247 (10) 985 (46) Total 1,337 1,279 3,333 (294) (200) 3,086 3,086 (1,796) 198,009 208,939 - 7 39 (9) £m (41) (81) 975 (16) (48) (64) (138) (149) 30,139 50,612 (1,023) functions Head office - - - - 12 34 113 118 118 £m 125 (41) 454 (341) 2,728 13,138 Commercial - - (1) £m 251 (46) (241) 1,310 1,357 3,021 Retail (634) 3,272 3,655 (1,674) 165,662 144,669 continued

continued

Other income excludes gains from derivatives and hedge accounting which are shown separately. A gain of £100 million relating to the disposal of an investment in Visa to A gain of £100 relating million separately. shown which are derivatives and hedge accounting gains from excludes Other income in the year ended 4 April 2017 segment. Limited is included in the Retail Europe and remain segments across allocated not are costs centralised Certain and bank levy separately. shown costs which are transformation expenses exclude Administrative within the Head office segment. functions FSCS) (excluding and impairment losses/recoveries charges liabilities and for provisions loans and advances, include impairment losses on Impairment and other provisions on investment securities. (UK) plc. Works of The Mortgage on the acquisition assets include goodwill arising Retail 2016 Net income/(expense) from external customers external from Net income/(expense) (Charge)/revenue from other segments from (Charge)/revenue Net interest income Net interest Total revenue Total Other income (note i) (note Other income Administrative expenses (note ii) expenses (note Administrative Impairment and other provisions (note iii) (note Impairment and other provisions FSCS levies Underlying profit/(loss) before tax before Underlying profit/(loss) Transformation costs costs Transformation Bank levyBank Gains from derivatives and hedge accounting Gains from Profit/(loss) before tax before Profit/(loss) Taxation tax after Profit iv) assets (note Total Total liabilities Total ii. iii. iv. Notes: i.

12. Operating segments segments 12. Operating Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

175

Strategic Report Governance Business and Risk Report Financial Statements Other Information 7 8 67 £m 746 276 Total 1,716 3,182 2,376 2,587 9,764 8,734 2,905 6,459 5,043 3,068 13,017 40,339 187,371 210,537 221,670 144,542 218,602 208,821 ------8 £m 276 cost 2,376 8,734 2,905 5,649 40,339 144,542 204,829 amortised Liabilities at ------7 £m 810 3,182 3,992 5,043 5,050 income income through through Fair value Fair statement ------£m 746 2,587 13,017 187,371 203,721 Loans and Loans receivables ------

67 £m sale 9,831 9,764 Available for for Available continued

Classification of financial assets and liabilities Classification of financial 2017 Available for sale investment securities for Available Fair value adjustment for portfolio hedged risk portfolio adjustment for value Fair Group Loans and advances to banks to and advances Loans Derivative financial instruments customers to and advances Loans Financial assets Cash Investments in equity shares Other financial assets (note i) Other financial assets (note Total financial assets Total Other non-financial assets assets Total Financial liabilities Shares Deposits from banks Deposits from Other deposits customers to Due hedged risk portfolio adjustment for value Fair Debt securities in issue Derivative financial instruments Subordinated liabilities Subordinated Subscribed capital Subscribed financial liabilities Total Other non-financial liabilities Total liabilities Total

3. Classification and measurement and measurement 13. Classification Notes to the accounts As the majority of assets the Group’s and liabilities are held within the Society, the disclosures this in note and to 27 notes are 24 on a consolidated basis. The following table summarises the classification of carrying amounts of financialthe Group’s assets liabilities. and Annual Report and Accounts 2017 Accounts and Report Annual

176

Strategic Report Governance Business and Risk Report Financial Statements Other Information 2 13 £m 126 413 756 Total 1,817 1,572 3,591 6,201 7,635 8,797 2,350 3,463 2,095 3,898 10,612 36,085 138,715 196,437 178,807 198,009 208,939 206,589

------

13 £m 413 cost 1,817 6,201 5,750 2,095 36,085 138,715 191,089 amortised Liabilities at ------

2 £m 1,885 3,463 5,348 3,900 3,898 income income through through Fair value Fair statement ------

£m 756 3,591 8,797 191,951 178,807 Loans and Loans receivables ------

£m 126 10,612 10,738 for sale for Available continued continued

Other financial assets relate to the fair value of certain mortgage commitments included within other assets on the balance sheet. commitments included within other assets on the balance certain mortgage to the fair value of relate Other financial assets

Classification of financial assets and liabilities Classification of financial 2016 Group Financial assets Cash Loans and advances to banks to and advances Loans Available for sale investment securities for Available Derivative financial instruments Investments in equity shares Fair value adjustment for portfolio hedged risk portfolio adjustment for value Fair Loans and advances to customers to and advances Loans i) Other financial assets (note Total financial assets Total Other non-financial assets Total assets Total Financial liabilities Shares banks Deposits from Other deposits Due to customers to Due Fair value adjustment for portfolio hedged risk portfolio adjustment for value Fair Debt securities in issue Derivative financial instruments Subordinated liabilities Subordinated Subscribed capital Subscribed Other non-financial liabilities Total financial liabilities Total Total liabilities Total Note: i. Furtherinformation on the fair value of financial assets andliabilitiesincluded is 24 to 26. in notes Amounts classified as due to customers do not confer membership rights.

13. Classification and measurement and measurement 13. Classification Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

177

Strategic Report Governance Business and Risk Report Financial Statements Other Information

- - 26 £m £m 126 100 2016 2016 3,769 6,843 10,612 £m £m 67 25 34 126 2017 2017 (118) 2,867 9,764 6,897 Group and Society Group Group and Society Group continued

Increase in fair value Increase At 5 April At Additions Disposals 4 April At Government and supranational investment securities Government and supranational Other debt investment securities Total 4. Available for sale investment securities for 4. Available 5. Investments in equity shares 15. Investments in equity shares

1 Notes to the accounts At 4 April 2016, £128 of million investment securities had been sold under sale and repurchase agreements. The cash received and At 4 April 2017 the Group holds no collateral under either reverse sale and repurchase agreements or reverse total return swaps Further information on available for sale investment securities included is the in ‘Treasury assets’ section of the Business and Risk Report. At 4 April 2017 investment securities of £32 had been (2016: million million) pledged £42 as collateral under UK payment schemes. accrued interest relation in to these sale and repurchase agreements of £127 million was included within deposits from banks 18). (note (2016: £577 million). Annual Report and Accounts 2017 Accounts and Report Annual Disposals of £118 include million £100 relation in million to the disposal of share the Visa in Group’s Europe Limited. The Group was a principal member and shareholder of Visa Europe Limited and exchange in for its share received a combination of cash, deferred consideration and preferred stock. The preferred stock of £25 will million be convertible into Visa Inc. common stock at a future date provided certain conditions are met. The conversion of the preferred stock remains subject to potential reduction for certain litigation losses that may be incurred by Visa Europe Limited. Investments equity in sharesinclude investments of £66 (2016: million £125 carried million) at fair value. Of these, £66 million (2016: £107 relate participation to the Group’s million) industry in wide banking and credit card service operations.

178

Strategic Report Governance Business and Risk Report Financial Statements Other Information

5 £m £m £m 806 2016 2016 1,977 5,431 1,366 1,366 4,070 1,994 (365) 3,588 11,253 14,927 16,136 35,133 26,092 in issue 129,271 144,923 145,288 109,794 146,289 146,289 Total notes notes Total -

13 Society Society £m £m £m 733 448 2017 2017 2,011 1,370 1,370 2,631 (328) 3,079 5,559 2,050 3,680 10,677 27,823 115,415 137,427 152,530 152,858 153,900 153,900 Undrawn - -

19 £m £m £m 2016 2016 1,997 (443) 1,366 1,366 5,573 3,588 2,094 Notes in issue Notes 32,114 11,772 Drawn 27,363 13,505 13,505 177,441 177,884 140,857 178,807 178,807 Held by the Group Held by 129,948

Group Group 17 £m £m £m 2017 2017 3,622 1,370 1,370 2,013 (438) 2,196 5,734 14,927 3,680 11,185 18,549 33,149 Held by Held by 29,322 147,174 187,371 187,371 137,970 186,001 186,439 third parties third £m 10,412 16,136 19,322 45,870 pledged Mortgages Mortgages continued

On demand In not more than three months than three In not more In more than one year but not more than five years than five than one year but not more In more In more than three months but not more than one year months but not more than three In more In more than five years In more

Mortgages pledged to asset backed funding programmes asset backed pledged to Mortgages 2017 Group Residual maturity of loans and advances to customers to maturity of loans and advances Residual Covered bond programme Covered Repayable: Securitisation programme Specialist residential mortgages Specialist residential Prime residential mortgages Prime residential Whole mortgage loan pools loan Whole mortgage Total Consumer banking Consumer Other lending Commercial lending Commercial hedged risk micro adjustment for value Fair Total Impairment provision on loans and advances (note 10) (note on loans and advances Impairment provision Fair value adjustment for micro hedged risk micro value adjustment for Fair Total Mortgages pledged and the nominal values of the notes issue in are as follows:

16. Loans and advances to customers customers to and advances 16. Loans Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual Loans and advances to customers the in table above are shown net of impairment provisions held against them. The fair value adjustment for micro hedged risk relates to commercial lending. analysis Maturity The following table shows the residual maturity of loans and advances to customers, based on their contractual maturity: The maturity analysis produced is on the basis that where a loan repayable is by instalments, each such instalment treated is as a separate repayment. The analysis based is on contractual maturity rather than actual redemption levels experienced, which are to be likely materially different. Arrears are spread across the remaining term of the loan. funding Asset backed Certain prime residential mortgages have been pledged asset to the Group’s backed funding programmes or utilised as whole mortgage loan pools for the Bank of England’s (BoE) Funding for Lending Scheme (FLS) Funding Scheme and Term (TFS). The programmes have enabled the Group to obtain secured funding or to create additional collateral which could be used to source additional funding.

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Strategic Report Governance Business and Risk Report Financial Statements Other Information £m

Total 5,607 5,904 £m 6,340 12,344 13,709 32,393 in issue Total notes notes Total £m (6,424) (4,126) - liabilities Fair value Fair £m Associated 1,635 1,595 3,230 Undrawn £m 12,031 assets 10,030 - - Transferred Transferred £m Notes in issue Notes £m Drawn 10,749 10,749 Total Held by the Group 5,966 6,324

- £m £m 4,705 18,414 13,709 Held by (6,402) (4,088) liabilities Associated third parties third Carrying value £m assets £m 12,368 10,412 12,344 12,368 18,996 43,708 continued Transferred Transferred pledged Mortgages Mortgages continued

Mortgages pledged to asset backed funding programmes asset backed to pledged Mortgages 2016 Group Covered bond programme bond Covered At 4 April 2017At 4 April 2016 At Securitisation programme Whole mortgage loan pools Whole mortgage Total

16. Loans and advances to customers customers to and advances 16. Loans Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual The Society holds cash deposited by the Nationwide Covered Bond programme billion (2016: of £1.2 £0.4 and by the billion) Silverstone programme billion). billion (2016: of £0.4 £0.4 The securitisation programme notes are issued by Silverstone Master Issuer plc and are not included the in accounts of the Society. Silverstone Master Issuer plc fully is consolidated into the accounts of the Group. The whole mortgage loan pools are pledged at the BoE under the FLS and TFS. Notes are not issued when pledging the mortgage loan pools at the BoE. Instead, the whole loan pool pledged is to the BoE and drawings are made directly against the eligible collateral, subject to a haircut. Therefore, values shown under notes issue in are the whole mortgage loan pool notional balances. Mortgages the in pledged covered billion) bond billion (2016: include and £7.4 securitisation £9.1 programmes that are excess in of the amount contractually requiredto support notes issue. in Mortgages pledged are not derecognised from the Group or Society balance sheets as the Group has retained substantially all the risks and rewards of ownership. The Group and Society continue to be exposed the to liquidity risk, interest rate risk and credit risk of the mortgages. No or gain loss has been recognised on pledging the mortgages to the programmes. Notes issue in which are held by third parties are included within debt securities 21). issue in (note Notes issue, in heldby the Group and drawn are whole mortgage loan pools securing amounts drawn under the FLS and TFS. At 4 April 2017 the Group had outstanding FLS drawings billion (2016: of £4.8 and £8.5 TFS billion) drawings billion (2016: of £6.0 £nil). Notes issue, in heldby the Group and undrawn, are debt securities issued by the programmes to the Society and mortgage loan pools that have been pledged to the BoE but not utilised. In accordance with accounting standards, notes issue in and held by the Group are not recognised or the in Society’s Group’s balance sheets. The Society established the Nationwide Covered Bond programme November in 2005. Mortgages pledged provide security for issues of covered bonds made by the Society. During the year ended billion and €1.1 billion £0.8 (total 4 April £1.7 billion sterling 2017, equivalent) of notes were issued, and €1.5 billion sterling billion (£1.4 equivalent) of notes matured. The Society established the Silverstone Master securitisation Trust programme July in 2008. Notes are issued under the programme and the issuance proceeds are used to purchase, for the benefit of note holders, a share of the beneficial interest in the mortgages pledged by the Society. The remaining beneficialinterest in the pledged mortgages billion (2016:£6.3stays of billion) £7.0 with the Society andincludes its required seller minimum share accordance in with the rules of the programme. The Group under is no obligation to support losses incurred by the programme or holders of the notes and does not intend to provide such further support. The entitlement of note holders restricted is to payment of principal and interest to the extent that the resources of the programme are sufficient to support such payment and the holders of the notes have agreed not to seek recourse any in other form. During the year ended 4 April 2017 £2.5 billion and $0.5 billion (total £2.9 billion sterling equivalent) of notes matured. During the year ended 4 April 2017 no notes were issued. The following table sets out the carrying value and fair value of the transferred assets and liabilities for the Silverstone Master Trust.

180

Strategic Report Governance Business and Risk Report Financial Statements Other Information - - - 1 5 4 8 11 £m 291 302 825 4,910 3,463 4,067 (1,749) Liabilities - - - - - 5 85 44 £m £m £m 753 343 Fair value Fair 436 1,769 3,515 2,136 1,383 1,870 1,266 4,910 3,463 3,035 3,035 3,898 Assets (1,753) 2016 Liabilities Liabilities - 2016 2016 £m £m £m Fair value Fair Fair value Fair 160 248 280 596 699 699 400 3,515 2,816 1,460 2,249 4,225 2,603 3,898 Assets Assets 13,575 26,514 12,939 28,937 171,272 amount 187,979 (43,221) notional 150,020 Contract/ - - - - 1 5 4 31 54 85 £m £m £m 121 110 249 929 3,182 3,182 1,858 2,823 2,823 4,802 4,802 3,863 (1,705) Liabilities Liabilities Liabilities - - - - 2017 2017 16 20 £m £m £m 611 Fair value Fair Fair value Fair 168 233 693 365 Fair value Fair 1,179 1,547 1,484 2,726 2,269 3,243 4,022 4,022 5,043 5,043 3,985 Assets Assets Assets (1,705) 2017 £m 135 401 577 240 280 1,651 3,075 12,851 27,272 12,808 25,659 amount 190,177 162,270 195,901 notional (31,383) Contract/ continued

Interest rate swaps rate Interest swaps rate interest currency Cross Index linked swaps Index linked Interest rate swaps rate Interest futures rate Interest Caps, collars and floors Caps, collars exchange foreign Forward agreements rate Forward Swaptions index swaps Equity Cross currency interest rate swaps rate interest currency Cross

Derivatives by instrument type by Derivatives Group Subsidiaries: derivative elimination Group Intra Designated as cash flow hedges Designated hedge accounting Not subject to Total Designated as fair value hedges Designated Designated as cash flow hedges Designated Society Designated as fair value hedges Designated hedge accounting Not subject to Total Group Society: Contract/notionalamount the is amount on which payment flows are derived and does not represent amounts at risk. The table below provides an analysis of the fair value of derivatives, split between those designated effective in hedging relationships and those which, whilst being economic hedges, are not subject to hedge accounting: All of derivative the Group’s financialinstruments are held for mitigation risk purposes, although not all of the derivatives are designated as hedging instruments as defined by IAS 39 Financial Instruments: Recognition and Measurement. The table below provides an analysis of the notional amount and fair value of derivatives by instrument type: 17. Derivative financial instruments financial instruments Derivative 17. Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

181

Strategic Report Governance Business and Risk Report Financial Statements Other Information £m 180 £m 214 3,283 3,463 4,910 4,696 Liabilities Liabilities

93 £m Fair value Fair £m £m £m 436 (61) 585 Fair value Fair 890 Total 1,166 Total 3,515 3,462 3,898 2,930 Assets Assets 2016 (2,801) 2016 (22,614) (28,602) - - - 11 13 £m £m £m £m years (256) years (348) 66,418 171,272 69,572 amount 118,407 notional In more In more amount than 20 187,979 104,854 notional In more In more than 20 Contract/ Contract/

- - - £m 181 £m £m £m 235 164 262 3,182 3,001 4,540 4,802 (3,191) In 10 to In 10 to In 10 to In 10 to (2,395) 20 years 20 years Liabilities Liabilities

£m 49 £m £m £m Fair value Fair 441 386 307 400 (58) Fair value Fair 4,657 5,043 3,581 4,022 In 5 to In 5 to Assets Assets In 5 to In 5 to (7,052) 2017 (1,339) 10 years (7,609) 2017 10 years

£m 44 (3) £m £m £m 518 408 In 0 to In 0 to In 0 to In 0 to 75,054 5 years (12,115) 115,123 75,489 amount (1,462) 5 years 190,177 amount 120,412 notional 195,901 notional (18,250) Contract/ Contract/ continued continued

In not more than one year In not more than one year In more Forecast payable cash flows payable Forecast Forecast receivable cash flows receivable Forecast Forecast receivable cash flows receivable Forecast Forecast payable cash flows payable Forecast Forecast receivable cash flows receivable Forecast cash flows payable Forecast Forecast payable cash flows payable Forecast In not more than one year In not more In more than one year In more

Derivatives maturities Derivatives Group maturities as follows: remaining Derivatives have Total Society Hedged forecast cash flows expected to occur: cash flows expected Hedged forecast Group Maturity of cash flow hedge accounting cash flows hedge accounting Maturity of cash flow 2016 to occur: cash flows expected Hedged forecast Group Maturity of cash flow hedge accounting cash flows cash flows hedge accounting Maturity of cash flow 2017 Derivatives maturities Derivatives Society Society maturities as follows: remaining Derivatives have Total Derivative assets and liabilities have remaining contractual maturities as follows: 17. Derivative financial instruments financial instruments Derivative 17. Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual Cash flow hedge accountingis used primarily for derivatives which economically hedge foreign currency debtissuances. The following table shows the maturity profile of the cash flows designated as hedged items. These cash flows will impact the income statement in the same period which in they are expected occur to and will be offset by cash flows arising from derivative positions.

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1 5 25 £m £m 184 744 228 935 2016 2016 1,373 3,019 8,797 2,947 2,082 2 4 Society Society 26 84 £m £m 123 2017 2017 1,326 2,476 7,563 1,639 6,028 8,028 3,883

1 5 25 £m £m 184 744 228 2016 2016 1,857 1,657 7,635 2,947 2,082 2,095 Group Group 2 4 £m £m 26 84 123 2017 2017 2,314 2,476 2,497 1,639 8,734 6,459 6,028 continued

On demand On demand In not more than three months than three In not more than one year months but not more than three In more In not more than three months than three In not more years than five than one year but not more In more In more than one year but not more than five years than one year but not more In more In more than three months but not more than one year months but not more than three In more

Accrued interest Accrued Accrued interest Accrued Repayable: Repayable: Total Total 20. Due to customers customers to 20. Due The Group has announced the closure of its Isle of Man and Republic of Ireland operations. Amounts due to customers include £1,960 million (2016: £5,540 respect in million) of balances deposited with these operations. 19. Other deposits

18. Deposits from banks from 18. Deposits Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual For the Group and Society, deposits from banks include billion (2016: £6.0 £nil) drawn down against the Bank Funding of England Term Scheme (TFS). At 4 April 2016, deposits from banks for Group and Society included £127 respect in million of sale and repurchase agreements. The corresponding carrying value of assets of £128 sold million under sale and repurchase agreements was included within available for sale investment securities 14). (note Deposits from banks are repayable from the balance sheet date the in ordinary course of business as follows: The Society’s other deposits for the year ended 4 April 2017 include £1,569 (2016: million of deposits £1,162 million) from subsidiary undertakings. Other deposits comprise wholesale deposits, commercial deposits and amounts relating to the sale of PEBs by the Group on behalf of Legal & General. Further details of the valuation methodology of the PEBs are included note in 25. Other deposits are repayable from the balance sheet date the in ordinary course of business as follows:

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Strategic Report Governance Business and Risk Report Financial Statements Other Information

£m 151 374 374 286 2016 8,403 6,409 30,147 30,147 21,593 30,521 30,521 23,452

Society £m 168 264 264 290 2017 9,154 7,065 28,253 35,872 35,872 26,286 35,608 35,608 -

77 30 £m £m 125 (10) 997 178 598 1,817 2016 2016 1,211 1,211 1,750 5,014 9,753 6,409 23,451 34,874 34,874 24,943 36,085 36,085

Group Group 45 30 £m £m 125 (11) 642 178 2017 2017 1,114 1,114 1,070 2,871 1,004 2,905 7,065 3,920 9,932 29,115 40,339 28,240 39,225 39,225 40,339 continued

In not more than one year In not more In more than one year In more

4.125% subordinated notes due 2023 (€1,250m) notes 4.125% subordinated 6.75% subordinated notes due 2020 (€750m) notes 6.75% subordinated due 2022 (£) notes subordinated 6.5% callable reset 8.625% subordinated notes due 2018 (£) notes 8.625% subordinated ($1,250m) due 2026 notes 4% subordinated adjustments value hedge accounting Fair and issue costs Unamortised premiums Total Certificates of deposit and commercial paper commercial and of deposit Certificates Other debt securities Fixed and floating rate notes rate and floating Fixed hedged risk micro value adjustment for Fair Total Debt securities in issue are repayable from the balance sheet the balance from repayable Debt securities in issue are of business as follows: in the ordinary course date interest Accrued Residual maturity repayable: Residual Fair value adjustment for micro hedged risk micro adjustment for value Fair Total 22. Subordinated liabilities 22. Subordinated

21. issue securities in Debt Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual The Society’s subordinated liabilities are as shown above for the Group, except that they exclude £5 of fair (2016: million million) £6 value hedge adjustments relating cash to flow hedge accounting, with the total balance sheet value amounting to £2,910million (2016: £1,823 million). Debt securities issue in the in Group and Society include £18,549 (2016: million secured £18,414 million) on certain loans and advances to customers. Further information given is note in 16. Certificates of deposit and commercial paper at 4 April 2017include £619million (2016: £nil) which wasin the course of settlement, with the associated receivable included other in assets on the balance sheet. As a result, reported other assets have increased million to £692 (2016: £129 Fixed and floating million). rate notes at 4 April 2016included £25million which wasin the course of settlement.

184

Strategic Report Governance Business and Risk Report Financial Statements Other Information 3 10 10 33 £m 44 84 68 38 413 140 (17) 362 2016 - 3 10 10 57 £m 33 44 84 38 (3) 222 276 2017 Group and Society Group continued

continued

The PIBS 7.25% are repayable, at the option of the Society, whole in on 5 December 2021 or every fifth anniversary thereafter. The 6.25% PIBS are repayable, at the option of the Society, whole in on 22 October or every 2024 fifth anniversary thereafter. The PIBS 5.769% are repayable, at the option of the Society, whole in on 6 February 2026 or every fifth anniversary thereafter. PIBS are repayable,The 7.859% at the option of the Society, whole in on 13 March 2030 or every fifth anniversary thereafter. The 6.875% PIBS are repayable at the option of the Society, whole in on 10 January or 2019, any fifth anniversary thereafter. If the PIBS are not repaid on a call date, then the interest rate reset is at a margin of 3% over the yield on the prevailing five year benchmarkgilt rate. The floating rate PIBS payable0.5% at above 3 month Libor are repayable at the option of the Society, at everyinterest payment date, and if the PIBS are not repaid on 6 February 2018 then the interest resets to 1.5% above 3 month Libor. The floating rate PIBS payable above at 6 2.4% month Libor are only repayablein the event of winding up the Society. All or some of the 8.625% notes due 2018 in at any time at the higher of par (100%) or a price determined by reference to an 8.75% 2017 benchmark gilt, by giving not less than 30 days’ and not more than 60 days’ notice. All or some of the 6.5% notes due 2022 on 1 September 2017 by giving not less than 30 days’ or more than 60 days’ notice. If the notes are not called the rate reverts to the 5 year gilt rate + 3%. All or some of the notes 4.125% due 2023 on 20 March 2018 by giving not less than 30 days’ or more than 60 days’ notice. If the notes are not called the rate reverts to theyear 5 swap rate + 3.3%.

Floating rate (6 month Libor + 2.4%) permanent interest bearing shares permanent interest (6 month Libor + 2.4%) Floating rate adjustments value hedge accounting Fair and issue costs Unamortised premiums 6% permanent interest bearing shares 6% permanent interest bearing shares (3Floating rate month Libor + 0.5%) permanent interest Total 7.859% permanent interest bearing shares bearing permanent interest 7.859% bearing shares interest permanent 6.875% 6.25% permanent interest bearing shares 6.25% permanent interest bearing shares permanent interest 5.769% 7.25% permanent interest bearing shares permanent interest 7.25% • • • If the above four tranches of PIBS are not repaid on a call date then the interest rate reset is at a margin to the yield on the then prevailing five year benchmark gilt rate, as follows: • • • All permanent interest bearing shares (PIBS) are unsecured and denominated sterling. in The PIBS are only repayable with the prior consent of the PRA as follows: • 23. Subscribed capital 23. Subscribed • • On 14 September 2016 the Group issued $1,250 of million subordinated notes. The subordinated notes rank pari passu with each other and behind the claims against the Society of all depositors, creditors and investing members than holders (other of permanent interest bearing shares, Additional Tier 1 (AT1) capital and core capital deferred shares of (CCDS)) the Society. Interest accrued on subordinated liabilities of £35 (2016: million £31 recognised is million) within accruals and deferred income on the balance sheet. The interest rate risk arising from the issuance of fixed rate subordinatedliabilities has beenmitigated through the use interestof rate swaps. The foreign exchange risk arising from the issuance of foreign currency subordinated liabilities has been mitigated through the use of cross currency swaps. All of the Society’s subordinated liabilities are unsecured. The Society with the may, prior consent of the Prudential Regulation Authority (PRA), redeem some of the subordinated notes at early, par (100%) unless stated, as follows: • 22. Subordinated liabilities 22. Subordinated Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

185

Strategic Report Governance Business and Risk Report Financial Statements Other Information 7 16 20 (1) 66 (4) (5) £m 233 (71) Total (810) 2,915 1,859 2,867 9,764 6,897 5,043 (3,101) 14,880 (3,182) (3,992) ------66 (5) (5) £m 233 233 299 (815) (810) Level 3 - - - - 7 16 20 (1) (4) (5) £m (71) 2,915 1,859 1,936 1,936 4,810 6,753 Level 2 (3,177) (3,177) (3,096) ------Fair values based on Fair £m 931 7,828 7,828 6,897 Level 1 continued

continued

2017 Financial assets investments Government and supranational Other debt investment securities Available for sale investment securities sale investment for Available Investments in equity shares (note i) (note equity in shares Investments Interest rate swaps rate Interest Cross currency interest rate swaps rate interest currency Cross Forward foreign exchange foreign Forward Equity index swaps Equity swaps Index linked Total derivative financial instruments financial derivative Total Forward foreign exchange foreign Forward Swaptions Other financial assets (note ii) Other(note financial assets Forward rate agreements rate Forward financial instruments derivative Total Cross currency interest rate swaps rate interest currency Cross iii) Other deposits – PEBs (note Total financial assets Total Total financial liabilities Total Financial liabilities swaps rate Interest 24. Fair value hierarchy of financial assets and liabilities held at fair value of financial assets and value hierarchy Fair 24.

23. Subscribed capital capital 23. Subscribed Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual As the majority of assets the Group’s and liabilities are held within the Society, the disclosures 27 to notes in are 24 on a consolidated basis. The following tables show financial the Group’s assets andliabilities that are held at fair value by fair valuehierarchy, balance sheet classification and product type: On 15 December 2016, the Group redeemed the £140 PIBS 6% million at par. PIBS rank pari passu with each other and AT1 the instruments. Group’s They are deferred shares of the Society and rank behind the claims against the Society of all subordinated noteholders, depositors, creditors and investing members of the Society, other than the holders of CCDS. Interest accrued on subscribed capital of £3 recognised is (2016: million million) £6 within accruals and deferred income on the balance sheet. The interest rate risk arising from the issuance of fixed rate PIBS has beenmitigated through the use interest of rate swaps.

186

Strategic Report Governance Business and Risk Report Financial Statements Other Information 2 (1) (4) 44 (5) (8) £m 125 436 Total 1,238 2,180 (338) 3,769 6,843 3,898 10,612 14,637 (3,107) (1,885) (5,348) (3,463) ------(1) (4) (5) £m 125 561 436 436 continued Level 3 Level (1,885) (1,890) - - - - - 2 (4) 44 (5) (8) £m 1,238 2,180 (338) 2,758 2,758 6,222 3,462 Level 2 Level (3,103) (3,458) (3,458) Fair values based on Fair ------£m 1,011 7,854 7,854 6,843 Level 1 Level continued

Investments in equity shares exclude £1 million of investments in equity shares which are held at cost. £1 which are exclude million of investments in equity shares Investments in equity shares sheet. commitments included within other assets in the balance certain mortgage the fair value of represent Other financial assets and are cost held at amortised other deposits are The remaining statement. the income held at fair value through PEBs which are Other deposits comprise 26. included in note 2016 Financial assets investments Government and supranational Other debt investment securities Available for sale securities investment for Available Investments in equity shares (note i) (note Investments in equity shares Interest rate swaps rate Interest exchange foreign Forward Forward foreign exchange foreign Forward Equity index swaps Equity Cross currency interest rate swaps rate interest currency Cross Swaptions Cross currency interest rate swaps rate interest currency Cross Total derivative financial instruments Total Other deposits – PEBs (note iii) Other deposits – PEBs (note financial liabilities Total Equity index swaps Equity swaps Index linked Financial liabilities swaps rate Interest Other financial assets (note ii) Other financial assets (note Total derivative financial instruments Total Total financial assets Total The Level Group’s 1 portfolio comprises securities liquid for which traded prices are readily available. Asset valuations for Level 2 available for sale investment securities are sourced from consensus pricing or other observable market prices. None of theLevel 2 available for sale assets are valued from models. Level 2 derivative assets and liabilities are valued from discounted cash flow models using yield curves based on observable market data. More detail on the Level 3 portfolio provided is note in 25. hierarchies value fair between Transfers Instruments move between fair value hierarchies primarily due to increases or decreases market in activity or changes the to significance of unobservable inputs to valuation. There were no significant transfers between the Level 1 and Level 2 portfolios during the year. Notes: i. ii. iii.

24. Fair value hierarchy of financial assets and liabilities held at fair value held at fair value and liabilities of financial assets hierarchy value Fair 24. Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

187

Strategic Report Governance Business and Risk Report Financial Statements Other Information

------£m £m 201 465 1,421 PEBs PEBs (439) 1,201 Other (810) (327) Other (1,885) (1,885) (3,332) deposits - deposits -

------£m £m Net 431 431 910 Net 398 228 308 (401) (476) (205) (306) financial financial derivative derivative instruments instruments

------25 25 66 £m £m 125 125 100 100 (66) (118) shares shares in equity in equity Investments Investments

- - - - - 12 £m (12) for sale for Available Available securities investment continued

Net interest income/(expense) Net interest Net interest income/(expense) Net interest (Losses)/gains from derivatives and hedge accounting from (Losses)/gains income Other operating Fair value movement taken to members’ interests and equity members’ interests to value movement taken Fair (Losses)/gains from derivatives and hedge accounting from (Losses)/gains Fair value movement taken to members’ interests and equity members’ interests to value movement taken Fair

Movements in Level 3 portfolio in Level Movements Movements in Level 3 portfolio in Level Movements At 5 April 2016 5 April At Gains/(losses) recognised in the income statement: in the income Gains/(losses) recognised At 5 April 2015 At Gains/(losses) recognised in the income statement: in the income Gains/(losses) recognised Gains recognised in other comprehensive income: in other comprehensive Gains recognised Losses recognised in other comprehensive income: in other comprehensive recognised Losses Settlements Transfers out of Level 3 portfolio out of Level Transfers Settlements Acquisitions At 4 April 2016 At Disposals At 4 April 2017At The constituents main of the Level 3 portfolio are as follows: shares equity in Investments The Level 3 investments equity in shares include investments of £66 (2016: million £125 industry in million) wide banking and credit card operations. service instruments financial Derivative Level 3 assets and liabilities this in category are primarily equity derivatives linked with external counterparties which economically match the investment return payable by the Group investors to Protected in Equity Bonds The (PEBs). derivatives are to the linked performance of specified stock marketindices and have been valued by an external third party. Fair value changes are recognised within gains/losses from derivatives and hedge accounting. Upon maturity the gain/loss transferred is interest to expense and charges. similar PEBs – deposits Other This category relates to deposit accounts with the potential for stock market correlated growth to the linked performance of specified stock market indices. The PEBs liability of £810 (2016: million £1,885 valued is million) at a discount reflect to the time value of overlaidmoney, by a fair value adjustment representing the expected return payable to the The customer. fair value adjustment has been constructed from the valuation of the associated derivatives as valued by an external third party. value changes Fair are recognised within gains/losses from derivatives and hedge accounting. Upon maturity the gain/loss transferred is to interest expense and charges. similar The amount minimum on an undiscounted basis that the Group and Society are contractually required to pay at maturity for the PEBs £621 is (2016:million £1,551 The maximum million). additional amount which would also be payable at maturity respect in of additional investment returns £250 is (2016: million Thepayment £636 million). of additional investment returns dependent is upon performance of certain specified stock indices during the period of the PEBs. As noted above, the Group has entered into equity derivatives linked with external counterparties which economically match the investment returns on the PEBs. The tables below set out movements the in Level 3 portfolio, including transfers and in out of Level 3. 25. Fair value of financial assets and liabilities held at fair value – Level 3 portfolio fair value – liabilities held at assets and value of financial 25. Fair Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

188

Strategic Report Governance Business and Risk Report Financial Statements Other Information % % Units 7.08 continued 77.76 average (note iii) (note Weighted - - - - £m £m (32) (32) (24) (24) 7.75 changes changes Range 100.00 (note ii) (note Unfavourable Unfavourable - Unfavourable Unfavourable 6.41 - - - - 41 41 12 12 £m £m changes changes Favourable Favourable Favourable Favourable inputs Members’ interests and equity Members’ interests Members’ interests and equity Members’ interests Significant

Discount rate Discount unobservable 66 £m £m 125 431 228 (516) (810) Share conversion Share (1,329) (1,885) Fair value Fair Fair value Fair Valuation technique cash flows Discounted Discounted - - continued

£m Total (810) liabilities - 66 £m 228 Total assets

Investments in equity shares Significant unobservable inputs 2017 Sensitivity of Level 3 fair values Sensitivity of Level 2016 Sensitivity of Level 3 fair values 3 fair Sensitivity of Level 2017 Other deposits – PEBs i) (note Net derivative financial i) instruments (note Investments in equity shares Investments in equity shares Investments in equity shares Investments in equity shares i) Net derivative financial instruments (note i) Other deposits – PEBs (note Total Net derivative financial instruments (note i) Net derivative financial instruments (note i) Other deposits – PEBs (note Total Note: i. Level 3 portfolio sensitivity analysis of valuations using unobservable using portfolio sensitivity valuations 3 analysis of inputsLevel The fair value of financialinstruments is, in certain circumstances, measured using valuation techniques based on market prices that are not observable anactive in market or significant unobservable marketinputs. Reasonable alternative assumptions can be applied for sensitivity analysis, taking account of the nature of valuation techniques used, as well as the availability and reliability of observable proxy and historic data. The following table shows the sensitivity of the Level 3 fair values to reasonable alternative assumptions set out the in (as table of significant unobservableinputs below) and the resultantimpact of such changes fairin value on the income statement or members’ interests and equity: 25. Fair value of financial assets and liabilities held at fair value – Level 3 portfolio Level 3 portfolio fair value – liabilities held at assets and value of financial 25. Fair Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual The Level 3 portfolio at 4 April 2017 not did include any impaired assets (2016: £nil). The sensitivity analysis on fair values the in tables above therefore does not impact on the income statement. Alternative assumptions are considered for each product and varied according to the quality of the data and variability of the underlying market. The following table discloses the significant unobservableinputs underlying the above alternative assumptions for assets andliabilities recognised at fair value and classified as Level3, along with the range of values for thosesignificant unobservable inputs. Where sensitivities are described the inverse relationship will also generally apply.

189

Strategic Report Governance Business and Risk Report Financial Statements Other Information % % % Units Points (note iv) (note 12.41 11.00 77.30 continued 98.00 average (note iii) (note Weighted 12.00 30.00 Range 107.00 100.00 (note ii) (note - - 10.00 93.30 Price inputs Significant Discount rate Discount unobservable Execution risk Execution Share conversion Share

Valuation technique cash flows Discounted Discounted Mark to market Mark to - - - - continued £m

Total (1,885) liabilities - 18 £m 125 107 431 Total assets

Changes in fair values of the equity index swaps included in net derivative financial instruments will be largely offset included in net derivative financial instruments will be largely Changes in fair values of the equity by the change in fair value of the PEBs deposits. swaps index the table above. from been excluded these sensitivities have be insignificant; therefore to impact is deemed by the Group Any resultant table. in the previous changes as presented and unfavourable and lowest levels used in the calculation of favourable the values of the highest represents The range the above financial instruments. the fair values for the input values used in calculating represents average Weighted example, 125 basis points (bps) equals 1.25%. for One basis point (bps) equals 0.01%; example 100 points equals 100% of par. of par; for a percentage are Points Investments in equity shares Other deposits – PEBs i) (note Net derivative financial i) instruments (note Significant unobservable inputs 2016

Some of the significant unobservableinputs usedin fair value measurement areinterdependent. Where is thethis case, a description of those interrelationships included is below. Discount rate The discount rate used is to determine the present value of future cash flows. The level of thediscount rate intotakes account the time value of money, but also the risk or uncertainty of future cash flows.Typically, the greater the uncertainty, thehigher thediscount rate.higher A discount rate leads to a lower valuation and vice versa. conversion Share Where the conversion of a security into an underlying instrument subject is to underlyingsecurity market pricing and contingent litigation risk, share conversion factored is into the fair value. The higher the share conversion, the higher the valuation and vice versa. risk Execution Where a security’s value dependent is on a future transaction taking place, and the occurrence of not this is certain, execution risk factored is into the security’s valuation. The greater the execution risk, the lower the valuation and vice versa. Price Prices for securities that are marked to market, where the market and illiquid is supporting price information scarce, is are typically subject to significant uncertainty. increaseAn in the price directly will causeincrease an in fair value and vice versa. Notes: i. ii. iii. iv.

25. Fair value of financial assets and liabilities held at fair value – Level 3 portfolio Level 3 portfolio fair value – liabilities held at assets and value of financial 25. Fair Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

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19 17 £m £m 381 244 Total Total Total Total 3,591 5,752 1,949 3,458 2,377 5,651 6,204 2,587 2,096 8,736 3,053 3,546 13,077 181,911 11,284 36,777 41,236 161,766 192,055 187,976 138,896 170,542 205,961 144,664 fair value fair value ------14 12 £m £m 3,458 3,546 13,077 Level 3 Level 11,284 Level 3 178,315 161,766 170,542 185,384 ------5 5 £m £m 381 244 3,591 5,752 1,949 2,377 3,596 5,651 6,204 2,587 2,592 2,096 3,053 8,736 23,195 Level 2 Level Level 2 25,837 178,473 138,896 190,562 144,664 Fair values based on values Fair ------Fair values based on Fair £m £m Level 1 Level 13,582 13,582 Level 1 15,399 15,399

19 17 £m £m 413 276 1,817 value 3,591 6,201 value 5,750 2,095 2,376 3,588 2,587 8,734 13,138 2,905 5,649 3,680 12,555 36,085 138,715 191,076 171,119 40,339 162,062 182,398 Carrying 144,542 204,821 189,958 Carrying continued

Residential mortgages Residential banking Consumer Commercial lending Commercial mortgages Residential Consumer banking Consumer lending Commercial Other lending Other lending (note ii) Other lending (note

Other deposits exclude PEBs which are held at fair value through the income statement and which are included in note 24. included in note and which are statement the income held at fair value through PEBs which are Other deposits exclude posted the fair value of cash collateral to and an element of other lending relating customers banks, amounts due to to loans and advances fair values for The comparative year presentation. current with the consistent the valuation approach, reflects 2. This better Level been moved to have with non-bank counterparties 2016 2017 Loans and advances to customers: to and advances Loans Financial assets ii) banks (note to and advances Loans Loans and advances to customers: to and advances Loans Financial assets banks to and advances Loans Subordinated liabilities Subordinated Debt securities in issue Financial liabilities Shares i) Other deposits (note capital Subscribed Total Due to customers to Due Deposits from banks Deposits from Total Total Financial liabilities Shares Deposits from banks Deposits from Other deposits (note i) Other deposits (note Due to customers (note ii) (note customers to Due Debt securities in issue liabilities Subordinated Subscribed capital Subscribed Total Notes: i. ii. The following table summarises the carrying value and fair value of financial assets andliabilities measured at amortised cost on the Group’s balance sheet: 26. Fair value of financial assets and liabilities measured at amortised cost at amortised measured and liabilities of financial assets value Fair 26. Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

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19 17 £m £m Fair Fair Fair Fair value value 3,458 3,546 13,077 11,284 161,766 178,320 170,542 185,389

Total Total 19 17 £m £m value value 3,588 13,138 3,680 12,555 171,119 178,807 187,371 162,062 Carrying Carrying continued

15 17 £m £m Fair Fair Fair Fair value value 3,420 3,509 11,267 12,963 177,457 161,059 169,837 184,630

15 17 £m £m Not impaired value value Not impaired 3,550 13,021 3,643 12,530 161,333 177,919 Carrying 170,406 186,596 Carrying

- 4 17 37 38 114 £m £m 707 Fair Fair 759 705 Fair Fair 863 value value

- 4 37 38 25 117 Impaired £m £m Impaired 713 729 775 888 value continued value

Carrying Carrying

2016 2017 Residential mortgages Residential Residential mortgages Residential banking Consumer lending Commercial Consumer banking Consumer Other lending Commercial lending Commercial Other lending Total Total The fair values of loans and advances to customers may be further analysed, between those impaired and those not impaired, as follows: 26. Fair value of financial assets and liabilities measured at amortised cost cost at amortised measured and liabilities of financial assets value Fair 26. Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual Loans and advances to banks to advances and Loans The fair value of loans and advances to banks estimated is by discounting expected cashflows at a marketdiscount rate. The carrying amount consideredis a reasonable approximation of fair value. customers to advances and Loans The fair value of loans and advances to customers estimated is by discounting expected cash flows to reflect current rates similar for lending. Consistent modelling techniques are used across the different loan books. The estimates take into account expected future cash flows and future lifetime expected losses, based on historic trends and discount rates appropriate to the loans, to reflect a hypothetical exit price value on an asset by asset basis. Variable rate loans are modelled on estimated futurecash flows,discounted at current marketinterest rates. Variable rate retail mortgages are discounted at the currently available market standard variable interest rate (SVR) which, for example, the in case of residential the Group’s base mortgage rate (BMR) mortgage book, generates a fair value lower than the amortised cost value as those mortgages are priced below the SVR. For fixed rate loans,discount rates have been based on the expected funding and capital cost applicable to the book. When calculating fair values on fixed rate loans, no adjustment has been made to reflect interest raterisk management through internal natural hedges or external derivatives. via hedging customers to amounts due and deposits Shares, The estimated fair value of shares, deposits and amounts due to customers with no stated maturity, including non-interest bearing deposits, theis amount repayable on demand. For items without quoted market prices the estimated fair value represents the discounted amount of estimated future cash flows based on expectations of futureinterest rates, customer withdrawals andinterest capitalisation. For variable interest rate items, estimated future cash flows arediscounted using current marketinterest rates for new debt with similar remaining maturity. For fixed rate items, the estimated future cash flowsdiscounted are based on market offer rates currently available for equivalent deposits. Debt securities in issue The estimated fair values of longer dated liabilities are calculated based on quoted market prices where available or instruments using similar as a proxy for those liabilities that are not of sufficient liquidityor size to have an active market quote. For those notes for which quoted market prices are not available, a discounted cash flow modelis used based on a current yield curve appropriate for the remaining term to maturity. capital subscribed and liabilities Subordinated The fair value of subordinated liabilities and subscribed capital determined is by reference to quoted market prices instruments. of similar

192

Strategic Report Governance Business and Risk Report Financial Statements Other Information - - - 74 74 52 52 28 28 45 45 £m £m under IFRS 7 Net amounts under IFRS 7 Net amounts after offsettingafter after offsettingafter £m £m (87) (127) (450) (921) (921) (1,391) (1,518) (2,341) (1,804) (2,799) (2,799) collateral Financial Financial collateral - - - £m £m Master Master netting Master Master (2,020) (2,020) (2,020) (2,020) (2,216) (2,216) (2,216) (2,216) netting arrangements arrangements

87 127 £m £m 450 sheet sheet 3,463 4,435 3,182 3,182 3,590 3,898 5,043 5,043 the balance the balance reported on reported the balance the balance reported on reported Net amounts Net amounts

------£m £m (24) (24) (28) (28) offset offset (note i) (note (note i) (note Amounts Amounts

87 127 £m £m continued 450

Gross Gross Gross Gross 3,463 4,435 3,210 3,210 3,590 3,898 5,067 5,067 amounts amounts recognised recognised

there an enforceable is master netting arrangement or agreement similar place in and an unconditional right to offset place, in is there an enforceable is master nettingarrangement or agreement similar place in but the offset criteria are otherwise not satisfied, and financial collateralis paid and received. . Offsettingliabilities and financial financial assets Amounts offset for derivative financial assets of £24 million include cash collateral netted of netted £3 million collateral Amounts offset(2016: £nil). Amounts offset million include cash derivative financial assets of for derivative financial liabilities for £24 £21 amounts represent of £7 million of derivative the remaining netted of £28 netted, million (2016: million include cash collateral the cash collateral £nil). Excluding otherwise the were in place, offset criteria netting arrangements were are At 4 April 2016, whilst there financial assets and derivative financial liabilities which offset. offset. no amounts were not satisfied and therefore

Total financial liabilities Total Financial liabilities Derivative financial liabilities Total financial liabilities Total Financial liabilities Derivative financial liabilities Repurchase agreements Repurchase Reverse repurchase agreements repurchase Reverse financial assets Total Total financial assets Total Total return swaps return Total Financial assets Derivative financial instruments Financial assets Derivative financial instruments 2016 2017

The financial collateralin the table aboveis presented at fair value, except for the total return swaps collateral at 4 April 2016 which had a fair value of £127 and million the repurchase agreements collateral at 4 April 2016 which had a fair value of £128 million. Note: i. The Group has financial assets andliabilities for which thereis a legally enforceable right to set off the recognised amounts, and thereis an intention to settle on a net basis, or realise the asset and liability simultaneously. In accordance with IAS32 ‘Financial Instruments: Presentation’, where theright to set off not is unconditional all circumstances in this does not resultan offset in of balance sheet assets and liabilities. In accordance with IFRS 7 ‘Financial Instruments: the following Disclosures’, table shows the impact on derivative financialinstruments relating to transactions where: • 27 • • Master netting arrangements consist ofagreements such as an ISDA Master Agreement, global master repurchase agreements and global master securities lending agreements, whereby outstanding transactions with the same counterparty can be offset and settled net, either unconditionally or following a default or other predetermined event. Financial collateral on derivative financialinstruments consists of cash settled, typically daily or weekly,mitigate to the mark to market exposures. Financial collateral ontotal return swaps typically comprises highly liquid securities which are legally transferred and can be liquidated the in event of counterparty default. The net amounts after offsetting under IFRS 7 presented below show the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral, and are intendednot to represent actualthe Group’s exposure to credit risk. is due This to a variety of credit mitigation strategies which are employed addition in to netting and collateral arrangements. Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

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2 31 611 611 £m £m 186 339 273 784 456 (33) (33) 203 (61) (61) 1,191 Total Total 1,802 1,802 1,496 2,014 1,230 ------12 12 12 12 12 12 £m £m Goodwill Goodwill ------1 3 3 2 37 37 34 40 40 40 39 40 £m £m Other Other assets assets intangible intangible

2 31 £m £m 183 574 574 201 422 745 339 273 (33) (33) (61) (61) Total Total 1,176 Total Total 1,750 1,750 1,217 1,444 1,962 software software computer computer computer computer 2 31 84 £m £m 139 781 881 (15) (15) 153 320 294 420 420 (14) (14) 996 590 1,301 1,301 1,371 Internally Internally developed Internally Internally developed - - 19 44 continued 48 £m £m 154 154 128 155 591 (18) (18) 295 189 449 449 448

436 (47) (47) Computer software Computer acquired Computer software Computer acquired Externally Externally Externally Externally

2016 2017 Group Group Cost Cost 2015 5 April At Cost Cost 5 April 2016 At Additions Additions Disposals Disposals 4 April 2016 At Amortisation charge Accumulated amortisation Accumulated and impairment 2016 5 April At At 4 April 2017At Accumulated amortisation Accumulated and impairment 5 April 2015 At Impairment in the year Amortisation charge Disposals Disposals 4 April 2016 At Net book value 2017 4 April At Impairment in the year 2017 4 April At Net book value 4 April 2016 At

. Intangible assets 28. Intangible Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual Intangible assets at 4 April 2017 include £248 (2016: million of assets £274 million) the in course of construction. These assets relate mainly investmentto the Group’s infrastructure, in new applications and software to meet the future needs of the the business. extent To that these investments are not yet ready for use by the business, no amortisation has been charged against these assets. Software costs capitalised during the year ended 4 April 2017 primarily relate new to applications and operating system enhancements to support products the Group’s and activities. The items capitalised are being amortised over estimated useful lives of predominantly 5 years. Goodwill held is at cost less accumulated impairment; goodwill not is amortised but tested is for impairment at least Other annually. intangible assets are held at cost less accumulated amortisation and impairment and are amortised using the straight line method over their estimated useful lives of between 5 and 10 years. In the year ended 4 April of borrowing 2017 (2016: million million) £4 £4 costs have been capitalised using a capitalisation rate (2016: of 1.13% 1.30%). An impairment loss of £31 (2016: million was£2 recognised million) the in year respect in of certain development work relating to internal systems which has now been superseded. The Society’s intangible assets are as shown above for the Group, except that they exclude £12 (2016: million £12 of goodwill million) relating to the acquisition of The Mortgage Works (UK) plc, which only is recognised at Group level.

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Strategic Report Governance Business and Risk Report Financial Statements Other Information - 1 112 £m 137 £m 561 162 851 823 196 595 595 659 (112) Total (98) 1,417 1,418 1,418 (103) Total 1,510 (104)

- - 89 115 £m £m 819 376 376 146 421 136 426 364 802 802 432 (91) 853 (95) (103) (106) vehicles fixtures, fixtures, vehicles fixtures, fixtures, fittings and Equipment, Equipment, fittings and ------17 15 93 62 22 50 90 110 110 £m 157 £m 172 172 132 222 Plant and Plant and machinery machinery

- - - 1 5 4 8 (6) (9) £m £m (7) 441 104 109 109 335 106 444 444 329 435 Total land Total Total land land Total and buildings and buildings ------1 2 9 10 24 22 24 34 34 34 25 34 £m £m Short Short buildings leasehold buildings leasehold - - - - - 3 3 6 81 82 85 85 £m £m (7) (7) 101 183 104 189 189 182 buildings buildings Specialised Specialised administration continued administration

------1 2 (6) (2) £m £m 221 221 221 224 219 219 and non- buildings Branches Branches and non- buildings Branches Branches specialised specialised

2016 2017 Group Group Cost or valuation Cost 2015 5 April At Cost or valuation Cost 5 April 2016 At Additions Additions Revaluation Revaluation Disposals Disposals At 4 April 2016 At Accumulated depreciation depreciation Accumulated and impairment 5 April 2015 At At 4 April 2017 4 April At Depreciation charge charge Depreciation Accumulated depreciation depreciation Accumulated and impairment 2016 5 April At charge Depreciation At 4 April 2017 4 April At Net book value 2017 4 April At Disposals Disposals At 4 April 2016 At Net book value 4 April 2016 At Group property, plant and equipment at 4 April 2017 includes £2 (2016: million of £2 land and buildings million) held by subsidiary undertakings. Property, plant and equipment includes £17 million (2016: of £13 assets million) the in course of construction. In the year ended 4 April 2016 £1 of million borrowing costs were capitalised using a rate of 1.30%. In the year ended 4 April 2017 borrowing costs capitalised were less than £1 million, based on a rate of 1.13%. Branches and non-specialised buildings are valued annually by independent surveyors. The current use of all branches and non-specialised buildings equates to highest and best use, and there have been no changes to the valuation technique during the year. IFRS 13 requires that all assets held at fair value are classified accordinghierarchy to a that reflects significance the of observable market inputs calculatingin those fair values. Branches and non-specialised buildings valuations are classified within Level 2 of the fair valuehierarchy.

. Property, plant and equipment plant 29. Property, Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

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£m 197 213 387 230 (15) 343 343 228 295 (33) Total (153) (165) 3 21 19 24 10 16 10 (1) (5) (2) £m (4) (5) Other provisions £m 152 127 136 (11) 138 140 227 227 305 (16) (58) (40) redress Customer Customer - - 15 42 £m 84 84 46 46 126 (42) (15) (88) FSCS - - 13 41 41 22 22 16 £m 42 42 (32) (48) Bank levyBank continued

Group At 5 April 2016 At utilised Provisions Charge for the year for Charge Net income statement charge statement Net income Release for the year for Release At 4 April 2017 4 April At At 5 April 2015 5 April At Provisions utilised Provisions Charge for the year for Charge Release for the year for Release Net income statement charge statement Net income At 4 April 2016 4 April At The income statement charge for provisions for liabilities and charges of £136 (2016: million £173 includes million) the customer redress net income statement charge of £136 (2016: million £127 and the FSCS million), charge of £nil (2016: million). £46 The income statement charge for bank levy and other (2016: million provisions million) of £42 £41 charge of £19 (2016: million credit of £1 million) are£1 included million) within administrative expenses the in income statement. The Group provisions for liabilities and charges include £1 (2016: million of £3 customer million) redress held by subsidiary company The Mortgage Works (UK) plc; all other amounts are held by the Society. (FSCS) Scheme Services Compensation Financial The FSCS, the independent UK’s statutory compensation fund for customers of authorised financial services firms, pays compensation if a firm is unable pay to claims against it. Following the default of a number of deposit takers, the FSCS borrowed funds from approximately HM Treasury, £16 billion of whichwas outstanding relating at 4 April solely 2017, the to failure of Bradford & Bingley plc. The FSCS recovers the interest costs associated with this loan, together with ongoing management expenses, by way of annual levies on member firms. UK Asset Resolution Limited (UKAR) oversees the management of the closed books of Bradford & Bingley plc. On 31 UKAR March 2017, confirmed that it had agreed to sell two separate asset portfolios of Bradford & Bingley plcin order to repay the billion£16 loan outstanding to TheHM Treasury. first asset portfolio sale transaction was completed on reducing25 April the2017, loan outstandingTreasury to HM to approximately £5 billion. As a result, the annual FSCS charge relation in to interest costs and management expenses has reduced significantly to £15 for (2016: million the 2017/18 million) £46 The scheme second year. sales transaction anticipated is to be completed by March 2018. The FSCS income statement charge of £nil for the year ended 4 April 2017 comprises the £15 FSCS million 2017/18 scheme year charge (2016: offset million), £46 by £13 (2016: million £nil) of recoveries relation in to previous Icelandic banking failures and a £2 release million relating to lower than anticipated interest costs for the 2016/17 scheme year. The balance sheet amount provided by the Group (2016: million of £42 comprises £84 million) £27 of million leviesrelating to the 2016/17 FSCS scheme year and £15 relating million to the 2017/18 scheme year. Customer redress During the course of its business, the Group receives complaints from customers relation in past to sales or conduct. The Group also is subject to enquiries from and discussions with its regulators, governmental and other public bodies, including the Financial Ombudsman Service (FOS), on a range of matters. Customer redress provisions are recognised where the Group considers probable it is that payments will be made as a result of such complaints and other matters. The Group holds provisions of £305 (2016: million £227 respect in million) of the potential costs of remediation and redress relation in to historic sales of financial products and post sales administration. includes This amounts for past sales of PPI, non-compliance with consumer credit legislation and other regulatory matters. The income statement charge for the year mainly reflects updated assumptions for provisions previously recognised. includes This a £128 chargemillion relation in to PPI, largely response in to the announcements made by the Financial Conduct Authority (FCA) during the year and specifically the policy statement issued In PS17/03 this in policy March 2017. statement the FCA confirmed an industry-funded communications campaign, combined with a deadline for any further complaints. It also proposed new rules and guidance of light the in Supreme Court’s decision the in case of Plevin v Paragon Personal Finance Limited (‘Plevin’), part of which was a requirement to proactively previously mail refuted mis-sale complainants who will now be eligible claim to under Plevin. In of light these latest developments, considered it is appropriate for the Group to provide for the estimated total amount required to deal with all ongoing and future PPI complaints. The amount provided at 4 April 2017 therefore reflects the compensation and administrative costs associated with cases that the Group expects to uphold and the cost of processing invalid claims which the Group expects to receive. This estimate will be re-assessed on an ongoing basis the in of light actual claims levels observed.

30. Provisions for liabilities and charges and charges liabilities for 30. Provisions Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

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24 £m 124 Sensitivity 10 = £10m 100 5% = £11m 2016 £100 = £15m

153 52% £736 Future Future

87 71 16 £m expected expected 2017 Group and Society Group 317 32% £1,329 Cumulative to Cumulative 31 March 201731 March

continued continued

Claims include responses to proactive mailing. proactive to Claims include responses complaints. Plevin related for in uphold rate increase includes an anticipated uphold rate average expected Future Plevin. claims upheld for future for includes redress redress average expected Future

Average redress per claim (note iii) per claim (note redress Average Claims (‘000s of policies) (note i) Claims (‘000s of policies) (note ii) (note uphold rate Average Critical accounting estimates and judgements and estimates accounting Critical provisions redress Customer Judgement involved is determining in whether a present obligation exists for customer redress, and estimating in the probability, timing and amount of any associated outflows. The amount of the provision related to past sales of PPI calculated is based upon management’s best estimate of complaint volumes incorporating the expected impact of the 2017 FCA policy statement, referral rates the to Financial Ombudsman Service (FOS), uphold rates internally and with the FOS, response rates from customer contact activity relating previous to sales, average redress payments and complaint handling costs. theAt 4 April Group 2017, held a PPI provision of £212 (2016: million £117 This represents million). management’s best estimate of future costs including the expected impact of Plevin v Paragon Personal Finance Limited. The principal uncertainty this in calculation theis impact of the proposed FCA media campaign on complaints volumes. The table below shows the sensitivity of the PPI provision to changes complaints in volumes, along with other significant assumptions used calculating in the provision. Notes: i. ii. iii. Intangibles Property, plant and equipment Property,

Capital expenditure relating to: relating Capital expenditure Capital commitments at 4 April Capital commitments Total Capital expenditure contracted for but not accrued as follows: is 31. Capital and leasing commitments Other provisions Other Other provisions include provisions for severance costs and a number of property related provisions. Provisions are made for the expected severance costs relation in restructuring to the Group’s activities where therepresent a is obligation and probable it is that the expenditure will be made. 30. Provisions for liabilities and charges and charges liabilities for 30. Provisions Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

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Strategic Report Governance Business and Risk Report Financial Statements Other Information

5 7 3 4 31 14 £m £m 94 143 268 2016 (note i) 2016 (note i) 2016 (note

7 3 4 4 14 £m £m 32 96 133 261 2017 2017 Group and Society Group and Society Group continued continued

The prior year values for future minimum lease and sublease payments receivable under non-cancellable leases have been restatedbreak clauses, to take into account to be consistent contractual with the current year presentation. The prior year values for future minimum lease payments under non-cancellable leases have been restated to take into account contractual break clauses, to be consistent be consistent clauses, to break contractual account into take to been restated leases have under non-cancellable minimum lease payments future The prior year values for year presentation. with the current Within one year Between one and five years Within one year Between one and five years After five years After After five years After

Leasing payments receivable as lessor at 4 April receivable payments Leasing Amounts falling due: Amounts falling due: Leasing commitments at 4 April commitments Leasing At the balance sheet date, future minimum sublease payments minimum sublease payments future sheet date, the balance At subleases under non-cancellable receivable Total Total 32. Contingent liabilities 32. Contingent During the ordinary course of business, the Group receives complaints, subject is threatened to or actual legal proceedings, and manages regulatory enquiries, reviews, challenges and investigations. It also receives and reviews allegations of wrongdoing raised by employees and others and provides support and assistance, when appropriate it is to do so, relevant to Law Enforcement Agencies connection in with investigations they may undertake. All suchmaterial matters are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of incurring Where a liability. concluded it is that more it is than likely not that a payment will be made a provision recognised is based on management’s best estimate of the amount that will be payable. For other matters no provision is recognised but disclosure made is of items which are potentially material, either individually or aggregate, in except cases in where the likelihood of a liability crystallising considered is to be remote. Currently the Group does not expect the ultimate resolution of any such matters to have a material adverse impact on its financial position. Note: i. At the balance sheet date, future lease minimum payments receivable under non-cancellable operating leases were as follows: Note: i.

31. Capital and leasing commitments 31. leasing commitments Capital and Notes to the accounts The Group leases various offices, branches and other premises under non-cancellable operating lease arrangements. The leases have various terms, rent escalation clauses, renewal rights, and some in cases contingent rent payable. Future payments minimum under operating leases relating to land and buildings were as follows: Annual Report and Accounts 2017 Accounts and Report Annual

198

Strategic Report Governance Business and Risk Report Financial Statements Other Information 7 3 4 12 £m £m 50 64 (2) 119 213 126 2016 2016 4,657 4,645 (4,444) Group Group 5 4 4 12 73 £m £m 60 (4) 137 142 423 2017 2017 6,051 6,039 (5,628) continued

Retirement benefit obligations recognised in the income statement in the income recognised benefit obligations Retirement Defined benefit current service cost service Defined benefit current cost contribution Defined servicePast cost Curtailment gains Retirement benefit obligations on the balance sheet the balance benefit obligations on Retirement Present value of funded obligations Present value of unfunded obligations Present value of fund assets Fair Deficit at 4 April expenses Administrative Included in employee costs (note 8) (note Included in employee costs 4) liability on net defined benefit (note Interest Total

33. Retirement benefit obligations benefit 33. Retirement Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual Defined contribution pension schemes pension contribution Defined The Group operates two defined contribution pension schemesin the UK – the Nationwide Group Personal Pension(GPP) Planand the Nationwide Temporary Workers Pension Scheme. New employees are automatically enrolled into one of these schemes, with both schemes being administered by Friends Life. Outside of the UK, there are defined contribution pension schemes for employeesin the Isle of Man and Ireland. schemes pension benefit Defined The Group has funding obligations to several defined benefit pension schemes,which are administered by boards of trustees. Trustees are required by law to act the in interests of all relevant beneficiaries and are responsible for theinvestment policy with regard to the assets of the pension schemes as well as the day to day administration. The most Group’s significant pension schemeis the Nationwide PensionFund(the Fund). is a contributory This defined benefit pension arrangement, with both final salary and career average revalued(CARE) earnings sections. FundThe was closed to new entrantsin 2007 and since that date employees have been able join to the GPP. Eligible employees the in Fund are entitled to annual pensions after normal retirement at age 65 of one sixtieth of career average revalued earnings (revalued retirement) to for each year of service after 1 April 2011. Benefits accrued prior to 1 April 2011 varied with the majority being one fifty fourth of final salary for each yearof service. Benefitsare also payable on death and following other events such as leaving employment. No other post-retirement benefits are providedto these employees. Approximately 31% of the defined benefit obligations are attributable to current employees, 37% to former employees and 32% to current pensioners and dependants. The average duration of the obligation approximately is 22 years reflecting the split of the obligation between current employees (27 deferred years), members (25 and years) current pensioners (15 years). The retirement Group’s benefit obligationsinclude million £4 (2016: recognisedmillion) £2 in a subsidiary company, Nationwide (Isle of Man) Limited. This obligation relates to a defined benefit arrangement providing benefits based on both final salary and CARE which was closed to new entrants 2009. in The retirement Group’s benefit obligations alsoinclude £12million (2016: in respect£12million) of unfunded legacy defined benefit arrangements. The amounts recognised the in income statements are as follows: The Group operates a salary sacrifice arrangement and under arrangementthis employees’ salaries are reduced by an amount equivalent to their pension contributions. Therefore, employee contributions are reflected within the defined benefit current service cost and defined contribution cost the in table above.

199

Strategic Report Governance Business and Risk Report Financial Statements Other Information 7 3 3 4 £m £m 64 64 (2) (2) 122 213 158 286 (49) (29) 2016 2016 (86) (107) (164) (100) 4,657 4,698 1 Group Group 5 4 4 4 £m £m 60 60 (4) (4) 158 213 423 2017 2017 1,441 (122) (144) (951) 4,657 1,298 6,051 (206) continued continued

a £1,441 loss million (2016: from changes £86 gain) million financial in assumptions,including 1.05% decrease a in thediscount rate and a 0.30% increase assumed in Retail Price Index inflation, both of whichincrease the value of theliabilities. a £144 (2016: gain million £29 due to updating million) the mortality base tables and updating to the latest industry standard model for projecting future longevity improvements. an experience loss on the assumptions reflecting of £1 gain) million (2016: million £49 thedifferential between the long term assumptions and the actual observed pension increases and deferred revaluations during the year ended 4 April 2017.

Movements in the defined benefit obligations in the defined Movements At 5 April At Movements in the net defined benefit liability Movements Deficit at 5 April Current service cost Current servicePast cost Curtailment gains Current service cost Current servicePast cost Curtailment gains Interest on net defined benefit liability Interest Return on assets (greater)/less than discount rate than discount on assets (greater)/less Return Interest expense on retirement obligation expense on retirement Interest losses/(gains) on plan assumptions Experience Contributions by employer Contributions Changes in demographic assumptions Changes in demographic Administrative expenses Administrative Actuarial losses/(gains) on defined benefit obligations Actuarial Deficit at 4 April Changes in financial assumptions 4 April At Benefits paid • • Changes the in present value of defined benefit obligations(including unfunded are as obligations) follows: Current service cost represents theincrease liabilities in resulting from employee service over the period. Past service cost represents the increase liabilities in of the Fund arising from members of the Fund electing to pay additional contributions to receive additional benefits. Curtailment gains represent a reduction the in defined benefitliabilities arising from future pensions increasingline in with the Consumer Price Index (CPI), instead of estimated salary increases final (for salary benefits) or the Retail Price Index (for CARE benefits), in respect of members made redundant the during year. The interest on net defined benefitliability includes the interest expense on the retirement obligation, representing the annual interest accruing on the liabilities over the period.This partially is offset by the interest income on plan assets. The £951 relating million to the return on assets being greater than the discount rate (2016: £122 return million less than the discount is rate) driven by positive returns from listed equities, partially offset by a reduction bonds in yields As over the a result, year. the value of plan assets increased compared where to the prior there year, was a small increase bond in yields and a small increase the in value of plan assets. The £206 of million employer contributions includes deficit contributions with of themillion), million remainder£49 £149 (2016: relating to employer contributions respect in of future benefit accrual. The Group estimates that its contributions to the defined benefit pension schemes (including deficit contributions under the current deficit recovery during plan) the year 4ending April 2018will be £101million. The £1,298 actuarial million loss on the liabilities shown above driven is by: • Changes the in present value of the net defined benefitliability (including unfunded are as obligations) follows: 33. Retirement benefit obligations obligations benefit 33. Retirement Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

200

Strategic Report Governance Business and Risk Report Financial Statements Other Information 41 £m £m (4) 151 137 251 107 371 322 470 2016 2016 (122) 1,326 (100) 4,412 (357) 1,883 4,444 4,444 Group Group £m £m (4) 410 122 153 812 951 330 206 365 403 949 2017 2017 (122) 5,628 4,444 (207) 2,444 5,628 continued continued

Categories of plan assets Categories Interest income on assets income Interest rate discount than on assets greater/(less) Return expenses Administrative Movements in the plan assets Movements At 5 April At equities (quoted) Listed At 4 April 4 April At Contributions by employer Contributions Benefits paid Government bonds (quoted) investments (quoted) credit bonds and other Corporate Cash agreement repurchase to Liability relating Other assets and liabilities Total Infrastructure (unquoted) Infrastructure (unquoted) Property equity investments (unquoted) Private

33. Retirement benefit obligations obligations benefit 33. Retirement Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual The pension schemes do not invest own the in Group’s financialinstruments or property. Assets described as quoted are based on unadjusted prices quoted an active in market and represent Level 1 assets as defined by IFRS 13. All private equity, infrastructure and property investments are Level 3 assets as defined by IFRS 13. These assets have been valued using a combination of industry practice approaches, for example discounted cashflow models. The liabilities are partly Fund’s hedged by matching assets, primarily index government linked bonds and fixed rate government and corporate bonds. In addition, the Fund invests alternative in matching assets such as property ground rents receivable and property leases (included in property that above) are expected to generate inflationincomelinked over the long term. The Fund also holds return-seeking assets which are primarily listed equities. These are expected to generate a return over and above the liabilities the in longFund’s term, but may create risk and volatility the in short to medium term. £712 During the year, of million equities were sold and reinvested into credit and liability matching assets to reduce risk and increase investment diversification.Furthermore, Fundthe entered into £246 of million long-dated inflation swaps to further reduce its exposureinflation to risk. The investment in these assets is monitored by both the and Trustee the Group to ensure it remains appropriate given long the Fund’s term objectives. The proceeds of sale and repurchase agreements are included the in table above as a liability of £207 (2016: million £357 The million). securities, which have been sold under these sale and repurchase agreements, are included government in bonds, as the Fund has retained substantially all the risks and rewards of ownership of the securities. The Group operates a salary sacrifice arrangement and therefore there are no employee contributions reportedin the table above as employee contributions are reflectedin thecontributions by employer. In line with UK pensions legislation, a formal actuarial valuation (‘triennial valuation’) of the assets and liabilities of the carried Fund is out at least every three years by independent actuaries. The latest triennial valuation of the Fund, which has an effective date of 31 March 2016, is currently underway. As part of the process, a new schedule of regular and deficit contributions payable by the Group will be agreed with the trustees of the Fund (the Trustee). The major categories of assets held for the pension schemes, stated at fair value, are as follows: Changes the in fair value of plan assets for the pension schemes are as follows:

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Strategic Report Governance Business and Risk Report Financial Statements Other Information

% 31.5 2.75 1.90 2016 2016 29.7 3.45 28.3 years 2.90 2.90 30.0 121 £m 218 (137)

% 27.4 2017 2017 2.20 2.40 3.20 3.20 2.95 28.3 29.9 28.6 years in deficit from in deficit from assumption change (Decrease)/increase (Decrease)/increase continued continued

0.1% increase in discount rate in discount 0.1% increase in inflation assumption 0.1% increase of all members expectancy at age 60 in respect in life 1 year increase Change in key assumptions at 4 April 2017 Change in key The above sensitivities apply changing to individual assumptions isolation; in practice in assumptions are to be likely related, especially between the discount rate and inflation.Furthermore, a changein market yields couldimpact asset values (in particularin the bonds) opposite direction to the obligations. The sensitivity to the inflation assumptionincludes a correspondingincrease in assumptions0.1% for future salary and pension increases. Critical accounting estimates and judgements and estimates accounting Critical benefit obligations Retirement The assumptions key used to calculate the defined benefit obligation are discount the rate, inflation assumptions (including salary increases) and mortality assumptions. If different assumptions were used, this could have a material effect on the reported obligation. The sensitivity of the results to these assumptions are as follows: Males Females Males Females

Future salaryFuture increases (maximum 5%) increases pension Future index (RPI) inflation price Retail index (CPI) inflation price Consumer 60 at 4 April 2017Age Discount rate Discount expectancy assumptions Life Principal actuarial assumptions Age 60 at 4 April 2037 Age

33. Retirement benefit obligations obligations benefit 33. Retirement Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual The assumptions for mortality rates are based on standard mortality tables which allow for future improvements life in expectancies. The assumptions made are illustrated by the following years of life expectancy at age 60: The principal actuarial assumptions used are as follows:

202

Strategic Report Governance Business and Risk Report Financial Statements Other Information £m 531 531 Total £m 525 525 Share Share premium 6 6 £m CCDS continued £m 992 992

Total shares 5,500,000 Number of 5,500,000

At 4 April 2017At 4 April 2016 At Group and Society Group Group and Society Group At 4 April 2017At At 4 April 2016 At Other equity instruments are Additional Tier 1 (AT1) capital instruments. AT1 instruments rank pari passu to each other and to PIBS. They are junior claims to against the Society of all depositors, creditors and investing members, other than the holders of CCDS. AT1 instruments pay a fully discretionary, non-cumulative fixed coupon initialat an rate of 6.875% per annum. The rate will reset on 20 June 2019 and every five years thereafter to the five year mid swap rate4.88%. plus Coupons arepaid semi-annually in June and December. A coupon of £34 million, covering the period June 19 to 2016, was paid on 20 June 2016 and a coupon of £34 million, covering the period Decemberto 19 2016, was paid on 20 December 2016. These payments have been recognised the in statement of movements members’ in interests and equity. A coupon payment of £34 million, covering the period expected is June to 19 2017, to be paid on 20 June 2017 and will be recognised the in statement of movements members’ in interests and equity the in financial year ending 4 April 2018. The coupons paid and declared represent the maximum non-cumulative fixed coupon of 6.875%. AT1 instruments haveno maturity date. They are repayable at the option of the Society on 20 June 2019 and on every fifth anniversary thereafter. AT1 instruments are only repayable with the consent of the PRA. If the fully-loaded CET1 ratio for the Society, on either a consolidated or unconsolidated basis, falls below 7% the AT1 instruments convert to CCDS instruments at the rate of one CCDS share for every £80 of AT1 holding. 35. Other equity instruments CCDS are a form of Common Equity Tier 1 (CET1) capital which have been developed to enable the Group to raise capital from the capital markets. Previously issued Tier 1 capital instruments, PIBS, no longer meet the regulatory capital requirements of CRD IV and are being gradually phased out of the calculation of capital resources under transitional rules. CCDS are perpetual instruments. They rank pari passu to each other and are junior to claims against the Society of all depositors, creditors and investing members. Each holder of CCDS has one vote, regardless of the number of CCDS held. In the event of a winding up or dissolution of the Society and if there was surplus available, the amount that the investor would receive for each CCDS held limited is to the average principal amount issue, in which currently is £100 per share. There a cap is placed on the amount of distributions that can be paid to holders of CCDSThe any in financialis cap currentlyyear. set at £15.67 per share and adjusted is annually line with in CPI. A finaldistribution of (£5.125million £28 for theper share) financial year ended 4 April 2016 waspaid on 20 June 2016 and an interim distribution of £28 (£5.125 respect million in per share) of the period to 30 September 2016 was paid on 20 December 2016. These distributions have been recognised the in statement of movements members’ in interests and equity. The directors have declared an unconditional finaldistribution of £5.125 per sharein respect of the financial year ended 4 April 2017, amounting aggregate in to £28 million. The distribution will be recognised the in statement of movements members’ in interests and equity thein financial year ending 4 April 2018.

34. Core capital deferred shares (CCDS) shares capital deferred Core 34. Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

203

Strategic Report Governance Business and Risk Report Financial Statements Other Information 16 18 £m £m Total Total 4,391 (737) 1,280 (943) 27,732 31,402 31,402 31,757 16 18 £m £m 4,391 (737) 1,280 (943) Loans 27,419 Loans 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 31,089 31,089 31,444 2017 and 2016 2017 and 2016 ------£m £m 313 313 313 Ownership interest Ownership interest 313 Shares Shares continued

Derbyshire Home Loans Limited Limited Home Loans Derbyshire Limited E-MEX Home Funding Nationwide Syndications Limited (UK) plc Works The Mortgage Limited Corporation UCB Home Loans BS Nominees Limited Dunfermline First Nationwide Limited Mortgages Jubilee Limited Monument (Sutton) Limited (Premises) The Derbyshire Subsidiary name Subsidiary name 2016 2017 At 5 April 2016 At 2015 5 April At Additions 2017 4 April At Additions of impairment Release Release of impairment Release and repayments Redemptions and repayments Redemptions 2016 4 April At The above subsidiary undertakings, with the exception of Nationwide Syndications Limited, are regulated entities. subsidiaries Other The Group has adopted the audit exemption for the following subsidiary undertakingsfor the year ended 4 April 2017 under Section 479A of the Companies Act 2006: In order to fulfil the requirements of these regulations the Society guarantees all outstandingliabilities of the exempted subsidiary undertakings. The Society received no dividends from Group undertakings during the year ended 4 April 2017 (2016: £10 million). The impairment release of £18 (2016: million relates £16 to a Group million) undertaking that holds a corporate loan portfolio. Loans Group to undertakings of £31,444 at million 4 April 2017 are reported net of a £3 provision million relation in to this Group undertaking. Significant subsidiaries Audited accounts are prepared for all of principalthe Group’s subsidiaries. The interests of the Society its in principal subsidiary undertakings as at 4 April 2017 are set out below: The Society’s investments Group in undertakings are as follows: 36. Investments in Group undertakings in Group 36. Investments Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

204

Strategic Report Governance Business and Risk Report Financial Statements Other Information 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 2017 2016 and Ownership interest continued continued

Registered office Registered 2, 662881 Dublin Upper Mount Street, 39/40 KY11 Dunfermline, 8PJ Caledonia House, Carnegie Avenue, Douglas, Isle of Man, IM99 1RN Street, 5-11 St. Georges

Ashton Employment Limited Ashton at.home nationwide Limited Services Mortgage Limited Confederation ServicesEthos Independent Financial Limited Limited Trust Exeter Limited LBS Mortgages Overseas B.V. Finance Moulton ServicesNationwide Anglia Property Limited Nationwide Financial Service Limited Limited Nationwide Home Loans Limited Nationwide Housing Trust Limited Nationwide International Nationwide Investments (No.1) Limited Nationwide (Isle of Man) Limited Limited Finance Nationwide Lease Limited Corporation Nationwide Mortgage Nationwide Overseas (UK) Limited ServicesNationwide Property (NBS) Limited Limited Nationwide Trust NBS Fleet Services Limited Limited Leasing Staffordshire Subsidiary name Subsidiary name Employment Limited Ashton BS Nominees Limited Dunfermline Nationwide (Isle of Man) Limited There are no significant restrictions on any of the Society’s subsidiariesin payingdividends or repaying loans, subject to their financial and operating performance and availability of distributable reserves. The Group has no material shares associates. in See note 15 for further details regarding interests the Group’s equity in shares. Subsidiaries by virtue of control Details of consolidated and unconsolidated structured entities are provided note in 37. The subsidiary undertakings the in table above, with the exceptions of Ashton Employment Limited, Moulton Finance Overseas B.V. and Nationwide Limited, (Isle of were Man) dormant companies during the year ended 4 April 2017. All of the subsidiary undertakings are limited liability companies, with the exception of First Nationwide which an unlimited is company. The registered office for all subsidiary undertakings, other than thoselisted in the table is Nationwidebelow, House, Pipers Way, 1NW. SN38 Swindon, The interests of the Society its in other subsidiary undertakings, as are at set 4 April out 2017, below: 36. Investments in Group undertakings undertakings in Group 36. Investments Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

205

Strategic Report Governance Business and Risk Report Financial Statements Other Information 2016 1,273 1,278 £’000 3,263 4,970 10,784 - 2017 1,311 1,012 £’000 7,369 5,046 Registered office Registered Clontarf, Park, Pinnacle 2, Eastpoint Business 6th Floor, 3, 662882 Dublin SN38 1NW Swindon, Nationwide House, Pipers Way, Floor, Third Limited, SP Services (London) Trust Wilmington 7AF EC2R London, 1 King’s Arms Yard, continued

Investment in a portfolio Investment in a portfolio loans of European and acquisition Mortgage bonds of covered guarantor vehicle Funding vehicle Funding Nature of business Nature

Key management personnel compensation Key Cromarty CLO Limited CLO Cromarty Bonds LLP Nationwide Covered Issuer plc Master Silverstone (No.1) Limited Funding Silverstone Short term employee benefits Short term benefits Other long term Structured entity name Structured Share based payments Share Contractual/other settlements Contractual/other the year for management personnel compensation key Total Further details on the activities of Nationwide Silverstone Covered Bonds Master LLP, Issuer plc and Silverstone Limited Funding are (No.1) given note in As 16. at4 April 2017 the total assets of Cromarty CLO Limited (2016: million were £4 The £14 Group million). has no contractual arrangements that would require it to provide financial or other support to Cromarty CLO Limited, nor does the Group have currentintentions to provide such support to the entity. entities structured Unconsolidated The Group has interests structured in entities which it does not sponsor or control. These largely consist of holdings of mortgage backed securities, covered bonds and CLOs issued by entities that are sponsored by other unrelated financialinstitutions. The entities are financed primarily by investments from investors, such as the purchase of issued notes. The direct Group’s interests unconsolidated in structured entities comprise primarily investments asset in backed securities which are reported within available for sale investment securities on the balance sheet. The total carrying value of these interests at 4 April 2017 £2,845 is million (2016: Further £3,764 million). details on the lending risk that the Group exposed is respect to in of these asset backed securities can be found in the ‘Treasury assets’ section of the Business and Risk Report. Management has concluded that the Group has no control or significantinfluence over these entities and that the carrying value of the interests held these in entities represents the maximum exposure to loss. During the year the Group has not provided any non-contractual financial or other support to these entities and has no current intention of providing any such support. There were no transfers to or from these unconsolidated structured entities duringthe year. Subsidiary, parent and ultimate controlling party controlling ultimate and parent Subsidiary, The Group controlled is by Nationwide Building Society, the ultimate parent, which registered is England in and Wales. Details of subsidiary undertakings are shown note in 36. compensation management Key The directors of the Society are considered be to the management key personnel as defined by IAS24 ‘Related Party Disclosures’. compensationTotal for management key personnel for the year was as follows: 38. Related party transactions 38. Related A structured entity an entity is which in voting or rights similar are not the dominant factor deciding in control. Structured entities are consolidated when the substance of the relationship indicates control. structured entities Consolidated Structured entities are assessed for consolidation accordance in with the accounting policy set out note in The 1. following structured entities are consolidated results: the in Group’s 37. Structured entities Structured 37. Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual Other long term benefitsinclude amounts relating to long term bonus schemes, some of which will be in paid future periods.Further information on these canbe found note in Share 8. based payments include amounts that are dependent on the performance of the CCDS. Contractual/other settlements include compensation for loss of office.Further information includedis in the Report of thedirectors on remuneration.

206

Strategic Report Governance Business and Risk Report Financial Statements Other Information

------1.2 £m 1.4 9.1 0.1 6.3 5.9 0.9 2016 (0.7) (8.7) - - - - -

- - £m 1.4 1.1 6.3 2.2 0.2 4.6 2017 (0.5) (8.7) Key management personnel management Key

15 16 10 £m 98 (14) 228 258 855 948 2016 1,162 4,391 (737) 4,367 27,419 31,089

- 74 18 £m 22 (2) 901 409 2017 1,162 1,122 1,280 1,569 (943) 2,805 31,089 31,444 Society subsidiaries continued

continued

Transactions with related parties with related Transactions Loans payable to the Society to payable Loans outstanding at 5 April Loans Loans issued during the year Loans Loan impairment release Loan Loan repayments during the year repayments Loan Loans outstanding at 4 April outstanding Loans Deposits payable by the Society by Deposits payable Deposits outstanding at 5 April Deposits issued during the year Deposit repayments during the year Deposit repayments Deposits outstanding at 4 April Net interest income Net interest receivable Interest Interest expense Interest Other income and expenses Other income the Society to Dividends payable Fees and expenses paid to the Society and expenses paid to Fees Accrued income and expenses prepaid due to the Society due to and expenses prepaid income Accrued Other liabilities payable by the Society by the Other liabilities payable Other balance sheet items Other balance Transactions with key management personnel management key with Transactions Transactions with management key personnel are on the same terms and conditions applicable other to employees within the Group. A register maintained is by the Society containing details of loans, transactions and arrangements made between the Society or its subsidiary undertakings and directors of the Society or persons connected with directors of the Society. The register will be available for inspection by members at the Annual General Meeting on 20 July 2017 and during normal office hours at the Society’s principal office (Nationwide House, Pipers duringSwindon) theWay, period of 15 days priorto the meeting. companies Group with Transactions Transactions with Group companies arise the in normal course of business. Interest on outstanding loans and deposits accrues at a transfer price rate agreed between the Society and its subsidiary undertakings. The Society does not charge the net defined benefit cost to the subsidiary undertakings that participate in the Nationwide Pension Fund. The pension cost to these subsidiary undertakings equals the contributions payable to the Fund. Transactions with related parties related with Transactions A number of transactions are entered into withrelated parties the in normal course of business. These include derivatives, loans, deposits and the payment and recharge of administrative expenses. Further details of derivative balances outstanding between the Society and its subsidiaries The are included outstanding note in 17. balances for other related party transactions at the year end, and the associated income and expenses for the year are as follows: 38. Related party transactions party transactions 38. Related Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

207

Strategic Report Governance Business and Risk Report Financial Statements Other Information

31 26 48 (5) 99 (8) 161 £m 142 325 (10) (72) 2016 (129) 1,777 (198) (938) 8,797 3,217 6,342 12,014 (4,197) (1,025) (4,348) (2,298) 1 9 Society 34 46 (4) £m 128 504 208 396 (37) (69) (36) (88) 2017 (595) 2,196 1,596 5,827 2,206 13,017 15,223 (7,574) (1,673) (2,377) (2,238) 7 3 26 48 (5) 99 (8) £m 142 136 325 240 (73) (39) 2016 1,613 (971) (420) 8,797 (209) 6,342 3,266 12,063 (2,413) (7,951) (1,238) 1 9 Group 34 44 (4) (5) £m 128 210 537 396 (66) (36) 2017 (154) (137) 2,226 5,827 1,638 2,509 13,017 15,243 (1,327) (1,023) (1,602) (8,559) continued

Cash equivalents include £1,959 million (2016: with bank counterparties. posted £2,620 million) of cash collateral

Non-cash items included in profit before tax before included in profit Non-cash items in impairment provisions Net decrease and charges liabilities for in provisions Net increase Impairment losses/(recoveries) on investment securities Impairment losses/(recoveries) Depreciation, amortisation and impairment Depreciation, Profit on sale of property, plant and equipment on sale of property, Profit Loss on the revaluation of land and buildings on the revaluation Loss Interest on subordinated liabilities on subordinated Interest Interest on subscribed capital Interest Gains from derivatives and hedge accounting Gains from Total Changes in operating assets and liabilities Changes in operating banks to and advances Loans Net derivative financial instruments and fair value adjustment Net derivative financial instruments and fair value hedged risk portfolio for Other operating assets Other operating Loans and advances to customers to and advances Loans Shares Total Cash and cash equivalents Cash or less in 3 months banks repayable to and advances Loans i) (note Deposits from banks, customers and others banks, customers Deposits from Debt securities in issue taxation Deferred Total Total Retirement benefit obligations Retirement liabilities Other operating The Group required is to maintain balances with the Bank of England and certain other central banks which, amounted at 4 April 2017, Note: i. to £361 (2016: million £325 These million). balances are included within loans and advances to banks on the balance sheet and are not included thein cash and cash equivalents thein cash flow statement as they are liquidin not nature.

39. Notes to the cash flow statements the cash to Notes 39. Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

208

Strategic Report Governance Business and Risk Report Financial Statements Other Information continued

41. Registered office 41. Registered Nationwide a building is society, incorporated and domiciled the in United Kingdom. The address of its registered officeis: Nationwide Building Society Nationwide House Pipers Swindon Way, 1NW SN38 The Group subject is to the regulatory capital requirements applied by its regulator the Prudential Regulation Authority (PRA). Regulatory capital comprises general the Group’s reserve, revaluation reserve, core capital deferred shares, other equity instruments, permanent interest bearing shares (PIBS) and subordinated debt,subject to various adjustments and transitional arrangements required by the capital rules. During the year the Group complied with the capital requirements applied by the PRA. Further unaudited details about capital the Group’s position can be found the in ‘Solvency risk’ section of the Business and Risk Report. 40. Capital management 40. Capital Notes to the accounts Annual Report and Accounts 2017 Accounts and Report Annual

209

Strategic Report Governance Business and Risk Report Financial Statements Other Information

Statutory percentages Other percentages Information relating to directors to relating Information Directors’ service contracts Directors’ Directors’ share options share Directors’ Information

Annual business statement • • • • • looking statements Forward

Index

211 Other Information

215 Glossary 224

214 Other Annual Report and Accounts 2017 Accounts and Report Annual

210

Strategic Report Governance Business and Risk Report Financial Statements Other Information % 6.9 6.0 12.1 0.91 0.49 2016 % 7.1 6.2 12.5 0.35 0.94 2017 % limit 25.00 50.00 Statutory For the year ended 4 April 2017 the year ended For % 7.92 2017 28.26

the principal value of, and interest accrued under, bills of exchange, instruments or agreements creating or acknowledging indebtedness and or acknowledging indebtedness creating instruments or agreements bills of exchange, accrued under, the principal value of, and interest by the Society qualifying or any such undertaking, less any amounts into funds. as own or entered made, issued accepted, the principal of, and interest accrued on, sums deposited with the Society or any subsidiary accrued on, sums deposited offshore undertaking of the Societythe principal of, and interest excluding and deposits in an EEA subsidiary, the principal value of, and interest accrued on, shares in the Society, accrued on, shares the principal value of, and interest

Gross capital Gross Free capital Free Liquid assets

the principal value of, and interest accrued on, shares in the Society held by individuals otherwise than as bare trustees (or, in Scotland, simple in Scotland, (or, in the Society individuals otherwise held by trustees accrued on, shares than as bare the principal value of, and interest persons who include bodies corporate. or for bodies corporate for trustees) iii) ii) business assets, being the total assets of the Group plus impairment provisions on loans and advances to customers less liquid assets, property, less liquid assets, property, customers to on loans and advances plus impairment provisions assets of the Group business assets, being the total sheet. balance as shown in the Group assets and investment properties plant and equipment, intangible fixed property. on residential fully secured which are the Group accrued on, loans owed to the principal of, and interest of: being the aggregate and borrowings, shares i) • • •

‘Shares and borrowings’ represent the total of shares, deposits from banks, other deposits, amounts due to customers and debt securities in issue and debt securities in customers banks, other deposits, amounts due to deposits from of shares, the total represent and borrowings’ ‘Shares reserve, sale reserve, reserve, for CCDS, reserve, available cash flow hedge revaluation of general the aggregate capital’ represents ‘Gross liabilities subscribed capital and subordinated Tier 1 capital, Additional less customers to impairment losses on loans and advances collective for capital and provisions of gross the aggregate capital’ represents ‘Free plant and equipment and intangible assets property, sale investment securities for banks and available to and advances of cash, loans the total ‘Liquid assets’ represent assets at the beginning and end of the financial year of total by halving the aggregate the amount produced assets’ represent ‘Mean total plant and amortisation and impairment of property, expenses including depreciation, administrative ‘Management expenses’ represent equipment and intangible assets. As a percentage of shares and borrowings: of shares As a percentage Other percentages Statutory percentages Statutory percentages Funding limit Funding Lending limit Lending Management expenses as a percentage of mean total assets of mean total Management expenses as a percentage Profit for the financial year as a percentage of mean total assets of mean total the financial year as a percentage for Profit

2. Other percentages

1. Statutory percentages Annual business statement statement business Annual The above percentages have been prepared from the Society’s consolidated accounts and in particular: and in accounts the Society’s consolidated from been prepared have The above percentages • • • • • • Annual Report and Accounts 2017 Accounts and Report Annual The statutory limits are as laid down under the Building Societies Act 1986 as amended by the Building Societies Act 1997 and ensure that the that 1997 and ensure Societies Act as amended by the Building 1986 Societies Act as laid down under the Building The statutory limits are funded substantially by its members. and are property on residential secured principal purpose of a building society is that of making loans which are Y =

The above percentages have been calculated in accordance with the provisions of the Building Societies Act 1986 as amended by the Building by the Building as amended 1986 Societies Act of the Building with the provisions accordance in been calculated have The above percentages 2004. Funding Limit Calculations Order Lending Limit and the Modification of the 1997 and Societies Act as and is calculated property on residential of loans fully secured business assets not in the form of the proportion The lending limit measures (X-Y)/X where: X = Y = (X-Y)/X as held by individuals and is calculated of shares not in the form where: borrowings and of shares the proportion The funding limit measures X =

211

Strategic Report Governance Business and Risk Report Financial Statements Other Information Eclipse Film Partners No.39 LLP No.39 Film Partners Eclipse Member) (Designated No.37 LLP The Invicta Film Partnership Member) (Designated Limited Cloud Group The Currency Populus Limited Populus Limited Group Populus Limited Henley Festival The Conservation Volunteers Limited BrandCap Limited Rita Clifton ASOS plc plc Ascential at.home nationwide limited Limited Home Loans Derbyshire Limited E-Mex Home Funding Limited Mortgages Jubilee (UK) plc Works The Mortgage Limited Corporation UCB Home Loans (Trustee) National Numeracy Limited Board Standards The Lending Confederation Mortgage Services Mortgage Limited Confederation Limited Trust Exeter First Nationwide Limited LBS Mortgages ServicesNationwide Anglia Property Limited Limited Nationwide Housing Trust Nationwide Investments (No.1) Limited Limited Finance Nationwide Lease Limited Corporation Nationwide Mortgage Nationwide Syndications Limited NBS Fleet Services Limited Limited Leasing Staffordshire Limited Funding Arkose Nationwide Anglia Property ServicesNationwide Anglia Property Limited BS Nominees Limited Dunfermline Limited Monument (Sutton) Limited (Premises) The Derbyshire The Nationwide Foundation British Triathlon Foundation Trust Foundation British Triathlon Campion Willcocks Limited Campion Willcocks (Governor) School Dr Challoner’s Grammar NHS England Other directorships continued

18 July 2011 18 July 2 June 2015 2 June 1 July 2012 1 July 20 April 2009 1 February 2007 28 August 2007 28 August 5 April 2016 1 September 2014 1 September Date of appointment Date Company Director Company Non Executive Non Executive Director Non Executive Director Chief Products and Chief Products Officer Propositions Chief Financial Officer Chief Relationships Chief Relationships and Distribution Officer Chief Executive Chief Executive Officer Non Executive Non Executive Director Occupation

M A Lenson (Hons), BA MBA, FSI ACIB, 17 1954 September R M Fyfield (Hons) MA, BA 1969 3 May R A Clifton CBE, MA (Cantab), FRSA 30 January 1958 C S Rhodes BSc (Hons), ACA 17 1963 March M M Rennison FCA BA, 1960 9 August T P Prestedge 12 February 1970 J D Garner MA (Cantab) 1969 23 June D L Roberts PhD BSc (Hons), MBA, (Honorary), CFifs Chairman 1962 12 September Name and date of birth Name and date Information relating to directors at 4 April 2017 directors to relating Information

3. Information relating to directors at 4 April 2017 at 4 April directors to relating 3. Information Annual businessstatement Annual Report and Accounts 2017 Accounts and Report Annual

212

Strategic Report Governance Business and Risk Report Financial Statements Other Information

Alliance Trust Savings Limited Limited Savings Trust Alliance 30 April 2017)(resigned Management Limited Old Mutual Wealth Management Court Westmoreland Limited (Beckenham) Philharmonia Trust Limited Limited Philharmonia Trust (Trustee) British Council (Honorary President) Foundations UK Community AXA Services Limited Portfolio Limited Residents Hawkins Water Scottish Holdings Limited Stream Business Water Scottish Holdings Limited Horizons Water Scottish plc Life Standard Limited Assurance Life Standard Limited Savings Life Standard with People Society for The Westminster Disabilities Learning Daily Mail and General Trust plc Trust Mail and General Daily plc Group Capital Intermediate KAH Parry Limited Foundation National Children’s Royal plc Life Standard Other directorships continued continued

2 June 2015 2 June 18 January 2017 18 July 2011 18 July 23 May 2016 23 May Date of appointment Date Non Executive Non Executive Director Member of House of Lords Company Director Company Company Director Company Occupation

T J W Tookey BSc (Hons), FCA 17 1962 July Baroness U K Prashar Baroness CBE PC 1948 29 June L M Peacock (Hons) BA 1953 December 26 K A H Parry MA (Cantab), FCA 29 January 1962 Name and date of birth Name and date Information relating to directors at 4 April 2017 directors to relating Information Documents may be served on any of the Directors c/o Addleshaw Goddard, One St Peter’s Square, Manchester M2 3DE. Manchester Square, One St Peter’s Goddard, c/o Addleshaw be servedDocuments may on any of the Directors service contracts Directors’ period of 12 months from which include a notice detailed in their individual contracts of employment are and conditions terms directors’ Executive would any new recruit to period offered The notice the Society. the individual to period of six months from the individual and a notice the Society to be in line with this approach. options share Directors’ been details of which have (CCDS), shares capital deferred the value of the Society’s core to is linked variable pay directors’ of executive A proportion plan in pay the only variable was (DPA) Award Performance 2016/17, the Directors’ For on remuneration. of the directors in the Report provided in five payable 2017 60% is deferred, in June and the remaining will be paid upfront under the DPA 40% of awards participated. which directors and 60% of the portion (i.e. 20% overall) of the upfront 50% of the award. the date and seven following equal amounts between years three under the DPA, award 56% of the overall These elements, totalling the value of the Society’s CCDS. to is linked portion (i.e. 36% overall) deferred under 2015/16, For 50% of outstanding awards December. period and so will be paid in the following a six month retention also subject to are the value of the Society’s CCDS. to also linked Plan are Pay Performance and the legacy 2013-16 Medium Term the 2015/16 DPA

3. Information relating to directors at 4 April 2017 at 4 April directors to relating 3. Information Annual businessstatement Annual Report and Accounts 2017 Accounts and Report Annual

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Forward looking statements Certain statements in this document are forward looking with respect to plans, goals and expectations relating to the future financial position, financial position, the future to plans, goals and expectations relating to looking with respect forward in this document are statements Certain looking statements forward in these reflected Nationwide believes that the expectations of Nationwide. Although and results business performance forward all By their nature, results. of actual reflection be an accurate to expectations will prove that these it can give no assurance reasonable, are of Nationwide beyond the control that are events and circumstances future to because they relate involve risk and uncertainty looking statements in interest risks such as fluctuation related market conditions, and business things, UK domestic and global economic including, amongst other credit borrower concerning risks preferences, competition, changes in customer inflation/deflation, the impact of rates, and exchange rates within relevant or other combinations acquisitions of future impact and other uncertainties the timing, proposals, in implementing delays quality, in the jurisdictions in legislation and other regulations authorities, the impact of tax or other actions of regulatory industries, the policies and which the differ from results may materially and condition, business performance financial Nationwide’s actual future As a result, Nationwide operates. Nationwide cautions such risks and uncertainties to Due looking statements. or implied in these forward expressed plans, goals and expectations looking statements. on such forward undue reliance place not to readers events or otherwise. future of new information, whether as a result looking statements any forward update no obligation to Nationwide undertakes or sold in the not be offered Securities may part of an offer States. sale or form in the United of securities for This document does not constitute will be made by means States be made in the United Any public offering to registration. from or an exemption absent registration States United as well about Nationwide and management detailed information Nationwide and will contain be obtained from that may of a prospectus as financial statements. Annual Report and Accounts 2017 Accounts and Report Annual

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nancial system against unexpected losses. Basel II is comprised II is comprised losses. Basel against unexpected the financial system protect ficient capital to Capital that meets certain criteria set out in Capital Requirements Directive IV (CRD IV). Directive set out in Capital Requirements criteria Capital that meets certain capital the AT1 of a trigger event, upon the occurrence that require the criteria In particular, down Tier 1 capital or the principal is written Equity Common to instrument converts on a permanent or temporary basis. event of insolvency, In the Society. of the at the discretion annual coupon a fixed Securities that pay behind the claims (PIBS) but bearing shares the same interest as permanent securities rank AT1 of all subordinated debt holders, creditors and investing members of the Society, but ahead of core but ahead of core and investing members of the Society, creditors debt holders, of all subordinated eligible as Tier 1 capital. securities are These investors. (CCDS) shares capital deferred behind when they are is in arrears A customer date. unpaid at their contractual Amounts that are a customer Such is overdue. payment in fulfilling their obligations such that an outstanding loan the entire is in arrears, When a customer delinquency. of be in a state can also be said to the total are be delinquent, meaning that delinquent balances is said to outstanding balance overdue. are outstanding loans on which payments assets. The referenced in an underlying pool of referenced an interest Securities that represent card cash flows, including credit a set of associated any assets which attract pool can comprise in these Investors mortgages. or commercial pools of residential commonly assets, but are and/or principal) (interest payments future from cash received the right to securities have on the underlying asset pool. maturity investments held to not classified as loans and receivables, Financial assets that are statement. the income or financial assets at fair value through UK UK financial institutions (including Nationwide) and the A levy certain that applies to 1 January of the levy 2011. The banks since is based on a percentage of foreign operations sheet date. equity and liabilities of the institution at the balance chargeable banking all assets and liabilities held as part of Nationwide’s core The banking book contains trade. to held with no intention activities. These assets and liabilities are than 2% above the Bank be no more to which is guaranteed variable rate, The Society’s standard at the end of a deal reserved existing customers for rate is the revert This of England base rate. introduced. (SMR) was Rate Mortgage 29 April 2009, at which point the Standard on or before that defines the Supervision’s on Banking practice of best statement Committee The Basel retain to capital requirements their regulatory methods by which firms should calculate suf pillars. of three the details of 2010, which presents issued in December rules text, Committee The Basel This has been capital adequacy on bank and liquidity. standards global regulatory strengthened IV (CRD IV) Directive legislation. Capital Requirements via the implemented example, for Used, 100 basis points is one percent. (0.01 percent). of a percent One hundredth rates. in quoting movements in interest investment. as a rental property residential purchasing customers to offered Mortgages These include the capital adequacy or financial strength. measuring the Group’s ratios financial Key ratio. and UK leverage ratio CRR leverage capital ratio, total Tier 1 ratio, Tier 1 ratio, Equity Common which the hold based upon the risks to to is required The amount of capital that the Group business is exposed. Basel III rules Basel II and The supervisory the which reflects Union in the European framework and capital standards. on capital measurement Union, which includes the Capital III in the European implement Basel legislation to European (CRD). Directive (CRR) and Capital Requirements Regulation Requirements defining prudential Union member states, European applicable to that is directly regulation European institutions and investment firms. credit risk for capital, liquidity and credit for requirements Tier 1 capital Regulation (CRR) which measures Requirements defined by the Capital A ratio exposures. ratio CRR leverage of total as a proportion

Additional Tier 1 (AT1) capital Tier 1 (AT1) Additional Additional Tier 1 (AT1) securities Tier 1 (AT1) Additional Glossary Arrears securities (ABS) Asset backed sale (AFS) for Available levyBank book Banking (BMR) rate mortgage Base II Basel III Basel point (bp) Basis let mortgages Buy to Capital ratios Capital requirements (CRD) Directive Capital Requirements IV Directive Capital Requirements (CRD IV) (CRR) Regulation Capital Requirements (CRR) Regulation Capital Requirements ratio leverage Annual Report and Accounts 2017 Accounts and Report Annual

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Strategic Report Governance Business and Risk Report Financial Statements Other Information ce buildings, industrial property, medical centres, hotels, retail stores, shopping stores, retail hotels, medical centres, buildings, industrial property, fice The denominator used in the Capital Requirements Regulation (CRR) leverage ratio. Exposure Exposure ratio. leverage (CRR) Regulation used in the Capital Requirements The denominator derivative and securities for adjusted sheet exposures, as the sum of on-balance is measured and off-balance sheet items. exposures, financing transaction and deductions adjustments regulatory rules, less certain under regulatory Capital held, allowable be made. to required that are pensionable pay the pension accrued is based on where A defined benefit pension arrangement in that earned each year is based on pensionable pay The pension an employee’s career. across retirement each year up to inflation, for to linked rate, by a set revaluation year and is increased the scheme). the employee leaves the date if earlier, (or, fied deposit at a speci term of a fixed instruments acknowledging the receipt Bearer-negotiable rate. interest due to only, being one of recovery to is transferred relationship The point at which the customer agency or litigation. with a debt collection placement or through significant levels of arrears of a loan. repayment Security pledged for bank and ABS/RMBS A securitisation can include a mix of corporate, of debt securities. CDOs definition of ‘Securitisation’). securities (see separate companies rated A securitisation issued by sub-investment grade of loans and bonds of ‘Securitisation’). definition (see separate assessment impairment collective assets with similar characteristics, comprises a portfolio Where account assessment takes The collective statistical techniques. using appropriate place takes not yet identified. but are place taken of losses that will have loans relating and social landlords registered loans to property, on commercial secured Loans finance. project to definition of ‘Securitisation’). loans (see separate estate real A securitisation of commercial needs, which specifies the face credit short term finance issued to promissory note An unsecured on the maturity date. investors amount paid to Includes of industrial properties. and garages warehouses, multifamily housing buildings, centres, IV), IV (CRD Directive of capital as defined in Capital Requirements The highest quality form reserves and qualifying accumulated deductions. regulatory instruments after comprising assets. of risk weighted as a percentage expressed Tier 1 capital Equity Common of in the execution errors judgement or makes inappropriate exercises The risk that the Group integrity legislation, market or with regulation non-compliance its business activities, leading to customers. for being created being undermined, or an unfair outcome FlexAccount the Group’s personal lending and unsecured card, credit Comprises products. account) (current of a loan or other financial instrument, at which point the entire date The final payment be repaid. is due to outstanding principal and interest remaining enable the Society Tier 1 (CET1) capital which has been developed to Equity of Common A form the periodic distributions from receive Holders of CCDS the capital markets. capital from raise to In the event of insolvency, discretionary and capped in any financial year. Distributions are Society. and investing members creditors of all other depositors, behind the claims holders rank CCDS of the Society. income. total expenses to of administrative the proportion that represents A ratio the issuer’s other from segregated that are of mortgages by a portfolio Debt securities backed issues covered The Group bonds. the benefit of the holders of the covered be solely for assets to bonds as part of its funding activities.

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Capital Requirements Regulation (CRR) Regulation Capital Requirements exposure ratio leverage Glossary Capital resources earnings revalued average Career (CARE) of deposit ficates Certi offCharge Collateral (CDO) debt obligations Collateralised (CLO) loan obligations Collateralised assessed impairments Collectively lending Commercial securities backed mortgage Commercial (CMBS) paper (CP) Commercial (CRE) estate real Commercial Tier 1 capital Equity Common ratio Tier 1 (CET1) Equity Common risk and compliance Conduct banking Consumer maturity Contractual (CCDS) shares capital deferred Core (CIR) ratio income Cost bonds Covered

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Strategic Report Governance Business and Risk Report Financial Statements Other Information The risk that a borrower or counterparty fails to pay the interest or to repay the principal on a loan the principal on repay or to the interest pay fails to or counterparty The risk that a borrower as a bond) on time. or other financial instrument (such a lower accept to by the market required rate or risk-free over the benchmark The premium quality. credit value which and the market of trades value of a portfolio between the risk-free The difference of an estimate represents therefore CVA risk of default. The counterparty’s the account into takes risk. credit inherent incorporate to participant would make fair value that a market the change to currencies specific principal amounts of different parties exchange in which two An arrangement one party Often on the principal amounts. will payments interest and subsequent at inception also fixed- are (though there floating rate a while the other will pay of interest, rate a fixed pay the principal amounts are the maturity of the swap, At and floating-floating arrangements). fixed usually re-exchanged. as liabilities in the balance recorded funds are holders. Such by personal account Money deposited customers. or amounts due to sheet within shares (including technical sales of past or other consequence result loss as a for Compensation of financial products. breaches) value which takes and the market of trades a portfolio value of between the risk-free The difference of the adjustment an estimate represents therefore risk of default. The DVA the Group’s account into risk of the Group. the credit incorporate to participant would make fair value that a market to See ‘Investment securities’. These are ficates. of the certi the bearer to of the Group of indebtedness ficates certi Transferable of deposit. ficates certi and include liabilities of the Group the the purposes of as 100% for of default is taken in which the probability Circumstances IV (CRD Directive Requirements with the Capital capital and compliance calculation of regulatory status or where fined arrears a prede IV) reaches legislation. This is defined as when a borrower obligation in full without the lender taking the credit repay to unlikely is considered a borrower security. action such as realising deductible temporary of differences a result periods as in future recoverable taxes income Corporate in tax asset or liability and tax bases of an that will result between the accounting (being differences periods) and the carry credits. of unused tax deductible amounts in future forward of taxable temporary differences periods as a result in future payable taxes income Corporate and tax bases of an asset or liability that will result between the accounting (being differences periods). in taxable amounts in future past service of employees from resulting benefit payments future value of expected The present in the defined benefit pension plan. has an obligation benefit plan under which the Group A pension or other post-retirement bears the risk that its employees. The Group and former current fits to bene agreed provide to fall. or that the value of the assets in the pension fund may increase obligation may a separate as they fall due into contributions fixed pays A pension plan under which the Group obligations. entity (a fund) and has no further legal or constructive See ‘Arrears’. whose value changes with movements in an underlying index such or agreement A contract no initial and which requires or indices, prices share rates, exchange foreign rates, as interest other types of for investment or an initial investment that is smaller than would be required swaps, types The principal of derivatives are factors. market to with a similar response contracts and options. futures forwards, value, due to add the expected to continue or value is unable to of income The risk that a source factors. or other environmental regulatory changes in market,

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Credit risk Credit Glossary spread Credit valuation adjustment (CVA) Credit swap rate interest currency Cross deposits Customer redress Customer Debit valuation adjustment (DVA) Debt securities Debt securities in issue Default tax asset Deferred tax liability Deferred Defined benefit obligation Defined benefit pension plan pension plan Defined contribution Delinquency Derivative Earnings risk

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Strategic Report Governance Business and Risk Report Financial Statements Other Information nancial asset or liability. EIR allocates the carrying EIR allocates measure value of a financial asset or liability. The method used to of the financial asset life a level yield, over the expected produce to or expense income associated appropriate. period when shorter or a or liability, tax. fit before of pro as a percentage statement in the income The tax charge or credit-enhance collateralise secure, to pledged in order sheet which are Assets on the balance withdrawn. freely which they cannot be from a financial transaction IV (CRD IV) provisions. Directive no transitional with implementation of Capital Requirements Full risk management cohesive for and guidance the context provide that seeks to A framework the Group. activity across prudential effective and consistent ensure The independent EU authority works to which banking sector. and supervision the European regulation across defaults. It is potential due to exposures losses on current the potential estimate A calculation to at default (EAD). and exposure (LGD) of default (PD), loss given default of probability the product or group counterparty The maximum loss that a financial institution might suffer if a borrower, be realised. to meet their obligations or if assets and off-balance positions have sheet fails to at the time of default. that will be outstanding An estimation of the amount of exposure is based on the employee’s the pension payable where A defined benefit pension arrangement final pensionable salary. and supervision of business regulation of UK conduct for The statutory body responsible the prudential regulation for also has responsibility 1 April 2013. The FCA authorised firms from scope. (PRA’s) Authority’s of firms that do not fall within the Prudential Regulation financial between businesses providing An independent service settling disputes in the UK for services and their customers. to against performance future calibrates that the Group Sets out the financial parameters members, investing in the business and between distributing value to achieve the right balance maintaining our financial strength. or reduce taking action to and with identifying, monitoring charged of England committee A Bank It of the UK financial system. the resilience and enhance protect risks with a view to systemic remove policy of the UK Government. supporting the economic for is also responsible or future meet current earnings, cash flow or capital to inadequate having The risk of the Group market the earnings capacity, and expectations. This includes loss or damage to requirements between assets, funding and other mismatches arising from value or liquidity of the Group, or the conditions market rates, be exposed by changes in market and which may commitments, file. pro credit Group’s of authorised financial services firms. customers for fund of last resort The UK’s compensation pay be unable, to to if a firm is unable, or likely customers The FSCS to compensation pay may in default. or has been declared trading claims against it, usually because it has stopped The FSCS is funded by the financial services industry. Limited. Ratings Fitch agency, Rating of a loan terms is made on the contractual when a concession place takes Forbearance financial difficulties. experience that is experiencing or about to a customer to of default (PD) probability using internal risk capital requirements A method of calculating credit supervisory and conversion models but with regulators’ of loss given default (LGD) estimates at default (EAD). the calculation of exposure for factors impairment losses on loans and collective for capital and provisions of gross The aggregate plant and equipment and intangible assets. less property, customers to advances banks and building societies incentivise 2012 to of England in July A scheme launched by the Bank the benefits funding costs, reduced through UK households and non-financial companies lend to to loans. easily available of cheaper and more in the form UK borrowers passed on to of which are

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Effective interest rate method (EIR) rate Effective interest Glossary Effective tax rate assets Encumbered End point Risk Management Enterprise (ERMF) Framework Authority (EBA) Banking European loss (EL) Expected Exposure at default (EAD) Exposure Final salary pension arrangements Authority (FCA) Financial Conduct Financial Ombudsman Service (FOS) framework Financial performance (FPC) Committee Financial Policy Financial risk Financial Services Compensation Scheme (FSCS) Fitch Forbearance based (IRB) ratings internal Foundation approach capital Free Scheme (FLS) Lending for Funding

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Strategic Report Governance Business and Risk Report Financial Statements Other Information The aggregate of general reserve, revaluation reserve, available for sale reserve, core capital deferred capital deferred sale reserve, reserve, for reserve, available core revaluation of general The aggregate liabilities. and subordinated capital, subscribed capital Tier 1 (AT1) Additional (CCDS), shares during the period. customers to New lending advanced providing both monthly and annually, changes in house prices An index monitoring market. view of the property a comprehensive 5% deposit. with a obtain a mortgage helps house purchasers A Government scheme which the of 10%) by an equity 20% and a minimum loan from (up to is part financed The property Agency. Homes and Communities raised individual provisions or which have months in arrears, than three more which are Loans against them. management’s represent sheet. The provisions held against assets on the balance Provisions sheet date. at the balance in the loan portfolio of losses incurred best estimate is less be recovered to that the amount expected determines When an impairment review asset’s value the reduce to carryingthan the current is recognised value, an impairment loss amount. its recoverable to and document that defines Nationwide’s liquidity and funding risk management The process risks. of these and measurement including risk appetite framework, quantity of liquidity (PRA) Authority on a firm’s required the Prudential Regulation from Guidance file. and funding pro resources in possession. when they are impairment assessed individually for loans are Residential that is objective evidence impairment when there assessed individually for loans are Commercial an impairment loss has occurred. payments periodic interest exchange to agree under which two counterparties A contract monetary principal, the notional amount. on a predetermined of its hold in respect to own assessment of the levels of capital that it needs The Group’s other risks as well as for risks and operational market credit, for capital requirements regulatory events. including stress sophisticated more are risks. IRB approaches credit to measuring exposure for An approach or Advanced. be Foundation and may approach and risk sensitive than the Standardised (PRA) Authority permission. only be used with Prudential Regulation may IRB approaches responsible Its members are setting body of the IFRS Foundation. The independent standard (IFRSs) and Standards Financial Reporting the development and publication of International for (IFRIC). Committee of IFRS as developed by the IFRS Interpretations interpretations approving for derivative transactions. bilateral into enter and used to developed by ISDA contract A standardised This legal rights of set off with the same counterparty. derivative transaction grant for The contracts that negative values offset the extent positive values. risk of the derivatives to the credit reduces agencies. rating credit by external AAA BBB, as measured from to ratings, of credit The highest range institutions, public bodies or other of credit of indebtedness ficates certi Assets representing as debt securities. to banks. Sometimes referred those issued by central undertakings excluding in the UK (CRE) market estate real of the prime commercial of the performance A measurement total data series (including capital value returns, on a number of key on a monthly basis, reporting asset of other key against the performance values and void rates) rental returns, income returns, classes including UK equities and UK gilts. the principal on a loan repay to or the interest pay fails to or counterparty The risk that a borrower extension risk also encompasses or other financial instrument (such as a bond) on time. Lending risk. risk and concentration identical assets or liabilities in active markets for prices quoted unadjusted values derived from Fair high qualitysecurities. government such as for available, is readily price the quoted where

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Gross capital Gross Glossary lending mortgage Gross index (HPI) House price equity scheme Buy shared Help to loans Impaired Impairment provisions Impairment losses Liquidity Assessment Adequacy Internal (ILAAP) Process (ILG) Individual liquidity guidance Individually assessed impairments swap rate Interest capital adequacy assessment Internal (ICAAP)process (IRB) approach based ratings Internal Standards Accounting International (IASB) Board and Derivatives Swaps International agreement master Association (ISDA) grade Investment securities Investment (IPD) Databank Property Investment index risk Lending 1 fair values Level

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12 months. value of any security on a loan and the current between the outstanding balance The difference the security value is lower than the outstanding balance. held where liabilities. assets and total between total The difference paid and interest on assets and similar income receivable between interest The difference on liabilities and similar charges. assets. total average of weighted as a percentage income Net interest during the period offset customers by customer to The net amount of new lending advanced settled during the period. balances Fair values derived from models whose inputs are observable in an active market, such as for most observable such as for models whose inputs are active market, in an values derived from Fair debt obligations collateralised securities, certain bonds, asset backed and liquid investment grade derivatives. (OTC) over the counter and obligations (CLOs) loan (CDOs), collateralised on observable not based data (unobservable inputs that are market values derived from Fair equity derivatives including an equity investments, private deposits element, inputs), such as for asset backed (CDOs) and certain debt obligations including an equity element, some collateralised securities and bonds. basis. on a non risk weighted of exposures as a proportion Tier 1 capital which measures A ratio and Capital ratio UK leverage to further details refer two bases of calculation. For are There ratio. (CRR) leverage Regulation Requirements other banks in the London funds from at which banks can borrow rate A benchmark interest market. interbank and meet internal held to liquid assets that are unencumbered of high quality, A portfolio requirements. liquidityregulatory stress meet its liabilities as they fall due and maintain to is unable Liquidity risk is the risk that the Group maintain is unable to risk is the risk that the Group Funding fidence. con member and stakeholder funding risk that can and manage retail markets in wholesale and retail diverse funding sources of higher risk deposits. concentrations excessive arise from and which details liquidity identify and funding stress, an emerging A document that can be used to withstand such a stress. to and the actions which can be taken be followed to the procedures level of liquidity that a firm maintains an adequate ensure liquidityA regulatory metric which aims to 30 calendar days. lasting for stress in a severe-but-plausible meet its requirements to of the value of the property as a percentage the amount of exposure which expresses A ratio basis such that the value of the on an indexed LTV calculates The Group on which it is secured. using either the house flect changes in the market re basis to on a regular is updated property indices. estate real or commercial price and the net amount of the at default (EAD) between exposure of the difference An estimate of EAD. as a percentage expressed recovery expected as membership length increases. rates enhanced which pay products A distinctive set of savings used by the customer. The primary account or sole current assets and liabilities the Group’s arising from, The risk that the net value of, or net income changes. or rate prices of market as a result is impacted a range across a dealer, through investors, to by a company offered continuously notes Corporate of maturity periods. with the Society loan as set out in the investment or a mortgage A person who has a share of rules. Society’s Memorandum Service Limited. Moody’s Investors agency, Rating Judgement Court such as a County histories credit weakened with marginally borrowers to Loans in the last £1,000 payment or with one missed mortgage or default of less than or equal to (CCJ)

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Negative equity Negative Net assets income Net interest margin Net interest lending Net mortgage Level 2 fair values Level Glossary 3 fair values Level ratio Leverage Rate) Offered Interbank Libor (London Liquid asset buffer (LAB) Liquidity and funding risk Plan (LCP) Liquidity Contingency (LCR) ratio Liquidity coverage (LTV) value ratio to Loan default (LGD) given Loss Saver Loyalty account Main current risk Market notes Medium term Member Moody’s Near prime

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Strategic Report Governance Business and Risk Report Financial Statements Other Information culties. In the latter case, the case, ficulties. In the latter cient to meet the estimated liabilities of meet the estimated ficient to A regulatory funding metric which is used to promote a stable funding profile by assessing the funding profile a stable promote funding metric which is used to A regulatory (eg customer funding sources funded by stable long term assets that are of long term proportion wholesale funding). deposits and long term loans with individually assessed impairments. including impaired in arrears, which are Loans such as the of new regulations impact describe the combined to used term The collective II (PSD2), where Services Directive (CMA) and Payments Order Authority and Markets Competition with party organisations third registered as Nationwide will provide financial institutions such The aim of or member is provided. of customer the consent where information transactional fairness in banking and financial services and transparency more create will be to Open Banking and innovation. competition greater through or from people and systems, processes, or failed internal inadequate from The risk of loss resulting events. external exchanged. of collateral typically earned or paid in respect flecting the overnight interest re A rate derivatives. rate interest OIS is used in valuing collateralised between two parties, without going directly negotiated) (and privately traded that are Contracts standardised They offer or other intermediary. flexibility because, unlike an exchange through fit specific needs. to they can be tailored products, exchange-traded due. when contractually a payment make has failed to a counterparty where Loans assets will be insuf The risk that the value of the Fund’s in increased capital position and/or result impact the Group’s risk can adversely Pension the Fund. the Fund. cash funding obligations to neither past due nor impaired. which are Loans equally with the rank of the Society that, in the event of insolvency, shares deferred Unsecured, debt holders, the claims of all subordinated securities, behind Tier 1 (AT1) claims of Additional capital and ahead of the claims of core of the Group, and investing members creditors depositors, also known as subscribed capital. PIBS are investors. (CCDS) shares deferred the minimum capital requirements, Pillar 1 covers capital framework. of the Basel Components risks. Pillar 2/2A and operational credit additional firm-specific capital to covers in relation largely about disclosures Pillar 3 covers 1 requirements. in full by Pillar risks not covered for requirements the firm’s capital and risk position. quality and fit standard a higher credit loans, which typically have residential Mainstream and pass a standard history, a good credit have to likely As such, they are underwriting processes. affordability assessment at the point of origination. on a public exchange. not quoted that are companies investments in operating Equity obligations in the next will default on their credit that a borrower of the probability An estimate 12 months. the performance to growth linked correlated market stock for with the potential Deposit accounts original investment amount an investor’s PEBs protect indices. market of specified stock upside from for potential whilst providing indices, market stock in the linked against reductions term. over a fixed markets movements in the stock of loans and advances portfolio the corresponding to of impairment provisions The ratio which they relate. to the prudential supervision for The statutory body responsible of banks, building societies, 1 April 2013. and a small number of significant investment firms in the UK from insurers The PRA is a subsidiary of England. of the Bank adjustments and deductions. regulatory required rules, less certain under regulatory Capital allowable with relationship either as part of an ongoing customer be renegotiated may and advances Loans financial dif a borrower’s to or in response customer a creditworthy the is no change to if there due or impaired as past no longer be treated loan may renegotiated been have ows. Individually significant loans whose terms cash fl value of future present estimated past due or impaired. if they remain determine to ongoing review subject to are renegotiated

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Net stable funding ratio (NSFR) Net stable funding ratio Glossary loans Non-performing Open banking risk Operational (OIS) rate swap indexed Overnight (OTC) the counter Over due loans Past risk Pension loans Performing bearing shares interest Permanent (PIBS) Pillar 1/2/2A/3 mortgages Prime residential equity investments Private of default (PD) Probability equity bonds (PEBs) Protected ratio coverage Provision Authority (PRA)Prudential Regulation capital Regulatory loans Renegotiated

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Strategic Report Governance Business and Risk Report Financial Statements Other Information cient capital to absorb losses throughout a full throughout absorb losses ficient capital to dence of current and prospective investors, investors, and prospective of current fidence maintain the con ficient to members, the Board and regulators. members, the Board embassies, consulates governments, ministries, departments of governments, to Exposures banks. and deposits with central of cash balances on account and exposures often are and well defined objective. There a narrow accomplish to created Entities that are uses a number of SPEs, their ongoing activities. The Group or limits around specific restrictions with is used interchangeably This term including those set up under securitisation programmes. SPV (special purpose vehicle). mortgages. fied and other non-standard let, self-certi of buy to Consists Limited. Services Europe Market Credit & Poor’s Standard agency, Rating at the end of a deal reserved on or after customers existing mortgage for rate The revert 30 April 2009. the risk In this approach risk capital requirements. credit calculate The basic method used to supervisory by regulators’ determined parameters. weights used in the capital calculation are based (IRB) approach. ratings is less risk-sensitive than the internal approach The Standardised business decisions that impact the long-term The risk of significant loss or damage arising from developments. external adapt to an inability to or from of the membership, interests adverse events or changes in economic which involves identifying possible future A process (either financial or non-financial), effects on the Group unfavourable have that could conditions withstand such changes, and identifying ability management actions to assessing the Group’s the impact. mitigate to nancial security as collateral for a cash loan. In a for use a financial security as collateral to that allows a borrower An agreement repurchase to a commitment the lender subject to sell a security to to agrees the borrower repo, it in the repurchase to the party selling the security (and agreeing For the asset on a given date. (buying the transaction the to the counterparty for or repo; agreement it is a repurchase future) repo. or reverse agreement repurchase it is a reverse sell in the future) to security and agreeing let buy to by either prime, loans. RMBS can be backed mortgage A securitisation of residential definition of ‘Securitisation’). loans (see separate mortgage or sub-prime residential of a financial asset or financial liability. maturity date the contractual period to The remaining than institutions. individuals rather obtained from Funding risks. The method of calculating credit credit retail to measuring exposure for An approach and (LGD) of default (PD), loss given default probability uses internal risk capital requirements only be used may based (IRB) approaches ratings at default (EAD) models. Internal exposure (PRA) Authority permission. with Prudential Regulation lending and mortgage including residential than institutions, individuals rather to Loans banking. consumer goals. assume in pursuit of its strategic to is willing The level and type of risk that the Group of risk they represent. flect the degree re adjustment under the capital rules to The value of assets, after a pool, which is used into of assets, usually loans, is aggregated a group where A process a special purpose entity assets to transfers of new securities. A company back the issuance to by the assets. (SPE) which then issues securities backed the debt securities. repay on and interest to pay used the assets are The cash flows from with the Society. account or current savings by a person in a retail deposited Funds Society. the as liabilities for recorded funds are Such and debt customers banks, other deposits, amounts due to deposits from of shares, The total securities in issue. is consolidation a Individual basis less capital requirements. capital on an individual consolidated Total meeting particular purposes which only includes those subsidiaries regulatory basis for consolidation IV (CRD IV). Directive within Capital Requirements contained criteria suf maintain fails to The risk that the Group cycle and suf economic

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Sovereign exposures Sovereign Special purpose entities (SPEs) lending Specialist residential (S&P) & Poor’s Standard (SMR) rate mortgage Standard approach Standardised risk Strategic testing Stress Repurchase agreement (repo)/reverse (repo)/reverse agreement Repurchase repo) (reverse agreement repurchase Glossary securities backed mortgage Residential (RMBS) maturity Residual funding Retail (IRB) based ratings internal Retail approach loans Retail Risk appetite assets (RWA) Risk weighted Securitisation Shares and borrowings Shares Solo surplus risk Solvency

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Strategic Report Governance Business and Risk Report Financial Statements Other Information

An entity in which voting or similar rights are not the dominant factor in deciding control. in deciding control. not the dominant factor An entity rights are in which voting or similar control. indicates of the relationship when the substance consolidated entities are Structured creditors depositors, behind the claims of all and ranks of Tier 2 capital that is unsecured A form securities, Tier 1 (AT1) holders of Additional the claims of before and investing members but (CCDS). shares capital deferred (PIBS) and core bearing shares permanent interest delinquencies such as payment histories credit weakened that typically have borrowers to Loans or default greater (CCJs) Judgements Court such as County problems severe more and potentially 12 months or discharged in the last payment mortgage than one missed than £1,000, more as measured higher risk characteristics display also may borrowers prime Sub bankruptcies. risk of default. heightened indicating or other criteria scores, by credit (PIBS)’. bearing shares interest See ‘Permanent swap. rate floating interest to in a fixed rate interest The fixed 2016 within a package of monetary of England in August A scheme launched by the Bank pass on base rate lending institutions to with the purpose of encouraging stimulus measures, of funding. an efficientcuts, by providing source tier 1 capital Equity Common Tier 1 capital comprises financial strength. of the Group’s A measure and additional Tier 1 capital instruments. assets. of risk weighted Tier 1 capital as a percentage set out in financial capital that meets the Tier 2 requirements of the Group’s A further measure debt and other qualifying subordinated (CRR), comprising Regulation the Capital Requirements deductions. regulatory after securities and eligible impairment allowances held by of positions in financial instruments or commodities classification consisting A regulatory term fluctuations in price. short from of profiting a bank with the intention business combinations to related directly expenses, which are included within administrative Costs, or the restructuring of parts of the business to transform the way activities are performed. activities are the way transform of parts of the business to or the restructuring Tier 1 capital as measures Regulation (CRR) which Requirements defined by the Capital A ratio central eligible to exclude modified by the PRA exposures, ratio CRR leverage of total a proportion bank holdings. by the undertaken the audit procedures to that has not been subjected Financial information auditor. external Group’s underlying performance management’s view of the Group’s present which aims to A measure of performance comparisons like for with like and Accounts of the Annual Report the reader for flective of the not re one off of years without the distortion which are volatility and items across sustainable measure fit is not designed to ongoing business activities. Underlying pro Group’s even though items of non-recurring exclusion requires fitability as that potentially levels of pro business activities. of) consequence core (or even a direct the Group’s to closely related they are occur on risk positions as a result loss that could the potential that estimates A technique a given level and to over a specified time horizon and prices rates movements in market of future and horizon uses a 10 day the Group monitoring, day to In its day fidence. of statistical con level. fidence a 99% con entities. businesses, financial institutions and sovereign larger from received Funding funding. of total Wholesale funding as a percentage entities. businesses, financial institutions and sovereign larger to Lending or it is no longer considered that an asset is irrecoverable, it is determined The point where and the shortfall the asset or final settlement is reached try viable to and recover economically impairment balance off. and any related off,written balance In the event of write the customer sheet. the balance from removed are

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Structured entity (SE) Structured Glossary debt/liabilities Subordinated Sub prime Subscribed capital rate Swap Scheme Funding Term Tier 1 capital Tier 1 capital ratio Tier 2 capital book Trading costs Transformation

UK leverage ratio UK leverage Unaudited fit Underlying pro at risk (VaR) Value Wholesale funding Wholesale funding ratio Wholesale lending off Write Annual Report and Accounts 2017 Accounts and Report Annual

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Strategic Report Governance Business and Risk Report Financial Statements Other Information 4 6 11 31 53 43 38 94 80 98 211 131 151 181 137 212 152 213 213 197 176 178 183 183 165 148 184 166 196 198 203 203 209

Additional Tier 1 capital (note 35) Tier 1 capital (note Additional 8) (note expenses Administrative Annual business statement report Committee Audit Independent report, Auditors’ 14) sale investment securities (note for Available sheets Balance of directors Board 58 report Risk Committee Board and Risk Report Business model Business 31) (note Capital and leasing commitments 40) Capital management (note Cash flow statements Chairman’s statement review Chief Executive’s 13) (note Classification and measurement lending risk Commercial risk and compliance Conduct risk banking and lending Consumer 32) liabilities (note Contingent 34) (note (CCDS) shares capital deferred Core on of the directors Report governance, Corporate 30) (note redress Customer 21)Debt securities in issue (note 18) banks (note Deposits from Derivative financial instruments (note 17) 7) (note Gains from Derivatives and hedge accounting, to relating Information Directors, report Directors’ service contracts Directors’ options share Directors’ 20) (note customers to Due Accounting policies, Statement of (note 1) of (note policies, Statement Accounting Index

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Strategic Report Governance Business and Risk Report Financial Statements Other Information 2 61 18 36 63 83 191 122 152 173 197 214 215 178 179 193 128 163 163 146 165 164 194 186 196 109 168 108 168 188 204 208

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9) Employees (note biographies Committee Executive 24) (note of financial assets and liabilities held at fair value value hierarchy Fair 25) (note Level 3 portfolio liabilities held at fair value – value of financial assets and Fair 26) cost (note at amortised liabilities measured value of financial assets and Fair 5) expense (note and income and commission Fee Financial review Financial risk Financial services scheme (FSCS) compensation 30) (note looking statements Forward 7) (note derivatives and hedge accounting Gains from Glossary Highlights, 2017 10) (note customers to on loans and advances Impairment provisions statements Income 28) Intangible assets (note 4) (note expense and similar charges Interest 163 3) (note and similar income receivable Interest 15) (note Investments in equity shares 36) undertakings (note Investments in Group report Committee and Resilience IT Strategy 2) (note estimates policies and critical accounting in applying accounting Judgements 31) Capital and (note commitments, Leasing risk Lending Liquidity and funding risk 16) (note customers to and advances Loans risk Market report Committee Nomination and Governance the accounts to Notes 39) (note the cash flow statements to Notes Offsetting financial assets and financial liabilities (note 27) 12) segments (note Operating Earnings risk Index

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Strategic Report Governance Business and Risk Report Financial Statements Other Information 10 27 82 28 82 86 66 211 118 147 132 133 126 170 129 183 185 149 195 184 164 104 196 203 209 206 206

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Other deposits (note 19) Other deposits (note Other 35) equity instruments (note 6) (note income Other operating risk Pension Principal risks 29) (note plant and equipment Property, 30) (note liabilities and charges for Provisions 41) office (note Registered 38) (note party transactions Related on of the directors Report Remuneration, and lending risk mortgages Residential 199 33) benefit obligations (note Retirement Risk management Risk overview Social investment Solvency risk income of comprehensive Statements and equity of movements in members’ interests Statements Statutory percentages review Strategic risk Strategic 37) entities (note Structured 22) liabilities (note Subordinated 23) capital (note Subscribed 11) (note Taxation risks and emerging Top risk assets and treasury credit Treasury Operational risk Operational Index

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Nationwide Building Society Head Office: Nationwide House, Pipers Way, Swindon, SN38 1NW nationwide.co.uk

G101 (A) 2017