Introduction

Unless otherwise stated, the income statement analysis compares the period from 5 April 2024 to 30 September 2024 to the corresponding six months of 2023 and balance sheet analysis compares the position at 30 September 2024 to the position at 4 April 2024.

Underlying profit

Profit before tax shown on a statutory and underlying basis is set out on page 9. The purpose of the underlying profit measure is to reflect management's view of the Group's underlying performance and to assist with like-for-like comparisons of performance across periods. Underlying profit is not designed to measure sustainable levels of profitability as that potentially requires exclusion of non-recurring items even though they are closely related to (or even a direct consequence of) the Group's core business activities.

Forward-looking statements

Certain statements in this document are forward-looking with respect to plans, goals and expectations relating to the future financial position, business performance and results of the Group. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, the Group can give no assurance that these expectations will prove to be an accurate reflection of actual results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of the Group including, amongst other things, UK domestic and global economic and business conditions, market-related risks such as fluctuation in interest rates and exchange rates, inflation/deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations involving the Society and/or within relevant industries, risks relating to sustainability and climate change, the policies and actions of regulatory authorities and the impact of tax or other legislation and other regulations in the jurisdictions in which the Group operates. The economic outlook remains uncertain and, as a result, the Group's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements. Due to such risks and uncertainties, the Group cautions readers not to place undue reliance on such forward-looking statements.

The Group undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

This document is not intended to, and does not constitute, represent or form part of any offer invitation or solicitation of any offer to purchase, otherwise acquire, subscribe for, sell or otherwise dispose of, any securities or the solicitation of any vote or approval in any jurisdiction. No securities are being offered to the public by means of this document. Securities may not be offered or sold in the United States absent registration or an exemption from registration. Any public offering to be made in the United States will be made by means of a prospectus that may be obtained from the Group and will contain detailed information about the Group and its management, as well as its financial statements.

Chief Executive's review

Record growth and value to members

Debbie Crosbie, Chief Executive, Nationwide Building Society, said:

"Nationwide delivered record first half growth in both mortgages and deposits, and record member value. Over the past 18 months, our mutual model has enabled us to provide over £3.5 billion in member value, including £729 million through the Nationwide Fairer Share Payment.

"Following our acquisition of Virgin Money on 1 October, we've recorded a gain of £2.3bn, as the value of net assets acquired is well above the price we paid. This gain provides significant headroom to cover our investment in integration, as well as in service and value. 

"Future profits generated by Virgin Money can now be used for the benefit of customers, rather than being paid to external shareholders."

Business and trading highlights for the period ended 30 September 2024

Record first half year growth in mortgages and deposits

·    Mortgage balances of £210.8bn (4 April 2024: £204.5bn), with record half year net lending of £6.3bn (H1 2023/24: £0.5bn). Market share of balances increased to 12.6% (4 April 2024: 12.3%).

·    Member deposit balances increased by £8.3bn (H1 2023/24: £4.2bn) to £201.7bn (4 April 2024: £193.4bn). This was a record increase for a first half year. Deposit market share was 9.6% (4 April 2024: 9.5%).

·    Continued growth in current account volumes, and a market share of 9.7%¹(February 2024: 9.7%).

Leading customer service, giving customers a choice in how they bank with us

·    First for customer satisfaction among our peer group for over 12 years, with a lead of 6.8%pts² (March 2024: lead of 5.5%pts).

·    We continue to have the largest single-brand branch network in the UK, supported by our Branch Promise - everywhere we have a branch, we promise to still be there until at least the start of 2028.

·    More than 35% of our new current accounts were opened in branches this half year.

Mutual model delivers record value to our members

·    Member financial benefit increased to £950m (H1 2023/24: £885m), from pricing and incentives that were better than the market average.

·    Distributed £385m through our Nationwide Fairer Share Payments to 3.85m eligible members in June 2024.

·    On average, interest rates on deposits were 30% higher than the market average, largely driven by our savings rates.

¹CACI's Current Account and Savings Database, Stock (August 2024).

²Lead at September 2024: 6.8%pts, March 2024: 5.5%pts. © Ipsos 2024, Financial Research Survey (FRS), for the 12 months ending 31 March 2013 to 12 months ending 30 September 2024. Results based on a sample of around 47,000 adults (aged 16+). The survey contacts around 51,000 adults (aged 16+) a year in total across Great Britain. Interviews were face to face, over the phone and online, taking into account (and weighted to) the overall profile of the adult population. The results reflect the percentage of extremely satisfied and very satisfied customers minus the percentage of customers who were extremely or very or fairly dissatisfied across those customers with a main current account, mortgage or savings. Those in our peer group are Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB. Prior to April 2017, those in our peer group were Barclays, Halifax, HSBC, Lloyds Bank (Lloyds TSB prior to April 2015), NatWest and Santander.

Robust financial performance and balance sheet strength

·    Underlying profit before tax decreased to £959m (H1 2023/24: £1,262m) and statutory profit before tax was £568m (H1 2023/24: £989m), primarily due to the profile of interest rates over the period and our choice to offer competitive rates. 

·    Total underlying income of £2,129m (H1 2023/24: £2,449m). Net interest margin of 1.50% (H1 2023/24: 1.66%), higher than H2 2023/24 net interest margin of 1.46%.

·    Credit impairment charges of £7m (H1 2023/24: £54m), reflecting the resilience of our lending.

·    Underlying costs of £1,154m (H1 2023/24: £1,115m).

·    CET1 ratio of 28.4% (4 April 2024: 27.1%) and leverage ratio of 6.7% (4 April 2024: 6.5%).

Making a meaningful impact across society

·    Helped 53,000 (H1 2023/24: 31,000) first time buyers into a home of their own.

·    Continued to commit 1% of pre-tax profits to good causes each year³, which for 2024/25 includes committing £9m to our three new charity partners, Centrepoint, Action for Children and Dementia UK, under our new Fairer Futures social impact strategy.

Acquisition of Virgin Money UK plc on 1 October 2024

Gain on acquisition of £2.3bn, resulting from a net asset value well in excess of the £2.8bn acquisition price.

·    Peer-leading combined group CET1 ratio of 19.6% and combined group leverage ratio of 5.4% at 1 October 2024, both comfortably above regulatory minimums.

·    A unique opportunity, underpinned by an exceptionally strong business case.

Positioning us to become the UK's first full-service mutual banking provider.

·    Acquisition broadens our product range to include business banking, which we intend to offer to more customers over time.

·    This will diversify our funding and strengthen us financially, enabling us to deliver even greater value for our customers, including through our Branch Promise, focus on customer service, and competitive deposit and lending rates.

Delivering scale and connecting us with one in three people in the UK.

·    Now the UK's second largest provider of mortgages⁴ and retail deposits, with total assets of over £370 billion.

·    Combined, we have £1 in every £6 of mortgage balances and hold £1 in every £8 of retail deposits in the UK.

·    Now have an extensive network of 696 branches across the UK.

A long-term, measured and fully funded approach to integration.

·    Acquired a profitable business so can take a longer-term approach to managing the Virgin Money business, with gradual integration following an initial 18-month strategic review.

·    Gain on acquisition expected to provide significant headroom to cover costs associated with integration, investment in customer service and delivery of value under our mutual model.

·    Future profits generated by Virgin Money will be fully retained within the Group, and available for investing in improving services and value for our customers, rather than being paid to shareholders.

The results for the period ended 30 September 2024 do not include the impacts of the Virgin Money acquisition. Further information is included in note 17 to the condensed consolidated interim financial statements, on page 89.

³The 1% is calculated based on average pre-tax profits over the previous three years.

⁴UK Finance 2023 balance database published on 31 July 2024 (latest available data).

Strategy update

More rewarding relationships: We will create deeper, lifelong relationships with our customers, that provide the best value in banking.

We delivered £950 million of member financial benefit, from pricing and incentives that were better than the market average, largely driven by our savings rates. In addition, we distributed £385 million through the Nationwide Fairer Share Payment in June 2024. Over the half year, we supported a record 39,000 (H1 2023/24: 14,700) students with our competitive FlexStudent current account, more than double that of the previous period. We continue to focus on supporting first time buyers, and in September 2024, we extended our Helping Hand mortgage to enable them to borrow six times their income, up to 33% more than through standard mortgages. We also increased the maximum loan to value available for purchasing a new-build house, from 85% to 90%.

Simply brilliant service: We will provide value beyond rates, with distinctive, personalised service our customers can trust, at every touchpoint.

We have the largest single-brand branch network in the UK, supported by our Branch Promise⁵. More than 35% of our new current accounts were opened in branches this half year, demonstrating the value of our branch network to customers. Our branches provide customers with choice in the way they can interact with us, alongside our digital channels, telephones, 24/7 online chat and dedicated cost-of-living helpline. We added further functionality to our new banking app, that launched in March 2024.

Beacon for mutual good: We want to have a meaningful impact on our customers, colleagues, communities and society, by driving fairer banking practices and positive change.

We launched our new Fairer Futures social impact strategy, helping to tackle three of the biggest issues we see in society today - youth homelessness, families living in poverty and people living with dementia. We are headline partner to three key charities: Centrepoint, Action for Children, and Dementia UK, who will help us make a meaningful difference across these important causes. As part of this, we are rolling out dementia clinics in 200 of our branches.

Continuous improvement: We will be focused, fit and fast, and simplify our processes and ways of working to deliver for the benefit of our customers, while retaining resilient controls that protect our customers and their money.

We continue to drive greater efficiency across our operations and improve our customer experiences. We are enabling faster mortgage offers for customers through our new automated income verification and valuation tools, and we continue to streamline our mortgage advice service, reducing interview times for customers whilst still ensuring appropriate products and good outcomes.

Looking forward

The economic outlook remains uncertain, and the interest rate outlook means we expect to have passed peak profitability. However, lower interest rates and resilience in real earnings are supporting consumer finances which, if maintained, should support a strengthening in housing market activity and overall deposit growth. The credit quality of our lending portfolios remains strong, and our capital resources are robust.

Following the acquisition of Virgin Money, we will use our ongoing financial strength to deliver even greater value to Nationwide and Virgin Money customers, through competitive rates, focus on customer service, and our unique Branch Promise.

Debbie Crosbie

Chief Executive

⁵ All our 605 Nationwide branches will remain open until at least 1 January 2028. There may be exceptional circumstances outside of our control that mean we have to close a branch. But we will only do this if we do not have another workable option. We have now extended our Branch Promise to include Virgin Money's 91 branches, following the acquisition on 1 October 2024.

Performance summary

Notes:

i.  Underlying profit before tax represents management's view of underlying performance. A reconciliation of statutory to underlying profit before tax is included in the Financial review on page 9. The following items are adjusted from statutory profit before tax to arrive at underlying profit before tax:

·     Member reward payments;

·     Gains or losses from derivatives and hedge accounting; and

·     Costs directly associated with the acquisition of Virgin Money.

ii. Member deposits include current account credit balances.

iii.  The underlying cost income ratio represents management's view of underlying performance. Further information is included in the Financial review on page 8.

iv.  Mortgage balances are presented gross of credit provisions.

v. The Liquidity Coverage Ratio represents a simple average of the ratios for the last 12 month ends.

vi.  The wholesale funding ratio includes all balance sheet sources of funding (including securitisations).

Financial review

Muir Mathieson, Chief Financial Officer, Nationwide Building Society, said:

"We continue to deliver a robust financial performance. Underlying profit has decreased by 24.0% to £959 million, primarily due to the profile of interest rates over the period and our choice to offer competitive rates. We have delivered record levels of financial value back to our members, a combined £1,335 million, comprising £950 million of member financial benefit through better pricing and incentives than the market average and a Nationwide Fairer Share payment of £385 million to eligible members.

"Our competitive pricing and market leading service have supported robust growth in our deposit and mortgage balances.

"On 1 October we successfully completed the acquisition of Virgin Money. We believe that the combined Group will enhance Nationwide's profit resilience and will allow for more customers to benefit from a broadened range of products and services. Following the acquisition of Virgin Money on 1 October, our combined Group CET1 ratio was 19.6% and our combined Group leverage ratio was 5.4%."

Financial highlights

The results are prepared in accordance with International Financial Reporting Standards (IFRSs). Results presented on an underlying basis represent management's view of underlying performance. A reconciliation of underlying results to the statutory results, along with associated ratios, is shown below.

Income statement

Note:

i.  Adjustments are made to exclude the following items from underlying profit before tax as management does not consider them to be representative of underlying business performance:

·     Gains or losses from derivatives and hedge accounting, which are presented within net other income;

·     Transaction-related costs arising from the acquisition of Virgin Money UK plc, which are presented within administrative expenses; and

·     Member reward payments, representing discretionary payments to eligible members of the Society which may be determined by the Board from time to time, depending on the financial strength of the Society.

Member financial benefit

As a building society, we seek to maintain Nationwide's financial strength whilst providing value to our members through pricing, products and service. Through member financial benefit, we measure the additional financial value for members from the competitive mortgage, savings and banking products that we offer compared to the market average. Member financial benefit is calculated by comparing, in aggregate, Nationwide's average interest rates and incentives to the market, predominantly using market data provided by the Bank of England and CACI, alongside internal calculations. The value for individual members will depend on their circumstances and product choices. More information on how we calculate member financial benefit can be found in our Annual Report and Accounts 2024.

For the half year ended 30 September 2024, we delivered member financial benefit of £950 million (H1 2023/24: £885 million). The increase is due to our strong savings rates and mortgage products which seek to provide good value to members.

Member reward payments

The Board approved a Nationwide Fairer Share payment in May 2024 as part of our ongoing commitment to reward our members. During the period, a Nationwide Fairer Share payment of £385 million (H1 2023/24: £344 million) was paid to eligible members who had a qualifying current account plus either qualifying savings or a qualifying mortgage as at 31 March 2024. This payment is in addition to delivering the £950 million of member financial benefit outlined above.

Administrative expenses

Underlying administrative expenses have increased by £39 million to £1,154 million (H1 2023/24: £1,115 million), with inflationary increases partially mitigated by efficiencies within strategic investment programmes and cost reductions as a result of the disposal of the Society's investment advice business in February 2024.

An additional £26 million of administrative expenses have been recognised in H1 2024/25 (H1 2023/24: £nil) which directly relate to the acquisition of Virgin Money. These costs are excluded from underlying profit.

Impairment charge on loans and advances to customers

Note:

i.  Impairment charge/(release) represents the net amount recognised in the income statement, rather than amounts written off during the period.

The net impairment charge for the period has reduced to £7 million (H1 2023/24: £54 million). In the period, balance sheet provisions have decreased due to reductions in the provisions held for economic uncertainty and associated affordability risks. Residential mortgage arrears have remained broadly stable and remain well below the industry average, with consumer banking arrears reducing slightly. More information regarding critical accounting judgements, and the forward-looking economic information used in impairment calculations, are included in note 8 to the condensed consolidated interim financial statements.

Provisions for liabilities and charges

Provisions are held to cover the costs of remediation and redress in relation to historical quality control procedures, past sales and administration of customer accounts, and other legal and regulatory matters. The charge of £9 million (H1 2023/24: £18 million) reflects updates to estimates of the amounts that will be paid in relation to these matters.

Taxation

The main UK rate of corporation tax remained at 25% (4 April 2024: 25%) and the banking surcharge remained at 3% (4 April 2024: 3%). The tax charge for the period of £147 million (H1 2023/24: £267 million) represents an effective tax rate of 25.9% (H1 2023/24: 27.0%) and includes the banking surcharge of £11 million (H1 2023/24: £24 million), which arises on Society profits. The effective tax rate is higher than the statutory UK corporation tax rate primarily due to the banking surcharge. Further information is provided in note 9 to the condensed consolidated interim financial statements.

Balance sheet

Assets

Total assets have increased by 3.8% to £282.4 billion at 30 September 2024 (4 April 2024: £271.9 billion). This increase is predominantly due to higher residential mortgage balances.

Notes:

i.  Residential mortgages include owner-occupied, buy to let and legacy lending.

ii. This represents a simple average of the Liquidity Coverage Ratio (LCR) for the last 12 month ends. The LCR ensures that sufficient high-quality liquid assets are held to survive a short-term severe but plausible liquidity stress.

Cash

Cash is held by our Treasury function for liquidity purposes, with the £5.0 billion increase to £28.8 billion (4 April 2024: £23.8 billion) predominantly due to increases in retail savings balances.

The average Liquidity Coverage Ratio over the 12 months ended 30 September 2024 decreased to 186% (12 months ended 4 April 2024: 191%), reflecting lower average liquid asset balances due to repayments of the Bank of England's Term Funding Scheme with additional incentives for SME's (TFSME). Liquidity continues to be managed against internal risk appetite, which is more prudent than regulatory requirements and, under the most severe internal 30 calendar day stress test, the average liquid asset buffer remains robust. Further details are included in the Liquidity and funding risk section of the Risk report.

Residential mortgages

Total gross mortgage lending was higher than in the prior period at £17.6 billion (H1 2023/24: £12.1 billion) and our market share of gross advances increased to 14.1% (H1 2023/24: 10.5%). Net lending in the period was £6.3 billion (H1 2023/24: £0.5 billion), increasing our market share of balances to 12.6%. Net lending has been supported by our continued focus on retention through highly competitive products provided to existing customers. Owner-occupied mortgage balances increased to £166.2 billion (4 April 2024: £161.0 billion) and buy to let and legacy mortgage balances increased slightly to £44.7 billion (4 April 2024: £43.5 billion).

Arrears have remained broadly stable, with cases more than three months in arrears representing 0.42% (4 April 2024: 0.41%) of the total portfolio. The level of arrears remains well below the industry average of 0.93% (4 April 2024: 0.94%). Impairment provision balances have decreased to £317 million (4 April 2024: £321 million).

Consumer banking

Consumer banking balances were £4.3 billion (4 April 2024: £4.3 billion). Consumer banking comprises personal loan balances of £2.4 billion (4 April 2024: £2.4 billion), credit card balances of £1.6 billion (4 April 2024: £1.6 billion) and overdrawn current account balances of £0.3 billion (4 April 2024: £0.3 billion).

Arrears have reduced slightly during the period, with balances more than three months in arrears (excluding charged off accounts) representing 1.24% (4 April 2024: 1.36%) of the total portfolio. Provision balances reduced to £409 million (4 April 2024: £436 million), primarily due to a reduction in the adjustments held for economic uncertainty.

Commercial lending

During the period, commercial lending balances remained broadly stable at £5.7 billion (4 April 2024: £5.5 billion). The overall portfolio includes registered social landlords with balances of £4.7 billion (4 April 2024: £4.4 billion), project finance with balances of £0.5 billion (4 April 2024: £0.5 billion), commercial real estate balances of £0.2 billion (4 April 2024: £0.3 billion) and a fair value adjustment for micro hedged risk of £0.3 billion (4 April 2024: £0.3 billion). Both project finance and commercial real estate books are closed to new lending.

Impairment provision balances remained stable at £24 million (4 April 2024: £24 million).

Other financial assets

Other financial assets of £30.8 billion (4 April 2024: £32.0 billion) comprise investment assets held by Nationwide's Treasury function amounting to £25.5 billion (4 April 2024: £26.5 billion), loans and advances to banks and similar institutions of £1.8 billion (4 April 2024: £2.5 billion), derivatives with positive fair values of £5.3 billion (4 April 2024: £6.3 billion) and negative fair value adjustments for portfolio hedged risk of £(1.8) billion (4 April 2024: £(3.3) billion). Derivatives largely comprise interest rate and foreign exchange contracts which economically hedge financial risks inherent in Nationwide's lending and funding activities.

Members' interests, equity and liabilities

Member deposits

Member deposit balances grew by £8.3 billion to £201.7 billion (4 April 2024: £193.4 billion). The increase in deposit balances is due to growth in savings balances of £6.4 billion (H1 2023/24: £5.1 billion) supported by competitive fixed rate products, including the Member Exclusive Bond, and increased levels of accrued and capitalised interest due to higher average savings rates. Credit balances on current accounts increased by £2.0 billion (H1 2023/24: £0.9 billion reduction). Nationwide's market share of deposit balances increased to 9.6%.

Debt securities in issue and other financial liabilities

Debt securities in issue relate to wholesale funding but exclude subordinated debt which is included within other financial liabilities. Balances increased to £34.3 billion (4 April 2024: £29.6 billion), reflecting secured and unsecured wholesale funding issuances during the period. Other financial liabilities decreased to £26.5 billion (4 April 2024: £29.8 billion) primarily due to repayment of £4.0 billion of drawings from the Bank of England's Term Funding Scheme with additional incentives for SMEs (TFSME). Nationwide's wholesale funding ratio decreased to 22.0% (2024: 22.5%). Further details are included in the Liquidity and funding risk section of the Risk report.

Members' interests and equity

Members' interests and equity have increased to £18.7 billion (4 April 2024: £17.7 billion) largely as a result of retained profits.

Statement of comprehensive income

Note:

i.  Movements are shown net of related taxation. Gross movements are set out in the condensed consolidated interim financial statements on page 64.

Capital structure

Nationwide's capital position remains strong, with both the Common Equity Tier 1 (CET1) ratio and leverage ratio comfortably above regulatory capital requirements of 12.8% and 4.3% respectively. The CET1 ratio increased to 28.4% (4 April 2024: 27.1%) and the leverage ratio increased to 6.7% (4 April 2024: 6.5%). The capital disclosures included in this report are in line with UK Capital Requirements Directive V (UK CRD V) with IFRS 9 transitional arrangements included. In addition, the disclosures are on a consolidated Nationwide Group basis, including all subsidiary entities but excluding the recent acquisition of Virgin Money, which occurred after the balance sheet date.

The CET1 ratio increased to 28.4% (4 April 2024: 27.1%) as a result of an increase in CET1 capital of £0.3 billion and a decrease in RWAs of £1.6 billion. The CET1 capital resources increase was driven by £0.4 billion profit after tax, partially offset by £0.1 billion of capital distributions. The RWA movement was predominantly driven by a £3.0 billion reduction in mortgage Internal Ratings Based (IRB) temporary model adjustments which were updated to align with Nationwide's latest version of the Hybrid IRB mortgage models. These models have now been approved by the Prudential Regulation Authority. The reduction was partially offset by an increase in RWAs driven by increased residential mortgage balances.

The leverage ratio increased to 6.7% (4 April 2024: 6.5%), with Tier 1 capital increasing by £1.0 billion as a result of the CET1 capital movements referenced above and an issuance of Additional Tier 1 (AT1) capital of £0.7 billion in the period. Partially offsetting the impact of this was an increase in leverage exposure of £6.1 billion, predominantly due to increased residential mortgage balances. Nationwide intends to redeem a £0.6 billion AT1 instrument in December 2024. Excluding the repaid AT1 instrument the leverage ratio would be 6.5%. Leverage requirements continue to be Nationwide's binding Tier 1 capital constraint, as the combination of minimum and regulatory buffer requirements are in excess of the risk-based equivalent.

As at 1 October 2024, following the acquisition of Virgin Money, the combined group CET1 ratio was 19.6% and the combined group leverage ratio was 5.4%. This reflects the larger combined balance sheet and the impact of a gain on acquisition of £2.3 billion resulting from the difference between the fair value of the net assets acquired and the purchase consideration of £2.8 billion. Excluding the £0.6 billion AT1 instrument being repaid in December, the combined group leverage ratio would be 5.2%.

Further details of the capital position and future regulatory developments are described in the Capital risk section of the Risk report.

Risk report

Contents

Introduction

This report provides information on developments during the period in relation to the risks Nationwide's business is exposed to, and how those risks are managed. This information supports, and should be read in conjunction with, the material found in the Risk report in the Annual Report and Accounts 2024. Where there has been no change to the approach to managing risks, or there has been no material change to the relevant risk environment from that disclosed at year end, this information has not been repeated.

Nationwide acquired Virgin Money UK plc on 1 October 2024, following regulatory approval. Whilst risks associated with the acquisition and integration have been identified and evaluated as part of our initial assessment, these do not materially alter the overall risk profile set out in the Annual Report and Accounts 2024. Work is underway to enhance existing risk management methodologies to ensure the robust management of risks associated with integration. As both organisations are UK regulated entities with a UK-focused customer base, it is anticipated that there will be close alignment between the risk management structures of the two organisations.

Emerging risks

Emerging risks are managed through the process outlined in the Risk overview section of the Annual Report and Accounts 2024 and remain broadly unchanged from those reported there. The external environment continues to present the most significant threats to the delivery of the Group's strategy. Key developments in the macroeconomic and geopolitical environment since 4 April 2024 are described below:

·    Macroeconomic conditions are stable. Recent OECD forecasts for the UK economy show a more positive outlook and the new government has signaled several measures to boost growth in the domestic economy. Bank rate has started to reduce, although persistent core inflation has meant only a modest decrease to date. The higher rates customers are now paying on their mortgages may exacerbate existing pressure on their finances, impacting both the housing market and mortgage trading volumes. Whilst affordability pressures remain, and some customers continue to experience higher interest rates as they renew their mortgages, these factors are adequately reflected in the assumptions used in our provisioning calculations.

·    Geopolitical tensions remain, with ongoing conflict in Europe and the Middle East. Any escalations in these conflicts, combined with shifts in domestic public policy, or changes to international governments' priorities and foreign relations, have the potential to put pressure on global supply chains and disrupt markets, further impacting our customers' finances through renewed inflationary pressures and challenging economic conditions more generally.

The following internal and external risks, which were highlighted in the Annual Report and Accounts 2024, have not materially changed since 4 April 2024:

·    Climate change

·    Cyber

·    Emergent technologies

·    Technology and resilience

Principal risks and uncertainties

Nationwide operates an Enterprise Risk Management Framework (ERMF), which ensures it remains safe and secure for its customers. The principal risks set out below are the key risks relevant to Nationwide's business model and achievement of its strategic objectives.

The principal risk categories and their definitions remain unchanged from those set out in the Annual Report and Accounts 2024 and are as follows:

·    Credit risk

·    Liquidity and funding risk

·    Capital risk

·    Market risk

·    Pension risk

·    Business risk

·    Operational and conduct risk

·    Model risk

Information on key developments in relation to the principal risks above are included within this report, except for pension, business, operational and conduct and model risk, where there have been no significant developments in the period.

Credit risk - Overview

Credit risk is the risk of loss as a result of a customer or counterparty failing to meet their financial obligations. Credit risk encompasses:

·    borrower/counterparty risk - the risk of loss arising from a borrower or counterparty failing to pay, or becoming increasingly likely not to pay the interest or principal on a loan, or on a financial product, or for a service, on time;

·    security/collateral risk - the risk of loss arising from deteriorating security/collateral quality;

·    concentration risk - the risk of loss arising from insufficient diversification of region, sector, counterparties or other significant factor; and

·    refinance risk - the risk of loss arising when a repayment of a loan or other financial product occurs later than originally anticipated.

Nationwide manages credit risk for the following portfolios:

Further detail regarding the scope of Nationwide's credit risks and how they are managed, together with information on the calculation of impairment provisions based on expected credit losses (ECLs), is included within the Annual Report and Accounts 2024.

Developments in the period

During the period to 30 September 2024, the UK has seen Bank rate reduce by 25 basis points but remain elevated, whilst the rate of inflation has reduced towards the Bank of England's 2% target. The cost of borrowing has reduced, which has slightly eased affordability pressures and prompted a recovery in the housing market, with 3.2% annual house price growth to September 2024. Average house prices are now around 2% below the all-time high recorded in summer 2022.

Residential mortgage arrears have remained broadly stable and remain well below the industry average. Consumer banking arrears have reduced slightly and remain at historically low levels.

Provisions have decreased to £750 million (4 April 2024: £781 million) and include a modelled adjustment for economic uncertainty totalling £105 million (4 April 2024: £145 million). This modelled adjustment captures the affordability risks caused by recent inflation and elevated mortgage interest rates, combined with adjustments to model inputs relating to improvements in borrower credit quality which are expected to reverse.

Outlook

The Group expects modest growth in the UK economy, with inflation close to its target level in the years ahead. House prices are expected to continue to grow steadily, whilst Bank rate is forecast to be reduced gradually over the next 18 months, with a 25-basis points reduction already made in November 2024. The outlook remains uncertain, given ongoing heightened geopolitical tensions and the emerging policies of the new UK Government. To date, borrowers have remained resilient to affordability pressures, and whilst arrears are expected to rise from their current levels, they are expected to remain relatively low in the long run.

Nationwide remains vigilant to the uncertainties within the geopolitical and economic landscape, assessing its impact on borrowers and the credit risks affecting our lending portfolios to ensure appropriate actions are taken to support our customers.

Credit risk - Overview (continued)

Maximum exposure to credit risk

Nationwide's maximum exposure to credit risk at 30 September 2024 was £295 billion (4 April 2024: £283 billion).

Credit risk largely arises from loans and advances to customers, which account for 80% (4 April 2024: 80%) of Nationwide's total credit risk exposure. Within this, the exposure relates primarily to residential mortgages, which account for 95% (4 April 2024: 95%) of total loans and advances to customers. Nationwide's residential mortgage portfolios comprise high-quality assets with low levels of credit losses.

In addition to loans and advances to customers, Nationwide is exposed to credit risk on all other financial assets. For all financial assets recognised on the balance sheet, the maximum exposure to credit risk represents the balance sheet carrying value after allowance for impairment, plus off-balance sheet commitments. For off-balance sheet commitments, the maximum exposure is the maximum amount that Nationwide would have to pay if the commitments were to be called upon. For loan commitments and other credit-related commitments that are irrevocable over the life of the respective facilities, the maximum exposure is the full amount of the committed facilities.

Credit risk - Overview (continued)

Notes:

i.    In addition to the amounts shown above, Nationwide has revocable commitments of £10,467 million (4 April 2024: £10,394 million) in respect of credit card and overdraft facilities. These commitments represent agreements to lend in the future, subject to certain considerations. Such commitments are cancellable by Nationwide, subject to notice requirements, and given their nature are not expected to be drawn down to the full level of exposure.

ii.   The fair value adjustment for portfolio hedged risk and the fair value adjustment for micro hedged risk (which relates to the commercial lending portfolio) represent hedge accounting adjustments.

iii.  FVTPL residential mortgages include equity release and shared equity loans.

Commitments

Irrevocable undrawn commitments to lend are within the scope of provision requirements. The commitments in the table above consist of overpayment reserves and separately identifiable irrevocable commitments for the pipeline of residential mortgages, personal loans, commercial loans and investment securities. These commitments are not recognised on the balance sheet; the associated provision of £0.5 million (4 April 2024: £0.3 million) is included within provisions for liabilities and charges.

Revocable commitments relating to overdrafts and credit cards are included in the calculation of impairment provisions, with the allowance for future drawdowns included in the estimate of the exposure at default.

Credit risk - Residential mortgages

Summary

Nationwide's residential mortgages comprise owner-occupied, buy to let and legacy loans. Owner-occupied residential mortgages are mainly Nationwide-branded advances made through intermediary and direct channels. Since 2008, all new buy to let mortgages have been originated under The Mortgage Works (UK) plc (TMW) brand. Legacy mortgages are smaller owner-occupied portfolios in run-off.

Residential mortgage arrears have remained broadly stable, with the proportion of cases more than 3 months in arrears marginally increasing to 0.42% (4 April 2024: 0.41%). This remains well below the industry average of 0.93% (UKF).

Mortgage lending has been strong during the period, with residential mortgage balances increasing to £210.8 billion (4 April 2024: £204.5 billion).

Notes:

i.    Buy to let mortgages include £42,941 million (4 April 2024: £41,577 million) originated under the TMW brand, with other brands now closed to new originations.

ii.   Legacy includes self-certified, near prime and sub-prime owner-occupied lending, all of which were discontinued in 2009.

Credit risk - Residential mortgages (continued)

Balance sheet provisions have decreased to £317 million (4 April 2024: £321 million). This includes a modelled adjustment totalling £52 million (4 April 2024: £72 million) to reflect an increase to the PD to account for ongoing economic uncertainty, including the risks related to higher interest rates. Further information is included in note 8 to the condensed consolidated interim financial statements. The impairment release of £4 million (H1 2023/24: £27 million charge) is favourable to the prior year impairment charge, due to an increase in balance sheet provisions during H1 2023/24, which was driven by affordability risks recognised in relation to rising inflation and higher interest rates.

The following table shows residential mortgage lending balances carried at amortised cost, the stage allocation of the loans, impairment provisions and the resulting provision coverage ratios.

Credit risk - Residential mortgages (continued)

Notes:

i.    Days past due (DPD) is a measure of arrears status.

ii.   POCI loans are those which were credit impaired on purchase or acquisition. The POCI loans shown in the table above were recognised on the balance sheet when the Derbyshire Building Society was acquired in December 2008. These balances, which are mainly interest-only, were 90 days or more in arrears when they were acquired and so have been classified as credit impaired on acquisition. The gross balance for POCI is shown net of the lifetime ECL on transition to IFRS 9 of £4 million (4 April 2024: £5 million).

Total residential mortgage provisions have decreased to £317 million (4 April 2024: £321 million). A reduction in the adjustments held for economic uncertainty has been partially offset by the impact of a model refinement, which has increased the sensitivity of provisions to economic assumptions. 

Stage 2 balances have decreased to £33.9 billion (4 April 2024: £35.6 billion), which includes £9.0 billion (4 April 2024: £12.8 billion) of balances where the PD has been uplifted to recognise the increased risk of default in a period of economic uncertainty.

Credit performance continues to be strong. Stage 3 loans in the residential mortgage portfolio equate to 0.6% (4 April 2024: 0.6%) of the total residential mortgage exposure. Of the total £1,249 million (4 April 2024: £1,233 million) stage 3 loans, £844 million (4 April 2024: £800 million) is in respect of loans which are more than 90 days past due, with the remainder being impaired due to other indicators of unlikeliness to pay such as forbearance. For loans subject to forbearance, accounts are transferred from stage 3 to stages 1 or 2 only after being up to date and meeting contractual obligations for a period of 12 months; £146 million (4 April 2024: £164 million) of the stage 3 balances in forbearance are in this probation period.

Credit risk - Residential mortgages (continued)

The table below summarises the movements in, and stage allocations of, the Group's residential mortgages held at amortised cost, including the impact of ECL impairment provisions. The movements within the table compare the position at 30 September 2024 to that at the start of the reporting period.

Notes:

i.    Gross balances of credit impaired loans include £107 million (4 April 2024: £113 million) of POCI loans, which are presented net of lifetime ECL on transition to IFRS 9 of £4 million (4 April 2024: £5 million).

ii.   If a new asset is originated in the period, the values included are the closing gross balance and provision for the period. The stage in which the addition is shown reflects the stage of the account at the end of the period.

Further information on movements in total gross loans and advances to customers and impairment provisions, including the methodology applied in preparing the table, is included in note 10 to the condensed consolidated interim financial statements.

Credit risk - Residential mortgages (continued)

Note:

i.    Where loans satisfy more than one of the criteria for determining a significant increase in credit risk, the corresponding gross balance has been assigned in the order in which the categories are presented above.

Loans which are reported within stage 2 are those which have experienced a significant increase in credit risk since origination. The Annual Report and Accounts 2024 sets out the main criteria used to determine whether a significant increase in credit risk has occurred since origination. There have been no changes to the criteria during the period.

Credit risk - Residential mortgages (continued)

Credit quality

The residential mortgage portfolio comprises many small loans which are broadly homogenous, have low volatility of credit risk outcomes and are geographically diversified. The table below shows the loan balances and provisions for residential mortgages held at amortised cost, by PD range. The PD distributions shown are based on 12-month IFRS 9 PDs at the reporting date.

Note:

i.    Includes POCI loans of £107 million (4 April 2024: £113 million).

At 30 September 2024, 95% (4 April 2024: 94%) of the portfolio had a 12-month IFRS 9 PD of less than 2.5%, reflecting the high quality of the residential mortgage portfolio.

Credit risk - Residential mortgages (continued)

Distribution of new business by borrower type (by value)