Nationwide Building Society Annual Report and Accounts 2010 Our members’ needs set our agenda 2010 Annual Report and Accounts Our members are at the heart of everything we do In unprecedented economic conditions, our difference has been our strength. That difference is our absolute commitment and responsibility to the people who own us – our members. • We exist to put their needs first and • We exist to recognise the potential with no shareholders to answer to, in our employees and to provide an that’s the biggest difference of all. environment in which they can flourish. • We exist to offer our members the • We exist in harmony with the products they need and which provide environment and remain committed to excellent long term value. minimising the impact we have on it. • We exist to provide an exceptional level • We exist to enhance the communities of service through all of our channels. we share with our members. In short, our business is all about relationships, with our members, with our employees and with the communities in which we all live. Our aim is to make those relationships as fulfilling and as rewarding as possible, for everybody. Nationwide. Proud to be different. Becky and Annie, Fran and Pete, Gavin, Vicki and Lawrie, Melksham Isle of Wight Birmingham Bristol Front cover: Jenni, Hungerford branch 2010 Annual Report and Accounts Contents Financial Highlights 02 Chairman’s Statement 04 Chief Executive’s Review 06 Business Review 10 Corporate Responsibility 37 The Nationwide Foundation 47 Board of Directors 48 Directors’ Report 50 Report of the Directors on Corporate Governance 54 Report of the Directors on Remuneration 59 Independent Auditors’ Report 68 Income Statements 69 Statements of Comprehensive Income 70 Balance Sheets 71 Statements of Movements in Members’ Interests 72 Cash Flow Statements 74 Notes to the Accounts 75 Annual Business Statement 155 Glossary 161 Nationwide Building Society 1 2010 Annual Report and Accounts Financial Highlights Reported profit Underlying profit before tax before tax £341 £212 million million Core Tier 1 ratio 12.2% Results 2006-2010 2006 2007 2008 2009 2010 Underlying Underlying Underlying Underlying Underlying (adjusted) Profit before tax £m 539 669 781 393 212 Total income £m 1,636 1,923 2,212 2,117 2,095 Cost income ratio % 60.6 56.6 55.7 60.0 61.3 Total assets £m 120,586 137,379 179,027 202,353 191,397 Loans and advances to customers £m 101,348 115,938 142,804 155,469 152,429 Member savings balances £m 80,919 86,795 113,816 128,292 120,943 Total regulatory capital £m 6,984 7,961 9,474 9,690 9,734 Underlying results Underlying profit before tax equates to These results have been prepared in line reported profit before tax adjusted for with International Financial Reporting the impact of movements in the value Standards accounting policies (‘IFRS’). of derivatives and hedge accounting of Where appropriate, certain aspects of the £34 million, a £117 million credit relating to a results are presented to reflect management’s change in the basis of recognition of Financial view of the underlying results in order to Services Compensation Scheme (FSCS) levies, provide a clearer representation of the transformation costs of £62 million and a gain performance of the group. of £40 million on the acquisition of the former Dunfermline Building Society social housing portfolio, further information on which is provided in note 48. The comparative year additionally includes an adjustment for gains on business combinations (please refer to note 49). 2 Nationwide Building Society 2010 Annual Report and Accounts Profit before tax 06 Underlying 539 (£million) 07 Underlying 669 08 Underlying 781 09 Underlying (adjusted) 393 10 Underlying 212 Total income 06 Underlying 1,636 (£million) 07 Underlying 1,923 08 Underlying 2,212 09 Underlying (adjusted) 2,117 10 Underlying 2,095 Cost income ratio 06 Underlying 60.6 (%) 07 Underlying 56.6 08 Underlying 55.7 09 Underlying (adjusted) 60.0 10 Underlying 61.3 Total assets 06 120,586 (£million) 07 137,379 08 179,027 09 (adjusted) 202,353 10 191,397 Loans and advances to 06 101,348 customers (£million) 07 115,938 08 142,804 09 (adjusted) 155,469 10 152,429 Member savings balances 06 80,919 (£million) 07 86,795 08 113,816 09 (adjusted) 128,292 10 120,943 Total regulatory capital 06 6,984 (£million) 07 7,961 08 9,474 09 (adjusted) 9,690 10 9,734 Nationwide Building Society 3 2010 Annual Report and Accounts Chairman’s Statement Resilience our members can rely on For the second year running, our industry has faced a challenging trading environment. The UK economy only started to turn the corner in the last quarter of 2009 and the recovery still looks fragile. Housing market transactions have remained subdued and the Bank of England base rate has been frozen at 0.5%. Both our core mortgage and savings markets have contracted and transaction volumes have remained low. Our resilience in the face of these challenges Delivering for our members Members attach great importance to the quality can be seen in the strength of the financial With a solid financial performance of the service we provide so we are proud that performance we have delivered for our underpinning security for our members, we our overall service ranks alongside the best members. We have continued to conduct our have sought to expand our range of products in the industry. According to independent business in a responsible manner and have designed to provide real long term value. research, we have the highest levels of maintained both a high level of liquidity and satisfaction amongst the big Current Account strong capital ratios. We have recorded an In a suppressed mortgage market, members Providers*. Across all accounts, complaints from underlying operating profit of £212 million on our Base Mortgage Rate have continued to members fell by 24% over the past year and we compared with £393 million in 2009, and benefit from low interest charges. Additionally were awarded ‘Overall Most Trusted Financial have broadly maintained our underlying new homebuyers, so long as they have had Services Company’ by Moneywise. their main current account with us, have trading surplus, measured before impairment *Source: GfK NOP Financial Research Survey, provisions, of £811 million compared with benefited from some highly competitive 90% top two box current account satisfaction, 12 months £846 million in 2009. loan to value deals. We have also published ending March 2010. our Homeowner’s Charter, to spell out the Challenges to the building society sector help we provide to members who run into Listening to our members Whilst our financial performance is testament to financial difficulty. The last financial year saw us hold Member the resilience of Nationwide in the face of tough TalkBacks across the country, with events economic conditions, we face other challenges. The savings market has been distorted by in Belfast, Cardiff, Sheffield and London. the difficulties some institutions have faced These events give Nationwide members Clearly, there is immense public and political in raising money in the wholesale markets. the opportunity to raise concerns and ask pressure on regulators to be seen to act In response, we have developed a number questions and Nationwide directors the decisively to prevent a repeat of the recent of innovative products designed to provide chance to answer those questions. financial crisis. We support the objective of a our members with long term good value. more secure and stable framework for banking An example of this is our ‘Champion Saver’, Of course, such events can only be attended regulation. However, the framework they a branch based savings account which by a relatively small number of people when introduce to mitigate the danger of excessive automatically tracks the average of the compared to the Society’s total membership, institutional risk-taking must not inadvertently best rates of equivalent savings products so we also hold online Member TalkBacks and damage consumer interests by undermining and provides an additional bonus on top. have developed the Members’ Zone website the competitive position of the mutual sector. This innovative savings product has been to give members from across the country the Increased capital requirements, enhancement particularly successful in attracting new opportunity to share views and catch up on the and harmonisation of investor compensation savers and retaining existing members. Society’s latest news. schemes across Europe, and the potential As members’ views are vital, we record and introduction of a bank levy are all emerging On the investment and insurance front, our act on comments and suggestions and also proposals that may have a role to play in partnerships with Legal & General and Liverpool arrange for an external accredited research future regulatory regimes. It is vital that they Victoria have continued to enable us to offer our company to ring customers every month to are developed with the interests and legal customers choice and value. Protected Equity gather feedback on their experiences for the framework of the mutual sector in mind to Bonds have been particularly popular with Society’s Customer Experience Tracker. Over avoid the unintended consequences that may customers looking to take a cautious first step the past year they have spoken to around arise from a ‘one size fits all’ approach. beyond the world of savings accounts. 4,000 customers each month and will speak to even more in the current year. 4 Nationwide Building Society 2010 Annual Report and Accounts “” We have continued to conduct our business in a responsible manner and have maintained both a high level of liquidity and strong capital ratios.