“Profitability has been adversely affected by the low interest rate environment and increased provisions as a result of the current recession. Our reported profit is 53% lower than it would otherwise have been because there is an exceptional charge of £241 million relating to the levies payable to the FSCS.
That’s Nationwide chief executive Graham Beale explaining why the UK Building Society has seen such a sharp drop in its full-year profits.
Of course, what strikes us about that statement is that a low interest rate environment should not necessarily be bad for mortgage lenders because they make money on the spreads charged to customers versus the Bank of England rate, and these have probably never been wider.
Perhaps the following sentence sheds some more light, however:
The remaining decline (c10bps) in net interest margin is attributable to increased costs of funding, including Government sponsored funding schemes, and declining retail spread. Margins on new lending in both the retail and commercial sector have widened considerably but with lower levels of new business origination have not fully offset the progressive impact of repricing of both wholesale and retail liabilities. The increased propensity of retail mortgage borrowers to migrate onto our BMR (our standard variable rate) product, which is capped at 200 basis points over base, at the end of their deal period has contributed to this imbalance in the rate at which assets and liabilities are repricing.
Which means, one of Nationwide’s biggest exposures (aside from impairments which it also sees rising) is to existing customers coming off fixed rate products and onto the bank’s variable, due to its own contractual small-print which promises the rate can never be more than 200bps over the base.
In a zero-rate environment that means Nationwide customers opting for a variable rate fare better than those with existing tracker mortgages as at Nationwide these cannot go lower than 2.75 per cent due to the floor contractually engineered into the products.
Looking to the future, Nationwide meanwhile, say:…we anticipate that our margin will continue to trend downwards, albeit at a reduced rate, due to the impact of the low base rate environment and continuing wholesale market disruption.
Wholesale market disruption presumably impacting one of the building society’s other major sources of revenue, the the money raised from the Building Society’s overnight operations.
Related links:
Nationwide cautious on pace of recovery – FT
The (non-) tracker – FT Alphaville
How to slash a mortgage lender - FT Alphaville