N&P financial results

Norwich and Peterborough Building Society (N&P) today reported profits that would have been acceptable in current market circumstances, were it not for the Financial Services Compensation Scheme levy by the Government for the failures of Bradford and Bingley plc and certain Icelandic banks.

N&P had no exposure to the Icelandic banks. The Society is in a healthy financial position, with good liquidity, low credit losses and continued capital strength and this has allowed continued investment for the longer term in branches and web-based services to members.

Financial highlights:

Group pre-tax profits before the FSCS levy were £11.4 million (2007 £24.3 million). After the Society was obliged to make an exceptional contribution of £5.5 million to the FSCS, pre-tax profits were £5.9 million

Total income was £74.4 million, down 11%; costs were £55.7 million, unchanged on 2007, reflecting continued investment

Net interest margin 1.12% (2007 1.44%)

Non-interest income was £22.2 million (2007 £26.2 million) and represents 30% (2007 31%) of total income

Management expense ratio 1.20% (2007 1.40%)

Assets up by over 15% to £4,985 million (2007 £4,308 million)

Liquid assets have increased from £1,016 million to £1,357 million and at the year end represented 27.2% of total assets; a covered bond was issued in January 2009 to provide additional funding

Total mortgage assets increased by 9.5% to £3,522 million (2007 £3,217 million)

Retail savings balances grew by 10.8% to £3,126 million (2007 £2,823 million)

At the end of the year, only 0.56% of our mortgage accounts were in serious arrears (2007 0.49%); this compares with the CML industry average of 1.57%

Tier 1 capital ratio 14.1% (2007 16.0%)

Membership grew by 7.4%

Comment: Matthew Bullock, chief executive, said: "Our challenge in 2008 has been to make sure that the Society remains safe and profitable in the current financial crisis, while keeping up the momentum to create a different, mutual alternative to the high street banks. We have sought to build an organisation with enduring values that provides a personal financial service that members can trust in these very difficult times.

"Our profits for 2008 were some way below 2007's record figures, with pre-tax profit declining from £24.3 million to £5.9 million. The three main reasons for the decline were:

The Bradford & Bingley plc and certain Icelandic bank failures resulted in all banks and building societies being obliged to contribute to the FSCS: N&P's share of this levy was £5.5 million. This sum significantly reduced what would otherwise have been acceptable profitability in the prevailing circumstances.

Out of prudence we have increased the loss provision charge from £3.6 million in 2007 to £7.3 million. This increase is prompted more by our assessment of the current economic climate than by our view of our own arrears, which remain well below the industry average, due to our cautious lending policy. Whilst arrears are rising, this is from a very low base - only 0.56% of accounts are in serious arrears and only 29 properties were in possession at the year end.

The trading circumstances of the last quarter of 2008, specifically the high cost of funding and the need to maintain high levels of liquidity, which reduced profitability and also depressed lending capability. The results also reflected our moves to protect our savers from some of the effects of falling rates.

"On the other hand, membership grew strongly by 30,000 members (7.4%), with many people transferring their accounts to us from banks, not least because we kept faith with savers by shielding them from the full effect of the Bank Base Rate cuts. We were also able to continue to lend to members through some months of record numbers of applications.

"We showed our commitment to helping key groups of members, such as the over fifties and families, to save. Our suite of Family Accounts was launched in February 2008 and of the accounts opened, 32% were new customers to the Society. Our attractive current account and savings products appeared regularly in national newspapers' ‘Best Buy' tables and Moneyfacts' ‘consistency' tables.

"To help our members set out and achieve their financial planning goals, our Financial Advice Service, one of the largest independent financial advisers in East Anglia, provided investment advice and reassurance to 14,000 customers during these difficult market conditions.

"We aim to put our members at the heart of what we do and our staff tell us that ‘making a real difference to their customers' lives' drives what they do more than anything else. Our customer satisfaction programme continues to provide insight into the expectations of members and challenges us to develop to meet those needs: 88.1% of customers surveyed in 2008 described themselves as ‘satisfied' with our service, our highest level yet, placing us in the top 10% of national organisations measured by The Leadership Factor research company .

"Customers were also independently reassured by reports from Moody's Investor Services and Fitch Ratings on the Society's stability and prospects. N&P is one of very few banks and building societies that have not seen a down-rating or negative comment about their credit strength. We also took steps to reduce costs as activity levels fell: 40 staff were made redundant from support functions at the year end, there will not be a general increase in salaries in 2009 and bonuses for 2008 have been cut.

"Reflecting our wish to expand our branch network, we opened a new branch in the centre of Cambridge in March, which has proved popular with members, and opened another on the outskirts of the city, in Sawston, in January 2009. With the successful opening of these two branches, we took the opportunity to rationalise and close our Burleigh Street branch in Cambridge earlier this month because members prefer the greater spaciousness and private facilities of the newer branches. We have also continued to upgrade our web-based services, particularly to savers, with our E-Saver account.

"Looking forward, 2009 will be a tough year. Until the capital markets re-open, profits will be reduced as a result of the banks scrambling for high street deposits. This will push up the price of our basic raw material - deposits - and mortgage lending will continue to be very subdued. As a result, net interest income will be squeezed and we will have to manage costs closely in line with business activity levels. At the same time we have already successfully issued a covered bond in January to raise over £280 million in funding and we will continue to drive our diversified range of income streams, in the expectation that members will want attractive savings income and advice for their long term finances.

"N&P is as well-placed as any society to contend with the harsh conditions which we will see in 2009. By continuing to manage our own affairs tightly, we will remain in a good position to help our members be in control of their money."