2012 Group Available
for sale Loans and
receivables Fair value through the income statement
Liabilities at
amortised cost Total
£m £m £m £m £m
Financial assets
Cash - 8,126 - - 8,126
Loans and advances to banks - 2,914 - - 2,914
Investment securities 23,325 - - - 23,325
Derivative financial instruments - - 4,176 - 4,176
Fair value adjustment for portfolio hedged risk - 1,330 - - 1,330
Loans and advances to customers - 154,169 - - 154,169
Investments in equity shares 29 - - - 29
Total financial assets 23,354 166,539 4,176 - 194,069
Other non-financial assets 2,060
Total assets 196,129
Financial liabilities
Shares - - - 125,617 125,617
Deposits from banks - - - 3,370 3,370
Other deposits - - 2,890 4,009 6,899
Due to customers - - - 5,833 5,833
Fair value adjustment for portfolio hedged risk - - - 278 278
Debt securities in issue - - - 38,854 38,854
Derivative financial instruments - - 4,287 - 4,287
Subordinated liabilities - - - 1,644 1,644
Subscribed capital - - - 1,625 1,625
Total financial liabilities - - 7,177 181,230 188,407
Other non-financial liabilities 1,563
Total liabilities 189,970
34 Classification and measurement (continued)
Fair values of financial assets and liabilities
The following table summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the balance sheets at fair value:
2013 Group Society
Carrying value Fair value Carrying value Fair value
£m £m £m £m
Financial assets
Loans and advances to banks 2,522 2,522 2,394 2,394
Loans and advances to customers:
Residential mortgages 135,393 130,871 109,969 106,737
Consumer banking 3,401 3,413 3,401 3,413
Commercial lending 20,371 20,752 19,469 19,738
Other lending 422 422 83 83
Financial liabilities
Shares 125,574 125,316 125,574 125,316
Deposits from banks 3,230 3,232 1,868 1,870
Other deposits 6,747 7,126 14,476 14,855
Due to customers 5,960 5,958 1,167 1,167
Debt securities in issue 33,429 34,003 24,340 25,923
Subordinated liabilities 2,540 2,566 2,540 2,566
Subscribed capital 1,304 1,012 1,304 1,012
2012 Group Society
Carrying value Fair value Carrying value Fair value
£m £m £m £m
Financial assets
Loans and advances to banks 2,914 2,914 2,850 2,850
Loans and advances to customers:
Residential mortgages 128,645 123,655 104,599 99,557
Consumer banking 2,888 2,900 2,888 2,900
Commercial lending 22,157 21,930 21,201 20,974
Other lending 479 480 80 80
Financial liabilities
Shares 125,617 125,968 125,617 125,968
Deposits from banks 3,370 3,570 2,730 2,930
Other deposits 6,899 6,900 13,333 13,334
Due to customers 5,833 5,836 1,301 1,301
Debt securities in issue 38,854 38,684 28,735 29,464
Subordinated liabilities 1,644 1,513 1,644 1,513
Subscribed capital 1,625 1,121 1,625 1,121
Financial statements
186 Nationwide Building Society
Notes to the Accounts continued
34 Classification and measurement (continued)
Loans and advances to customers
Loans and advances are net of provisions for impairment.
The estimated fair value of loans and advances to customers represents the discounted amount of estimated future cash flows expected to be received based on expectations of future interest rates and future loan repayment profiles. For fixed rate loans, discount rates are based on the market offer rates currently available for equivalent fixed rate products. For retail variable rate loans, estimated future cash flows are discounted at the currently available market standard variable interest rate.
Similar types of retail loan products are grouped together and the expected capital cash flows are discounted at the differential between the current product rate and the standard variable rate to determine fair value. The fair value estimations do not incorporate adjustments for future credit risk, however, incurred loss provisions are deducted from the fair value amounts.
Shares, deposits and borrowings
The estimated fair value of shares and deposits with no stated maturity, (including non-interest bearing deposits) is the amount repayable on demand. The estimated fair value of fixed interest rate shares, deposits and other borrowings without quoted market price represents the discounted amount of estimated
future cash flows based on expectations of future interest rates, customer withdrawals and interest capitalisation. For variable interest rate deposits, estimated future cash flows are discounted using current market interest rates for new debt with similar remaining maturity. For fixed rate shares and deposits, the estimated future cash flows are discounted 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 using similar instruments as a proxy for those liabilities that are not of sufficient size or liquidity to have an active market quote.
For those notes where quoted market prices are not available, a discounted cash flow model is used based on a current yield curve appropriate for the remaining term to maturity.
Fair value measurement
The following table provides an analysis of financial assets and liabilities held on the Group balance sheet at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:
2013 Group Level 1 Level 2 Level 3 Total
£m £m £m £m
Financial assets
Investment securities – AFS 8,641 4,720 60 13,421
Investments in equity shares - - 28 28
Derivative financial instruments - 3,828 384 4,212
Other financial assets - 8 - 8
8,641 8,556 472 17,669
Financial liabilities
Derivative financial instruments - (3,875) (10) (3,885)
Other deposits – PEBs - - (2,985) (2,985)
- (3,875) (2,995) (6,870)
34 Classification and measurement (continued)
2012 Group Level 1 Level 2 Level 3 Total
£m £m £m £m
Financial assets
Investment securities – AFS 16,493 6,756 76 23,325
Investments in equity shares 9 - 20 29
Derivative financial instruments - 3,942 234 4,176
16,502 10,698 330 27,530
Financial liabilities
Derivative financial instruments - (4,250) (37) (4,287)
Other deposits – PEBs - - (2,890) (2,890)
- (4,250) (2,927) (7,177)
Other financial assets represent fair value movements in mortgage commitments entered into where a loan has not yet been made. The Group recommenced the practice of fair valuing a portion of the mortgage commitments on the balance sheet during the year.
The Group’s Level 1 portfolio comprises highly rated government securities for which traded prices are readily available. During the year ended 4 April 2013, the Group has reduced this portfolio in response to the changing regulatory environment created by the Funding for Lending Scheme (FLS). There were no significant transfers between the Level 1 and 2 portfolios during the year.
Asset valuations for Level 2 AFS investment securities are sourced from consensus pricing or other observable market prices. None of the Level 2 AFS 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.
The main constituents of the Level 3 portfolio are as follows:
Investment securities – AFS
The Group’s £60 million Level 3 AFS investment securities at 4 April 2013 comprise mainly £59 million of CDOs, including CDOs with a fair value of £13 million that are subject to impairment. Substantially all of these securities are priced from internal models based on observable and unobservable performance assumptions.
Investments in equity shares
The Level 3 investments in equity shares of £28 million at 4 April 2013 consist primarily of an interest in a fund which is supported by zero coupon bonds of an A rated bank. External valuations are used to obtain the fair value of the instrument.
Derivative financial instruments
Level 3 assets and liabilities in this category are equity linked derivatives with external counterparties which economically match the investment return payable by the Group to investors in the PEB product. The derivatives are linked to the performance of specified stock market indices and have been valued by an external third party.
Other deposits – PEBs
This category relates to deposit accounts with the potential for stock market correlated growth linked to the performance of specified stock market indices. The PEBs liability is valued at a discount to reflect the time value of money, overlaid by a fair value adjustment representing the expected return payable to the customer. The fair value adjustment has been constructed from the valuation of the associated derivative as valued by an external third party.
Level 1: Fair value derived from unadjusted quoted prices in active markets for identical assets or liabilities, e.g. G10 government securities.
Level 2: Fair value derived from inputs other than quoted prices that are observable for the asset or liability, either directly (i.e. a price) or indirectly (i.e. derived from prices), e.g. most investment grade and liquid bonds, asset backed securities, certain collateralised debt obligations (CDOs), collateralised loan obligations (CLOs) and OTC derivatives.
Level 3: Inputs for the asset or liability are not based on observable market data (unobservable inputs), e.g. private equity investments, derivatives including an equity element, deposits including an equity element, some CDOs and certain asset backed securities and bonds.
Financial statements
188 Nationwide Building Society
Notes to the Accounts continued
34 Classification and measurement (continued)
Level 3 portfolio – movements analysis
The table below analyses movements in the Level 3 portfolio:
2013 Group Investment
securities – AFS
Investments in equity shares
Net derivative financial instruments
Other deposits – PEBs
£m £m £m £m
At 5 April 2012 76 20 197 (2,890)
(Losses)/gains recognised in the income statement:
Net interest expense - - (52)
Gains/(losses) from derivatives and hedge accounting - - 174 (160)
Impairment losses on investment securities (23) - -
-Gain recognised in other comprehensive income
− fair value movement taken to equity 3 8 -
-Settlements - - 55 65
Transfers into Level 3 4 - -
-At 4 April 2013 60 28 374 (2,985)
2012 Group Investment
securities – AFS
Investments in equity shares
Net derivative financial instruments
Other deposits – PEBs
£m £m £m £m
At 5 April 2011 95 98 12 (2,125)
Gains/(losses) recognised in the income statement:
Net interest income/(expense) 1 - (53)
Gains/(losses) from derivatives and hedge accounting - - 185 (179)
Impairment losses on investment securities (9) (7) -
-Loss recognised in other comprehensive income
− fair value movement taken to equity (6) (6) -
-Issues - - - (635)
Additions - 2 -
-Settlements - (67) 53 49
Transfers out of Level 3 (5) - -
-At 4 April 2012 76 20 197 (2,890)
Level 3 portfolio – sensitivity analysis
The table below provides sensitivity analysis of reasonably possible alternative valuation assumptions for the assets in the Level 3 portfolio.
2013 Group Carrying
value Increase in
fair value Decrease in fair value
£m £m £m
Investment securities – AFS:
Collateralised debt obligations 60 15 (11)
Investments in equity shares 28 - (7)
88 15 (18)
Increases/(decreases) in fair value would be recognised in:
Income statement 5 (2)
Statement of other comprehensive income (accumulated in the AFS reserve) 10 (16)
15 (18)
2012 Group Carrying
value Increase in
fair value Decrease in fair value
£m £m £m
Investment securities – AFS:
Collateralised debt obligations 53 16 (30)
Commercial mortgage backed securities (CMBS) 23 16 (15)
Investments in equity shares 20 2 (4)
96 34 (49)
Increases/(decreases) in fair value would be recognised in:
Income statement 23 (20)
Statement of other comprehensive income (accumulated in the AFS reserve) 11 (29)
34 (49)
Reasonable alternative assumptions applied take account of the nature of valuation techniques used, as well as the availability and reliability of observable proxy and historic data.
The scenarios applied are considered for each product and varied according to the quality of the data and variability of the underlying market.
Any increases in fair values of the PEB deposit would be offset by decreases in the fair values of the associated PEB derivative financial instruments and vice versa. Any resultant impact is deemed by the Group to be insignificant so these items have therefore been excluded from the table above.
The sensitivities for other items are described below:
Investment securities – AFS Collateralised debt obligations
Sensitivities on these assets, where there are no alternative pricing sources, have been calculated by applying a range of probable scenarios against our current valuation process, resulting in a range of possible prices.
Commercial mortgage backed securities Sensitivities on these assets, which are subject to impairment, have been derived from a modelled approach using estimated expected losses at legal maturity and risk adjusted discount rates.
Investments in equity shares
Sensitivities in these holdings have been based on the prices seen in these holdings in the preceding 12 months.
As the highest price in the previous 12 months was equal to the current price, there is no upper sensitivity of fair value.
Financial statements
190 Nationwide Building Society
Subsidiary, parent and ultimate controlling party The Group is controlled by Nationwide Building Society, the ultimate parent, which is registered in England and Wales.
Details of principal subsidiary undertakings can be found in note 19.
Key management compensation
The directors of the Society are considered to be the key management personnel as defined by IAS 24 Related Party Disclosures.
Total compensation for key management personnel for the year by category of benefit was as follows: