REG - Virgin Money UK PLC Clydesdale Bank PLC - Interim Financial Report
04/05/2023 07:00
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RNS Number : 3435Y Virgin Money UK PLC 04 May 2023
VIRGIN MONEY UK PLC
INTERIM FINANCIAL REPORT
SIX MONTHS TO 31 MARCH 2023
BASIS OF PRESENTATION
Virgin Money UK PLC ('Virgin Money', 'VMUK' or 'the Company'), together with
its subsidiary undertakings (which together comprise the 'Group'), operate
under the Clydesdale Bank, Yorkshire Bank and Virgin Money brands. This
release covers the results of the Group for the six months ended 31 March
2023.
Statutory basis: Statutory information is set out on page 21 and within the
interim condensed consolidated financial statements.
Underlying basis: Management exclude certain items from the Group's statutory
position to arrive at an underlying performance basis. A reconciliation from
the underlying results to the statutory basis is shown on page 22 and
rationale for the adjustments is shown on page 90.
Alternative performance measures: the key performance indicators (KPIs) and
performance metrics used in monitoring the Group's performance and reflected
throughout this report fall into two categories: financial and non-financial,
and are detailed at 'Measuring the Group's performance' on pages 344 to 352 of
the Group Annual Report and Accounts for the year ended 30 September 2022.
Alternative performance measures (APMs) are closely scrutinised to ensure that
they provide genuine insights into the Group's progress; however, statutory
measures are the key determinant of dividend paying capability.
Certain figures contained in this document, including financial information,
may have been subject to rounding adjustments and foreign exchange
conversions. Accordingly, in certain instances, the sum or percentage change
of the numbers contained in this document may not conform exactly to the total
figure given.
FORWARD-LOOKING STATEMENTS
This document and any other written or oral material discussed or distributed
in connection with the results (the 'Information') may include forward-looking
statements, which are based on assumptions, expectations, valuations, targets,
estimates, forecasts and projections about future events. These can be
identified by the use of words such as 'expects', 'aims', 'targets', 'seeks',
'anticipates', 'plans', 'intends', 'prospects', 'outlooks', 'projects',
'forecasts', 'believes', 'estimates', 'potential', 'possible', and similar
words or phrases. These forward-looking statements are subject to risks,
uncertainties and assumptions about the Group and its securities, investments
and the environment in which it operates, including, among other things, the
development of its business and strategy, any acquisitions, combinations,
disposals or other corporate activity undertaken by the Group, trends in its
operating industry, changes to customer behaviours and covenant, macroeconomic
and/or geopolitical factors, the repercussions of the outbreak of
coronaviruses (including but not limited to the COVID-19 outbreak), changes to
its Board and/or employee composition, exposures to terrorist activity, IT
system failures, cyber-crime, fraud and pension scheme liabilities, changes to
law and/or the policies and practices of the Bank of England (BoE), the
Financial Conduct Authority (FCA) and/or other regulatory and governmental
bodies, inflation, deflation, interest rates, exchange rates, tax and national
insurance rates, changes in the liquidity, capital, funding and/or asset
position and/or credit ratings of the Group, future capital expenditures and
acquisitions, the repercussions of Russia's invasion of Ukraine, the
repercussions of the UK's exit from the European Union (EU) (including any
change to the UK's currency and the terms of any trade agreements (or lack
thereof) between the UK and the EU), Eurozone instability, any referendum on
Scottish independence and any UK or global cost of living crisis or recession.
In light of these risks, uncertainties and assumptions, the events in the
forward-looking statements may not occur. Forward-looking statements involve
inherent risks and uncertainties and should be viewed as hypothetical. Other
events not taken into account may occur and may significantly affect the
analysis of the forward-looking statements. No member of the Group or their
respective directors, officers, employees, agents, advisers or affiliates
(each a 'VMUK Party') gives any representation, warranty or assurance that any
such projections or estimates will be realised, or that actual returns or
other results will not be materially lower than those set out in the
Information. No representation or warranty is made that any forward-looking
statement will come to pass. Whilst every effort has been made to ensure the
accuracy of the Information, no VMUK Party takes any responsibility for the
Information or to update or revise it. They will not be liable for any loss or
damages incurred through the reliance on or use of it. The Information is
subject to change. No representation or warranty, express or implied, as to
the truth, fullness, fairness, merchantability, accuracy, sufficiency or
completeness of the Information is given.
Certain industry, market and competitive position data contained in the
Information comes from official or third party sources. There is no guarantee
of the accuracy or completeness of such data. While the Group reasonably
believes that each of these publications, studies and surveys has been
prepared by a reputable source, no member of the Group or their respective
directors, officers, employees, agents, advisers or affiliates have
independently verified the data. In addition, certain industry, market and
competitive position data contained in the Information comes from the Group's
own internal research and estimates based on the knowledge and experience of
the Group's management in the markets in which the Group operates. While the
Group reasonably believes that such research and estimates are reasonable and
reliable, they, and their underlying methodology and assumptions, have not
been verified by any independent source for accuracy or completeness, and are
subject to change. Accordingly, undue reliance should not be placed on any of
the industry, market or competitive position data contained in the
Information.
The Information does not constitute or form part of, and should not be
construed as, any public offer under any applicable legislation or an offer to
sell or solicitation of any offer to buy any securities or financial
instruments or any advice or recommendation with respect to such securities or
other financial instruments. The distribution of the Information in certain
jurisdictions may be restricted by law. Recipients are required to inform
themselves about and to observe any such restrictions. No liability to any
person is accepted in relation to the distribution or possession of the
Information in any jurisdiction.
Interim financial report
For the six months ended 31 March 2023
Contents
Virgin Money UK PLC Interim Results 2023 (#_Toc71025630) (#_Toc71025630) 1
Business and financial review (#_Toc71025631) (#_Toc71025631) 3
Risk management (#_Toc71025632) 23
Risk overview (#_Toc71025633) (#_Toc71025633) 24
Credit risk (#_Toc71025634) (#_Toc71025634) 26
Financial risk (#_Toc71025635) (#_Toc71025635) 47
Statement of Directors' responsibilities (#_Toc71025636) (#_Toc71025636) 59
Independent review report to Virgin Money UK PLC (#_Toc71025637)
(#_Toc71025637) 60
Financial statements (#_Toc71025638) (#_Toc71025638) 61
Interim condensed consolidated income statement (#_Toc71025639) 61
Interim condensed consolidated statement of comprehensive income
(#_Toc71025640) (#_Toc71025640) 62
Interim condensed consolidated balance sheet (#_Toc71025641) 63
Interim condensed consolidated statement of changes in equity (#_Toc71025642)
(#_Toc71025642) 64
Interim condensed consolidated statement of cash flows (#_Toc71025643)
(#_Toc71025643) 65
Notes to the interim condensed consolidated financial statements
(#_Toc71025644) (#_Toc71025644) 66
Additional information (#_Toc71025645) (#_Toc71025645) 86
Virgin Money UK PLC Interim Results 2023
David Duffy, Chief Executive Officer:
"More people are choosing to bank with Virgin Money. While the past six months
have seen turbulence in the economy and in the financial system, we have
continued to focus on our target areas, growing customer numbers and deposits
thanks to our new and existing digital products. Further customer-centric
product launches are coming in the second half of the year."
"We have a strong capital position and we've significantly grown pre-provision
profit, while continuing our prudent approach. As the UK economy stabilises in
the months ahead, we have a high degree of confidence in our long-term plans."
Summary financials
Restated Restated
6 months to 6 months to 6 months to
31 Mar 2023 31 Mar 2022 Change 30 Sep 2022 Change
£m £m % £m %
Underlying net interest income (NII) 855 782 9 810 6
Underlying non-interest income((1)) 78 66 18 84 (7)
Total underlying operating income 933 848 10 894 4
Underlying operating and administrative expenses (477) (456) 5 (458) 4
Underlying operating profit before impairment losses 456 392 16 436 5
Impairment losses on credit exposures (144) (21) 586 (31) 365
Underlying profit on ordinary activities before tax 312 371 (16) 405 (23)
Adjusting items((1)) (76) (56) 36 (125) (39)
Statutory profit on ordinary activities before tax 236 315 (25) 280 (16)
Performance metrics((2))
Net interest margin (NIM) 1.91% 1.83% 8bps 1.86% 5bps
Underlying cost: income ratio((1)) 51% 54% (3)%pts 51% -%pts
Cost of risk (CoR) 0.40% 0.06% 34bps 0.09% 31bps
Statutory return on tangible equity (RoTE) 6.1% 9.1% (3.0)%pts 11.3% (5.2)%pts
Common Equity Tier 1 (CET1) ratio (IFRS 9 transitional) 14.7% 14.7% -%pts 15.0% (0.3)%pts
(1) Hedge ineffectiveness is now presented as an adjustment to
underlying earnings as detailed on page 90. The comparative periods have been
adjusted accordingly.
(2) For definitions of the performance metrics, refer to 'Measuring the
Group's performance' on pages 344 to 352 of the Group's 2022 Annual Report and
Accounts.
Benefitting from higher rates and growth in customers; continuing to invest in
our digital future
· NIM expanded further to 1.91% in H1 (Q223: 1.94%), supported by
higher rates, structural hedge reinvestment and improved mix
· Total income up 10%, reflecting 9% growth in NII and positive
fair value movements benefitting non-interest income
· Underlying costs 5% higher, driven by investment in service and
mortgage digitisation; underlying C:I ratio down 3%pts to 51%
· Underlying operating profit before impairment losses of £456m,
up 16% on H122, reflecting stronger income
· Impairment charge of £144m (CoR: 40bps), driven primarily by
provision build from higher modelled ECL, including updated macroeconomics and
credit bureau data in anticipation of an increase in arrears as the credit
cycle continues to normalise
· Underlying PBT 16% lower compared to a year ago reflecting the
prior period's low impairment charge (£21m)
· Restructuring charges of £53m broadly stable YoY. The Group
slowed some restructuring activity in H1 to further underpin service
· Statutory profit reduced compared to a year ago to £236m (H122:
£315m), primarily reflecting the higher impairment charge
Robust balance sheet with continued strong deposit inflows and broadly stable
customer lending
· Continued relationship deposit growth, +2.9% to £35.6bn; overall
deposits increased 2.6% to £67.0bn (with 72% FSCS insured)
· CET1 remains strong at 14.7% (FY22: 15.0%) including the impact
of the £50m buyback completed in H1; 3.3p interim dividend
· Underlying credit quality remained resilient; coverage increased
to 72bps (FY22: 62bps), primarily from higher modelled ECL
· LCR increased 15%pts to 153% (FY22: 138%); NSFR stable in the
period at 136% (FY22: 136%)
· Overall lending stable (0.2)%; Mortgages (0.8)% to £57.7bn given
lower market activity; Unsecured (0.2)%, including moderated growth in credit
cards +1.9%; Business lending +4.2% as growth in BAU balances offset a
reduction in Government lending
Continued strategic momentum with digital propositions driving growth in
relationship accounts
· c.69k growth in active relationship accounts during H1 (now 3.7m
active relationship accounts)
· Continued strong reception to new digital products including 52%
increase in BCA sales YoY and 16% growth in PCA sales
· c.10k new Slyce customers since launch as we test and learn;
c.300k travel insurance sales since launch in March 2022
· Launched Virgin Money Investments through abrdn JV, comprising a
new digital platform and straightforward investment products
Enhancing customer and colleague support through Purpose-led delivery
· Call waiting times down by c.75% compared to the position at
FY22, following investment in resource to support service
· Cost of Living hub, supporting customers with money saving
suggestions, budgeting tools and links to external resources
· Turn2us Benefits calculator supporting those who may be eligible
for additional or top up benefits (29k people to date)
· A Life More Virgin flexible working model supporting continued
higher colleague engagement (+4%pts in H1)
FY23 outlook updated; NIM guidance for FY23 upgraded
· Expect FY23 NIM to be c.190bps, with stable performance in H2
compared to H1
· Underlying cost: income ratio expected to be in the range 51-52%
· Expect cost of risk for FY23 to be in the range of c.35-40bps
· Anticipate the majority of the remaining c.£140m restructuring
charges to be incurred in H2
· Maintain CET1 > 14% through FY23 during period of heightened
macroeconomic uncertainty
· 30% dividend payout; buybacks subject to the outcome of ACS
results and regulatory approval
Contact details
For further information, please contact:
Investors and Analysts
Richard Smith +44 7483 399 303
Head of Investor Relations & Sustainability richard.smith@virginmoneyukplc.com
Amil Nathwani +44 7702 100 398
Senior Manager, Investor Relations amil.nathwani@virginmoneyukplc.com
Martin Pollard +44 7894 814 195
Senior Manager, Investor Relations martin.pollard@virginmoneyukplc.com
Media (UK)
Matt Magee +44 7411 299477
Head of Media Relations matthew.magee@virginmoneyukplc.com
Simon Hall +44 7855 257 081
Senior Media Relations Manager simon.hall@virginmoney.com
Press Office +44 800 066 5998
press.office@virginmoneyukplc.com
Teneo
Iain Dey +44 7976 295 906
Doug Campbell +44 7753 136 628
Teneo (Australia)
Emily Blyth +61 401 601 044
Virgin Money UK PLC will today be hosting a presentation for analysts and
investors covering the 2023 interim financial results starting at 08:30 BST
(17:30 AEST) with a presentation followed by live Q&A call:
https://webcast.openbriefing.com/vmuk-interim23/
(https://clicktime.symantec.com/15t6egUqkjjKyYvTk6A8Q?h=4dwQJ5pYHbj18PvnyOy79oskdDNhG__9PM0grKUYI0Q=&u=https://webcast.openbriefing.com/vmuk-interim23/)
A recording of the webcast and conference call will be made available on our
website shortly after the meeting at:
https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/
(https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/)
A call for fixed income investors will be held at 09:30 BST on Friday 5 May
2023: Dial-in details: UK: 0808 189 0158; All other locations: +44 20 3936
2999; Access code: 423509
The Group will publish its interim Pillar 3 on Wednesday 31 May 2023.
Business and financial review
KPIs
Measuring strategic delivery
All figures as at H1 2023
Total active relationship customer accounts Digital primacy Target lending segment asset growth
3.7m 59% 4% in H1
FY22: 3.6m FY22: 56% FY22: 7%
2021*: 3.3m H1 22**: 51% FY21: (3.3)%
* As at October 2021 ** New metric; as at March 2022
Gross annualised cost savings Customer complaints per 1k accounts Colleague engagement
£93m 4.2 83%
FY22: £69m FY22: 4.2 FY22: 79%
FY22-FY24 target: £175m FY21: 3.7 FY21: 68%
Group Smile score
44%
FY22: 46%
FY21: 51%
Business and financial review
Financial performance - summary
Summary income statement
Restated Restated
6 months to 6 months to 6 months to
31 Mar 2023 31 Mar 2022 Change 30 Sep 2022 Change
£m £m % £m %
Underlying net interest income (NII) 855 782 9 810 6
Underlying non-interest income((1)) 78 66 18 84 (7)
Total underlying operating income 933 848 10 894 4
Underlying operating and administrative expenses (477) (456) 5 (458) 4
Underlying operating profit before impairment losses 456 392 16 436 5
Impairment losses on credit exposures (144) (21) 586 (31) 365
Underlying profit on ordinary activities before tax 312 371 (16) 405 (23)
- Restructuring charges (53) (46) 15 (36) 47
- Acquisition accounting unwinds (3) (14) (79) (21) (86)
- Legacy conduct costs (4) (5) (20) (3) 33
- Hedge ineffectiveness((1)) (16) 17 n/a (4) 300
- Other items - (8) (100) (61) (100)
Statutory profit on ordinary activities before tax 236 315 (25) 280 (16)
Tax (expense)/credit (56) (77) (27) 19 n/a
Statutory profit after tax 180 238 (24) 299 (40)
Performance metrics((2))
6 months to Restated Restated
6 months to 6 months to
31 Mar 2023 31 Mar 2022 Change 30 Sep 2022 Change
Profitability:
Net interest margin (NIM) 1.91% 1.83% 8bps 1.86% 5bps
Underlying return on tangible equity (RoTE)((1)) 8.3% 11.1% (2.8)% 15.2% (6.9)%
Underlying cost: income ratio((1)) 51% 54% (3)%pts 51% -%pts
Underlying earnings per share (EPS)((1)) 14.9p 16.7p (1.8)p 25.1p (10.2)p
Statutory RoTE 6.1% 9.1% (3.0)%pts 11.3% (5.2)%pts
Statutory cost: income ratio 58% 60% (2)%pts 64% (6)%pts
Statutory EPS 11.0p 13.7p (2.7)p 18.7p (7.7)p
(1) Hedge ineffectiveness is now presented as an adjustment to underlying earnings
as detailed on page 90. The comparative periods have been adjusted
accordingly.
(2) For definitions of the performance metrics, refer to 'Measuring the Group's
performance' on pages 344 to 352 of the Group's 2022 Annual Report and
Accounts
Business and financial review
Financial performance - summary
Performance metrics (continued)
As at: 31 Mar 2023 31 Mar 2022 Change 30 Sep 2022 Change
Asset quality
Cost of risk((1)) 0.40% 0.06% 34bps 0.07% 33bps
Total provision to customer loans 0.72% 0.66% 6bps 0.62% 10bps
Indexed loan to value ratio (LTV) of mortgage portfolio((2)) 53.6% 54.4% (0.8)%pts 52.7% 0.9%pts
Regulatory Capital:
CET1 ratio (IFRS 9 transitional) 14.7% 14.7% -%pts 15.0% (0.3)%pts
CET1 ratio (IFRS 9 fully loaded) 14.4% 14.4% -%pts 14.6% (0.2)%pts
Total capital ratio 21.2% 21.8% (0.6)%pts 22.0% (0.8)%pts
Minimum requirement for own funds and eligible liabilities (MREL) ratio 31.0% 31.7% (0.7)%pts 32.1% (1.1)%pts
UK leverage ratio 5.0% 5.1% (0.1)%pts 5.1% (0.1)%pts
Tangible net asset value (TNAV) per share 350.5p 313.2p 37.3p 383.0p (32.5)p
Funding and Liquidity:
Loan to deposit ratio (LDR) 108% 112% (4)%pts 111% (3)%pts
Liquidity coverage ratio (LCR) 153% 139% 14%pts 138% 15%pts
(1) Cost of risk for the 6 months to March is calculated on an annualised basis.
(2) LTV of the mortgage portfolio is defined as mortgage portfolio weighted by
balance.
Summary balance sheet
As at
31 Mar 2023 30 Sep 2022 Change
£m £m %
Customer loans 72,435 72,565 -
of which Mortgages 57,687 58,155 (1)
of which Unsecured 6,152 6,163 -
of which Business 8,596 8,247 4
Other financial assets 18,501 17,545 5
Other non-financial assets 1,560 1,797 (13)
Total assets 92,496 91,907 1
Customer deposits 67,030 65,360 3
of which relationship deposits((1)) 35,643 34,649 3
of which non-linked savings 12,196 17,048 (28)
of which term deposits 19,191 13,663 40
Wholesale funding 16,896 17,012 (1)
Other liabilities 2,940 3,195 (8)
Total liabilities 86,866 85,567 2
Ordinary shareholders' equity 5,036 5,674 (11)
Additional Tier 1 (AT1) equity 594 666 (11)
Equity 5,630 6,340 (11)
Total liabilities and equity 92,496 91,907 1
Risk Weighted Assets (RWAs) 24,703 24,148 2
(1) Current account and linked savings balances
Business and financial review
Chief Executive Officer's statement
Delivering our Digital First strategy
"More people are choosing to bank with Virgin Money. While the past six months
have seen turbulence in the economy and in the financial system, we have
continued to focus on our target areas, growing customer numbers and deposits
thanks to our new and existing digital products. Further customer-centric
product launches are coming in the second half of the year."
"We have a strong capital position and we've significantly grown pre-provision
profit, while continuing our prudent approach. As the UK economy stabilises in
the months ahead, we have a high degree of confidence in our long-term plans."
David Duffy, CEO
Delivering our digital strategy
The Group is now halfway through the Purpose-led, digital strategy set out
alongside FY21 results, and we are making good progress in executing our
strategic priorities. Over the course of the last eighteen months, we've
delivered innovative digital propositions that have driven strong growth in
relationship customer numbers. Our capital ratios and funding position have
continued to improve, with strengthening capital generation also supporting a
growing level of distributions to investors. Our recent work to improve
customer service leaves us well placed to digitise the bank further and
support profitable growth. The continued diversification of both sides of our
balance sheet, combined with the rising rate environment, has driven a
reduction in our cost: income ratio, although there remains more work to do
here. As we look out to FY24, we are well placed to deliver on our financial
targets. There is still a significant amount to do during the second half of
our three-year digital strategy, but I remain confident it is the right
strategy despite the changing environment, and as we execute, this will
increasingly translate into stronger financial performance.
Over the last six months, the economic backdrop in the UK has been subdued,
with several economic indicators forecast to remain weak in the near term
before improving into FY24. During the first half of our financial year, the
Bank of England's (BoE) Monetary Policy Committee have progressively raised
the main policy rate further. Swap rates have been volatile throughout the
period, as market sentiment has been impacted by challenges at Silicon Valley
Bank and other US regional banks, as well as some European banks. Recent rate
rises and ongoing inflationary impacts have seen affordability tighten for
many UK businesses and individuals, and the Group remains ready to support our
customers as required. Pleasingly for now, the number of customers in
financial distress remains low, but we continue to expect arrears numbers to
increase as the credit cycle normalises, and have increased our provision
coverage during H1. Overall, the Group continues to have a robust balance
sheet, with a strong capital and funding position, whilst liquidity improved
further driven by continued deposit inflows.
Our strategy, supported by the rate environment, is translating into improved
financial momentum despite the weak backdrop. In H1, we've made good progress
in executing the customer-focused elements of our digital strategy, and our
programme of investment that is delivering compelling new digital propositions
is continuing to see good levels of customer engagement and growth. Our
successful execution is driving active customer account growth across business
(BCA) and personal current accounts (PCA), including higher levels of sales to
new customers, as well as continued growth in relationship deposits. We are
also delivering strong growth in business lending as our sector expertise
bears fruit, alongside a maturing of our position in the credit card market,
where we now have a c.8% share. More recent proposition launches including
Slyce, our response to the buy-now-pay-later market, and insurance and
investment product relaunches have seen positive initial customer reactions,
positioning us well for further profitable growth.
Over the course of H1, we've moderated the pace of restructuring activity and
added additional resources to support customer experience across the Group,
which has already seen a marked improvement in call waiting times and an 80%
reduction in outstanding complaint volumes from peak levels. We have also
continued to make progress developing our digital mortgage platform, although
we now expect this to be delivered in 2024 as we extend the testing and
development phase.
Over the remainder of the year, we remain focused on delivering continued
growth in customer numbers at good margins, delivery of enhancements to our
product and competitive proposition, and further efficiency gains from
restructuring and digitisation. Given the higher rate environment, and
supported by the ongoing execution of our strategy to diversify the balance
sheet, the outlook for NIM has strengthened further, and it is pleasing to be
able to upgrade our NIM guidance. Our short-term additional investment this
year will see a slower pace of reduction in our cost: income ratio in FY23
than previously expected, but we are laying the foundations for stronger
profitable growth in the medium term.
We remain committed to further capital returns and have announced a 3.3p
dividend in respect of H1 2023, and continue to expect to operate within our
target capital range in FY24, with further buybacks subject to the outcome of
the BoE's Annual Cyclical Scenario (ACS) stress test. We will continue to
safeguard the bank, operating with a prudent risk appetite, while maintaining
strong liquidity, funding and capital as we grow profitably. As the Group
executes its digital strategy, it is increasingly well positioned to deliver
on its FY24 targets for all our stakeholders, as our colleagues deliver
innovative, valuable propositions which provide good outcomes to our
customers, and drive strengthened returns for investors.
Business and financial review
Chief Executive Officer's statement
Robust financial performance and balance sheet
Overall statutory profit of £236m was lower compared to a year ago (H1 2022:
£315m), primarily due to a higher impairment charge, given a very low charge
in H1 2022, as well as higher investment costs in the period. The higher rate
environment and positive momentum from our digital strategy drove an
improvement in income to £933m, up 10% compared to a year ago. NIM expanded
further to 1.91% for the half, as we continued to optimise both sides of the
balance sheet. The additional investment in our mortgage platform and customer
experience, as well as inflation, saw a 5% increase in operating expenses. Our
impairment charge in the period was £144m (H1 2022: £21m) with the increase
primarily driven by updated economic assumptions as underlying credit quality
generally remained stable, albeit with some signs of a modest increase in
arrears in cards, from abnormally low pandemic levels.
Lending volumes in the period were stable compared to FY22 with good growth in
Business lending offset by the weaker Mortgage market backdrop and our prudent
approach to the Unsecured market. We continued to attract new deposits at
strong spreads with deposits increasing 3% to £67bn, benefitting from our
trusted brand, scale as a Tier 1 bank, and strong digital propositions. Our
relationship deposit base continued to expand, also increasing 3% in H1 and
now comprises 53% of total deposits. This growth in relationship deposits has
benefitted from our digital investment as we have leveraged our strong PCA and
linked saver proposition, offering customers enduring good value products.
Capital remained robust throughout the period with 72bps of underlying capital
generation, leaving our CET1 ratio at 14.7%, despite the c.30bps impact of
higher RWAs from MAs reflecting the latest view of hybrid mortgage model
impacts and the c.20bps impact from the buyback extension announced at FY22.
The Group's funding position remained strong, with the LDR declining to 108%
(FY22: 111%) as we maintained a well-diversified deposit base, which is around
72% Financial Services Compensation Scheme (FSCS) protected. Our LCR improved
over the half to 153% driven by the strong deposit growth, and the Group has
already completed all capital and MREL issuance required during FY23. We
continue to expect to issue £1.5bn - £2.5bn of primarily secured funding as
we refinance TFSME in advance of maturity, but given strong deposit inflows,
we now expect to be at the low end of this range. The Group fully hedges its
liquidity portfolio and all securities are held at fair value, with any
valuation adjustments already reflected within the Group's CET1 position.
Delighting customers & colleagues
Over the first half of the year, we've invested heavily in our customer
experience, with over 300 additional temporary colleagues working to address
the elevated level of inbound calls and outstanding complaints. The Group also
slowed the pace of restructuring activity to further underpin service levels.
As a result, call waiting times have reduced by around three-quarters compared
to the position at FY22, with the vast majority of processes now back within
their required timescales. Our Group Smile score across H1 stabilised at 44%
(FY22: 46%), with a 47% score reported for March. Complaints per 1,000
accounts have stabilised since FY22, remaining at 4.2 and we remain committed
to reducing this level as we resume digitising customer journeys. We'll
maintain the elevated levels of resourcing for our contact centres and
branches in the near term to ensure the improvement is well embedded as we
accelerate our restructuring programme. However, this improved position on
service provides a strong platform to make further progress as we move in to
H2.
Recognising that the current environment is challenging for some customers, we
are offering a range of initiatives to provide support for those who need it.
Our Cost of Living hub on the Group's website offers a single destination to
find help and support, with tips, tools and expert advice for managing money.
Recognising that the challenges of the rising cost of living are not just
limited to retail customers, we've also recently added a new dedicated
'supporting your businesses' section. In terms of direct support, we have
continued our partnership with Turn2Us through the benefits calculator which
has to date delivered £1.7m of additional income to c.29k people who have
used the tool. The tool and hub are available to everyone, whether a customer
or not.
For colleagues, our A Life More Virgin approach to work continues to be well
received, and we are continuing to shape our approach based on colleague
feedback and business objectives. Accordingly, our latest colleague engagement
score improved again to 83%, up 4% from FY22, and outperforming the UK
financial services norm. The majority of colleagues will also receive a 10%
pay increase over 2023 reflecting the increased cost of living. Diversity,
Equality and Inclusion remains an ongoing focus for Virgin Money. Progress
against our representation targets has been gradually improving, especially in
respect of gender within our senior leadership population, but with less
progress in respect of ethnicity representation at a senior leadership level.
The launch of our new allyship initiative 'Braver' over the summer this year
will help accelerate awareness, understanding and action against both our
representation and our inclusion goals.
Pioneering Growth
As we have continued to execute our digital strategy, total active
relationship accounts (across personal and business transactional banking)
increased 2% over the period to 3.7m. I've been particularly pleased with the
strong growth in the deposit business, and we've continued to drive good
inflows throughout the half. Deposit balances increased 3%, with corresponding
growth in relationship deposits, as we offered customers good value products
that have benefitted from our digital investment, supported by nimble pricing
throughout the period. PCA sales were 16% higher in H1 2023 than H1 2022,
supporting a 1% growth in active PCA accounts over the half. Sales benefitted
from an ongoing competitive proposition, with the vast majority of PCA
customers rewarded with credit interest and an attractive linked saver,
distinguishing ourselves from high-street peers. PCA customers also continue
to get access to rewards, cashback and exclusive product offerings.
BCA sales were even stronger, up 52% on H1 2022, which was a strong
performance in a slowing market, and supported a 5% growth in active BCA
accounts over the half. We've seen net growth in the number of BCA accounts
for 17 consecutive months now, benefitting from sustained investment in the
proposition and improvements to digital customer onboarding journeys. On the
other side of the balance sheet, we've been really pleased to leverage the
investment we've made in the Business franchise and our sectors of expertise,
driving 7% growth in BAU business lending, offsetting the continued run-off of
lower yielding government lending. We've seen particular strength in resilient
segments such as Health & Social Care and Social Housing.
Business and financial review
Chief Executive Officer's statement
In our Unsecured business, as set out at FY22, we have moderated the rate of
growth, by tightening underwriting and focusing on improved profitability
against the weaker credit environment. Our Cashback proposition continues to
resonate well with customers, with c.700k users at the end of March. We have
seen some reduction in personal loan balances as expected, as we have
withdrawn from the market for new customers, although this remains an area of
future opportunity with a suitably refreshed customer proposition.
Slyce, our buy-now pay better proposition has seen volumes building steadily
and in a responsible, controlled way. Over 10,000 customers have now accessed
the product, to support over £5m of spending to date, with prudent average
credit limits of less than £1k per account. We also continue to progress our
new Digital Wallet proposition and have recently launched a beta version to a
closed user group of Virgin Atlantic credit card customers as we continue to
develop the functionality.
Currently the mortgage market backdrop remains subdued with new application
spreads remaining lower than the backbook given elevated swap rates and
continued competition in the market. We have continued to trade nimbly,
focusing on margin and credit quality against this subdued backdrop, leading
to a 0.8% reduction in balances over the half. While the market is likely to
remain subdued in the near term, we've continued to invest in the development
of our new digital mortgage platform which will support greater market access
and our trading capability in the medium term. We now expect this to be
delivered in 2024, as we have taken a pragmatic decision to extend the testing
and development phase to ensure a better product for customers and brokers on
launch; this won't impact our trading capability through the remainder of
FY23.
Finally, our innovative new Virgin Money Investments proposition launched in
early April, with our JV partner abrdn. We are aiming to take the fear out of
investing, and offer customers simple, straightforward products and services,
without jargon (our investment product Ts and Cs have been awarded Fairer
Finance's Clear and Simple Mark). We've listened to customers throughout
development, re-designing customer journeys and launching the new investment
funds on a refreshed modern platform. Our existing Investments business has
c.£3.6bn assets under management, which we will be looking to grow through
the new proposition.
Super straightforward efficiency
Despite moderating the pace of some of our cost reduction activity earlier in
the year, we have continued to benefit from efficiencies realised within the
overall programme of work to digitise the bank, creating capacity to absorb
inflation and re-investment. In the half, our total annualised savings
increased to £93m against the planned £175m programme of savings that will
be completed by FY24, as we benefit from digitisation activities, savings from
3(rd) party spending and ongoing streamlining of property and organisational
design. Over the course of the half, we've continued to embed Agile
methodology into our change delivery which will support a continued
improvement in the long-term pace of change. As we move into FY24, we will
continue to generate run-rate savings from our digitisation activity.
Our digitisation activity and migration to a cloud-based operating environment
continues to make progress using the Microsoft Azure platform, with
applications being assessed and reviewed ahead of migration to the cloud and a
number being retired as we simplify the digital estate. The new technology
architecture has also underpinned the introduction of our new 'conversational
banking' platform, with Redi, our digital host deployed to our credit card
customers in March, before being rolled out across the bank in the future.
Redi is available 24/7, and uses AI to understand customer intent and either
execute customer instructions and make real-time changes to customer accounts
or pass the query to a live agent. This complements our existing successful
chatbot deployments which have now surpassed 1.2m chatbot conversations with
retail customers, with the resolution rate within the chatbot at over 70%.
As a result, the percentage of customer interactions through calls has reduced
from c.70% at FY21 to 44% as at the end of H1 2023 (FY22: c.50%). Meanwhile,
Digital Primacy, our key measure for assessing customer migration to digital
only engagement with us, rose to 59% from 56% at FY22.
Discipline and sustainability
The Group continues to have a robust balance sheet position with little change
in credit quality to date against the current backdrop. The higher cost of
risk in the period of 40bps was primarily driven by modelled outcomes based on
a weaker macroeconomic outlook and updated credit bureau data, in anticipation
of a continued increase in arrears. Current arrears trends within mortgages
and business show limited change, with unsecured arrears picking up from the
abnormally low levels seen through COVID-19.
The Group strengthened coverage over the early part of the year and now has
aggregate provision coverage of 72bps across the lending book, up from 62bps
at FY22, as we have refreshed our macroeconomic scenarios to reflect the
worsening economic backdrop and the continued normalisation of the credit
cycle. Our CET1 ratio remains towards the top of UK Tier 1 banks at 14.7%,
despite incorporating a c.30bps management adjustment for mortgage hybrid
models during Q2. Given the strong growth in deposits seen in the period our
LCR improved further to 153%, with our net stable funding ratio (NSFR) stable
at 136%, significantly above our regulatory and internal risk appetite
thresholds. With no upcoming capital or MREL calls, our funding position and
deposit franchise continue to show their strength in the current volatile
backdrop, and we believe our approach to funding and liquidity positions us
well.
From a sustainability perspective, we've also continued to make good progress
through the first half. Embedding climate further into our risk framework will
be an important step in our continued delivery and we remain focused on
enhancing our data quality as we progress towards net zero. Following the
publication of our initial net zero targets and roadmaps for our priority
sectors at FY22, which cover 82% of Group lending, we've continued to execute
against those plans and KPIs. Our Sustainable Business Coach app has been
developed further, to support customers in their thinking around transition
plans, with Sustainability Linked Loans and business sectoral tracking
underpinning overall delivery. In Mortgages we were pleased to extend our
Green Mortgage Reward proposition beyond the initial pilot period, and a
retrofit product to enable mortgage customers to improve the efficiency of
their homes is in development to go alongside the existing Green Mortgage
offering. Work to develop our remaining Business sector roadmaps and targets,
as well as our operational emissions roadmaps, is progressing well and we
expect to update further at FY23.
Business and financial review
Chief Executive Officer's statement
In FY22, we commissioned an independent third party to conduct a risk
assessment of our Modern Slavery processes and approach across the Group. The
assessment highlighted clear examples of proactive risk management, with some
opportunities to improve further. With the results of the assessment in mind,
we refreshed our Modern Slavery Statement in March, and we continue to focus
on implementing the recommendations for best practice.
Developing our leadership team for the future
I was delighted to welcome our new Chief Operating Officer (COO) Sarah
Wilkinson to the team in January. Sarah's background in large scale change
programmes covers 23 years in financial services, time as CEO of NHS digital
and most recently as Chief Information Officer and Head of TR Labs at Thomson
Reuters. She was also voted No 1 in the UK Tech50 for 2021, Computer Weekly's
annual ranking of the Top 50 Most Influential Leaders in UK Tech. The new COO
function that Sarah will lead brings together our Customer Experience and
Digital & Innovation areas, to provide a more integrated technological and
change delivery unit. I'd like to take this opportunity to thank these areas'
former leaders, Fergus Murphy and Fraser Ingram, for their contributions to
the Group.
From a Board perspective, we welcomed Sara Weller as the Virgin Group's new
Representative Director on 3 October 2022, replacing Amy Stirling. Sara has
extensive experience, including nine years as a non-executive director of
Lloyds Banking Group, and she currently also serves on the Board of BT Group.
Outlook
While the macroeconomic outlook remains uncertain in the short term, we
believe the Group's prudent risk appetite and positioning on liquidity,
funding and capital, and our ongoing focus on customers and digitisation,
position us for success. We have the scale and regulatory assurance of a Tier
1 bank, with the agility and ability to innovate of a challenger, all while we
leverage the strength and entrepreneurial spirit of the Virgin brand.
Over the remainder of the year, the Group's outlook continues to be robust.
NIM has continued to track above our expectations, and we now expect FY23 NIM
to be c.190bps, with stable performance in H2 compared to H1. We will continue
to invest in customer experience and digital propositions over the remainder
of the year, while accelerating our cost saving programme, and we now
anticipate a cost: income ratio of 51-52% in FY23, with short-term investment
costs reducing into FY24. Updating for our economic outlook under IFRS 9
methodology, we now expect our cost of risk for the year to be in the range of
35-40bps.
The Group remains strongly capital generative and I'm pleased the Board has
declared an interim dividend in line with the capital framework set out a year
ago, of one-third of the prior year's full dividend. As we look forward over
the remainder of the year, the Group expects that we'll be able to announce
further buybacks, subject to the outcome of the ACS stress test, due to be
reported in early July.
As we enter the second half of our three-year plan, our focus is firmly on the
continued execution of our digital strategy. We have a clear ambition and are
well placed to deliver on our targets for FY24, including a cost: income ratio
below 50%, and a statutory RoTE above 10%. Alongside this, we anticipate
significant further capital distributions as we return to operating within our
target CET1 range of 13% - 13.5% by FY24.
David Duffy, Chief Executive Officer - 3 May 2023
Business and financial review
Chief Financial Officer's review
Delivering strategic and financial momentum
"The Group has had a good first half of the year, demonstrating ongoing
strategic and financial momentum. Despite an uncertain economic environment,
the Group is well positioned to deliver prudent and profitable growth, while
controlling costs, maintaining robust capital and safeguarding and supporting
our customers"
Clifford Abrahams, Group CFO
Financial Highlights
Statutory profit before tax Underlying profit before tax Statutory RoTE
£236m £312m 6.1%
H1 2022: £315m H1 2022 (restated)((1)): £371m H1 2022: 9.1%
NIM Underlying cost: income ratio Cost of risk
1.91% 51% 40bps
H1 2022: 1.83% H1 2022 (restated)((1)): 54% H1 2022: 6bps
CET1 ratio Loan growth Relationship deposit growth
14.7% (0.2)% 2.9%
FY22: 15.0% H1 2022: (0.2)% H1 2022: 4.2%
LCR NSFR Dividend per share
153% 136% 3.3p
FY22: 138% FY22: 136% FY22: 10p
(1) Hedge ineffectiveness is now presented as an adjustment to underlying
earnings as detailed on page 90. The comparative periods have been adjusted
accordingly. This restatement does not impact the statutory results of the
Group.
Business and financial review
Chief Financial Officer's review
Momentum in strategic and financial delivery
The Group had a good first half of the year, with ongoing strategic delivery
and profitable growth in its target segments. Income has benefitted from
rising interest rates and the strength of our new digital propositions has
supported relationship customer growth. Costs have been higher as inflation
and investment in our mortgage platform and customer experience more than
offset savings in the period. Credit quality remained resilient in H1, and the
Group further increased provision coverage to reflect more conservative
economic scenarios and updated credit bureau data, in anticipation of a
continued increase in arrears as the credit cycle continues to normalise.
While profitability was lower, the Group is well placed to navigate the
current economic outlook and deliver further profitable growth, supported by
its resilient balance sheet, strong capital position and growing relationship
customer base.
Prudent growth in target segments
The Group has continued to execute against its digital strategy and made
further improvements to its customer propositions, launching compelling new
products and product features. The combination of these factors has supported
growth in key target segments in H1, including 2% growth in total active
relationship customer accounts (to 3.7m customers at H1 2023). Relationship
deposit growth remains a key area of focus and the Group has made further
progress, growing balances by 3% in H1 2023, supported by strong digital
customer propositions and competitive rates. This supported overall deposit
growth of 3% in H1 2023 as we continued to attract inflows across the half.
Overall lending remained broadly stable in the period. Given the current
weaker credit environment, the Group chose to moderate the pace of growth in
Unsecured lending, resulting in a 0.2% reduction in balances across H1,
including cards growth of 1.9%, a slower pace compared to last year. In
Business, the strength of our developing proposition, supported by the popular
fee-free digital BCA, resulted in above-market growth against a subdued
backdrop. In Mortgages, market activity levels were lower compared to last
year, as the impact of higher rates and inflation have dampened activity,
particularly in the house purchase segment with our balances reducing 0.8%
during the first half of the financial year.
Resilient financial performance
Underlying profit in H1 was £312m, which was a reduction compared to last
year (H1 2022: £371m), as higher operating income was more than offset by a
more normalised level of impairments compared to last year's low charge. NIM
of 1.91% (H1 2022: 1.83%) was significantly improved year-on-year. The key
drivers of this improvement were the higher rate environment and ongoing
strategic execution, enabling the Group to benefit from continued supportive
conditions in the deposit market and offset mortgage spread pressures.
Non-interest income of £78m was 18% higher year-on-year on an overall basis,
though broadly stable excluding all fair value movements, driven by normalised
customer activity. Overall, this resulted in total income that was 10% higher
compared to a year ago. Operating costs of £477m were 5% higher when compared
to H1 2022 as gross cost savings were more than offset by inflation, higher
digital development spend including costs associated with the ongoing
implementation of our digital mortgage platform and short-term investment to
support improved customer service. The improvement in income resulted in a
3%pts reduction in our cost: income ratio to 51% compared to H1 2022 and a 16%
increase in underlying profit before impairment losses. Credit impairments of
£144m were significantly higher year-on-year, mainly reflective of higher
modelled expected credit loss (ECL) given updated macroeconomic assumptions
and credit bureau data, in anticipation of a continued increase in arrears,
resulting in an increased level of provision coverage across the book.
The Group reported a lower statutory profit before tax in the period
delivering £236m (H1 2022: £315m) and a statutory RoTE of 6.1% (H1 2022:
9.1%). This reflected the lower underlying profit and adjusting items that
were £20m higher in H1 2023, primarily due to negative fair value movements,
mainly from hedge ineffectiveness. As a result of the Group's performance and
in line with the Group's dividend policy, the Board has announced an interim
dividend of 3.3p, representing one-third of the prior year's dividend.
Robust balance sheet with strong capital, liquidity and funding position
The Group maintained a conservative balance sheet position, including robust
funding and liquidity, a healthy capital position and increased provision
coverage. During the second quarter, the Group fully refreshed its IFRS 9
macroeconomic assumptions from 3(rd) party provider Oxford Economics, which
contributed to credit provisions totalling £526m (FY22: £457m) equivalent to
a coverage ratio of 0.72% (FY22: 0.62%). Funding and liquidity remain strong,
with the LCR ratio increasing to 153% (FY22: 138%) and NSFR stable at 136%
(FY22: 136%). The LDR reduced to 108% (FY22: 111%) as deposit balances
increased 2.6% to £67.0bn, while lending volumes were 0.2% lower at £72.4bn.
The CET1 ratio remains strong at 14.7% (FY22: 15.0%) with the reduction in the
period incorporating the full c.(20)bps impact of the £50m extended share
buyback programme and a management adjustment for the anticipated impact of
implementing mortgage hybrid models c.(30)bps. The Group continues to expect
to operate above 14% CET1 in FY23 due to heightened macroeconomic uncertainty,
before returning to its target range of 13% - 13.5% in FY24. The Group will
target a 30% full year dividend payout ratio, in line with the dividend policy
and supplement this with buybacks, subject to ongoing assessment of surplus
capital, market conditions and regulatory approval. The Group anticipates
further share buybacks this year will take place subject to the outcome of the
BoE's 2022 ACS stress test.
Outlook
The Group is well positioned to navigate the current economic outlook with
good financial momentum, including a strong margin, prudent growth, and a
robust balance sheet. We remain focused on investing to digitise the Bank in
the near term, which will drive further cost efficiency and support our
ambitions to grow our customer base further. The combination of this strategic
and financial momentum will underpin the delivery of profitable growth,
despite a weaker credit environment, and will improve returns over the coming
periods, while we remain committed to distributing surplus capital to
shareholders in line with our capital framework.
Business and financial review
Chief Financial Officer's review
Underlying income
Restated Restated
6 months to 6 months to 6 months to
31 Mar 2023 31 Mar 2022 30 Sep 2022
£m £m Change £m Change
Underlying net interest income 855 782 9% 810 6%
Underlying non-interest income((1)) 78 66 18% 84 (7)%
Total underlying operating income 933 848 10% 894 4%
NIM 1.91% 1.83% 8bps 1.86% 5bps
Average interest earning assets 89,568 85,729 4% 86,817 3%
(1) Hedge ineffectiveness is now presented as an adjustment to underlying
non-interest income as detailed on page 90. The comparative periods have been
adjusted accordingly. This restatement does not impact the statutory results
of the Group.
Overview
Operating income of £933m was 10% higher compared with H1 2022 and 4% higher
than H2 2022 as the Group continued to benefit from the higher rate
environment and ongoing strategic execution. NII improved 9% year-on-year as
NIM increased 8bps to 1.91%, including a Q2 NIM of 1.94%. Non-interest income
improved 18% compared to H1 2022 or 5% lower when excluding all fair value
movements. This underlying reduction was driven by lower merchant services
income.
NII and NIM
Asset yields increased 145bps compared to H1 2022 at an aggregate level.
Within this, mortgage yields increased 25bps, given the higher rate
environment. Average mortgage balances were 1% higher in H1 2022 year-on-year,
which together with the higher average yield resulted in higher interest
income.
In Unsecured, average balances increased by 10% relative to H1 2022, while
yields modestly increased to 673bps. Together, this drove a 12% increase in
interest income year-on-year.
In Business, a 253bps increase in the average yield was driven by a
combination of the higher rate environment and a reduction in lower-yielding
government-backed lending. This, alongside a growth in average balances,
resulted in 71% higher interest income year-on-year.
Elsewhere, the average yield on the Group's liquid assets increased 300bps
reflecting the higher rate environment.
Liability rates on interest bearing liabilities increased 154bps relative to
H1 2022, with increased average rates across current accounts, savings
accounts, term deposits and wholesale funding, mainly due to the higher rate
environment. The Group has continued to pass through the benefit of recent
rate rises to depositors in a balanced way; sector pass through levels have
been lower than anticipated given strong liquidity at a sector level.
Current account average balances continued to increase in line with the
Group's strategy to grow lower cost relationship deposits. Term deposit
average balances increased year-on-year as the Group actively participated in
this market, taking opportunities to secure term funding at attractive
spreads. Savings account balances reduced in H1 2023 relative to H1 2022 due
to the attrition or churn of existing balances into products with higher rates
and as the Group prioritised term funding for additional funding. Wholesale
funding average balances increased during the period, as the Group continued
to optimise overall funding.
Business and financial review
Chief Financial Officer's review
Underlying net interest income
6 months ended 31 March 2023 6 months ended 31 March 2022
Average Interest income/ (expense) Average Average Interest income/ (expense) Average
balance
yield/ (rate)((1))
balance
yield/ (rate)((1))
Average balance sheet £m £m % £m £m %
Interest earning assets:
Mortgages 58,315 719 2.47 57,976 641 2.22
Unsecured lending 6,492 218 6.73 5,902 195 6.62
Business lending((2)) 8,359 255 6.12 8,314 149 3.59
Liquid assets 15,651 264 3.38 12,563 24 0.38
Due from other banks 748 5 1.25 970 - 0.05
Swap income/other - 252 n/a - 9 n/a
Other interest earning assets 3 - n/a 4 - n/a
Total average interest earning assets 89,568 1,713 3.83 85,729 1,018 2.38
Total average non-interest earning assets 2,556 3,218
Total average assets 92,124 88,947
Interest bearing liabilities:
Current accounts 16,123 (84) (1.04) 15,467 (13) (0.17)
Savings accounts 27,560 (179) (1.30) 31,388 (52) (0.33)
Term deposits 17,129 (206) (2.41) 13,348 (68) (1.02)
Wholesale funding 18,395 (387) (4.22) 15,059 (102) (1.36)
Other interest earning liabilities 152 (2) n/a 150 (1) n/a
Total average interest bearing liabilities 79,359 (858) (2.17) 75,412 (236) (0.63)
Total average non-interest bearing liabilities 6,890 7,987
Total average liabilities 86,249 83,399
Total average equity 5,875 5,548
Total average liabilities and average equity 92,124 88,947
Net interest income 855 782 1.83
(1) Average yield is calculated by annualising the interest income/expense for the
period.
(2) Includes loans designated at fair value through profit or loss (FVTPL).
Underlying non-interest income
Non-interest income was £12m higher relative to H1 2022 at £78m and £4m
lower year-on-year excluding fair value movements. The key driver for the
modest reduction in performance was a reduction in Business fee income,
following the strategic decision by the Group to change its payments partner
and expand its relationship with Global Payments, resulting in an initial
reduction of merchant services income.
As a result of recent changes in interest rates leading to increased
volatility, the Group has taken the decision to exclude hedge ineffectiveness
from non-interest income. Hedge ineffectiveness will now be reported within
'Adjusting items' (see page 90) and a corresponding adjustment has also been
made to prior period comparatives. Hedge ineffectiveness largely represents
timing differences that will reverse out over the lives of derivatives that
are used in economic hedges but can result in volatility between reporting
periods.
Business and financial review
Chief Financial Officer's review
Underlying costs
6 months to 6 months to 6 months to
31 Mar 2023 31 Mar 2022 30 Sep 2022
Operating and administrative expenses £m £m Change £m Change
Staff costs 177 184 (4)% 191 (7)%
Property and infrastructure 19 20 (5)% 22 (14)%
Technology and communications 61 57 7% 59 3%
Corporate and professional services 87 54 61% 60 45%
Depreciation, amortisation and impairment 49 67 (27)% 49 -%
Other expenses 84 74 14% 77 9%
Total underlying operating and administrative expenses 477 456 5% 458 4%
Underlying cost: income ratio((1)) 51% 54% (3)%pts 51% -%pts
(1) Hedge ineffectiveness is now presented as an adjustment to underlying
non-interest income as detailed on page 90. The comparative period underlying
cost: income ratio has been adjusted accordingly. This restatement does not
impact the statutory results of the Group.
Operating expenses increased 5% year-on-year to £477m, while the cost: income
ratio reduced 3%pts to 51%. During the period, the Group slowed the pace of
its restructuring programme as it continued to support customer experience.
Despite this slower pace, the programme delivered further cost efficiencies,
taking the total annualised gross savings to date to £93m of the c.£175m
targeted. Relative to last year, the Group also benefitted from a net pension
benefit of £12m, and a lower depreciation charge following past changes to
D&A practices and as the Group adopts Agile methodology. These benefits
were offset, mainly by higher staff costs (net of the pension benefit), driven
by wage inflation and additional resource to support the improvement of
customer service levels, partially offset by a lower bonus accrual compared to
last year. During the period, the Group also increased digital development
spend, including costs associated with the ongoing implementation of our
digital mortgage platform.
Impairments
As at 31 March 2023 Credit Gross Coverage Net cost of risk((1)) % of loans in % of loans in
provisions lending ratio bps Stage 2 Stage 3
£m £bn bps
Mortgages 59 58.0 10 1 6.4 1.0
Unsecured: 354 6.5 575 410 22.9 1.5
of which credit cards 319 5.6 602 470 19.8 1.6
of which personal loans and overdrafts 35 0.9 412 56 41.8 1.0
Business 113 8.5 145((2)) 34 22.5 4.9
Total 526 73.0 72 40 9.7 1.5
of which Stage 2 349 7.1 494
of which Stage 3 112 1.1 1,209
(1) Cost of risk is calculated on an annualised basis.
(2) Government-guaranteed element of loan balances excluded for the purposes of
calculating the Business and total coverage ratio.
As at 30 September 2022 Credit Gross lending Coverage Net cost of % of loans in % of loans in
provisions £bn ratio risk Stage 2 Stage 3
£m bps bps
Mortgages 56 58.5 9 (5) 5.3 1.0
Unsecured: 284 6.5 466 322 17.3 1.2
of which credit cards 246 5.5 481 347 13.9 1.3
of which personal loans and overdrafts 38 1.0 388 161 34.9 0.9
Business 117 8.1 159((1)) (112) 18.7 4.6
Total 457 73.1 62 7 7.8 1.4
of which Stage 2 268 5.7 472
of which Stage 3 104 1.0 1,124
(1) Government-guaranteed element of loan balances excluded for the purposes of
calculating the Business and total coverage ratio.
Business and financial review
Chief Financial Officer's review
ECL provisions increased to £526m at H1 2023 (FY22: £457m), resulting in
aggregate coverage of 72bps (FY22: 62bps). This was mainly due to a higher
modelled ECL, largely in credit cards, in anticipation of a continued increase
in arrears reflecting revised macroeconomic assumptions, which showed a
deterioration from those applied in September 2022, and updated credit bureau
data. Accordingly, the modelled and individually assessed (IA) ECL increased
by £83m to £455m in H1 2023 (FY22: £372m), while Management Adjustments
(MAs) reduced to £71m (FY22: £85m). The combination of these factors
resulted in a £144m impairment charge during the period, equivalent to an
annualised cost of risk of 40bps.
The key macroeconomic assumptions used in the Group's IFRS 9 modelling were
updated based on scenarios provided by our 3(rd) party provider Oxford
Economics. The weightings applied to the scenarios were 10% to the Upside
scenario, 60% to the Base scenario and 30% to the Downside scenario. The
weighted macroeconomic scenario includes a 1.4% contraction in GDP in 2023,
peak unemployment of 4.9% in 2024 and a decline in the House Price Index (HPI)
across 2023-2025.
To supplement the modelled ECL provision, the Group applied expert credit risk
judgement through MAs, designed to account for factors that the models cannot
incorporate. Through this process, the Group applied MAs of £71m (FY22:
£85m) which are deemed appropriate for the portfolio at the current time.
This includes reduced cost of living and economic resilience MAs of £18m
(FY22: £57m), as these impacts are now better reflected in the modelled ECL
outcome. During the period, the new Loss Given Default (LGD) model in Business
lending was fully implemented, resulting in the removal of a negative MA
(£(15)m) that was held at FY22, given it is now reflected in the modelled
output.
In H1 loans classified as stage 2 increased from 8% of the portfolio at FY22
to 10% at H1 2023. 97% of the Stage 2 lending balances remain <30 days past
due (DPD). Stage 3 assets as a % of Group lending remained broadly stable at
1.45% (FY22: 1.41%). The Group's credit provisioning assumes that arrears
continue to increase over the remainder of the year.
Across all portfolios, the Group has provision coverage that remains above
pre-pandemic levels. In Mortgages, the coverage ratio of 10bps is considered
appropriate for the conservative loan book with low LTVs. The portfolio
continues to evidence good underlying credit performance, with no significant
deterioration in asset quality, despite a marginal increase in late-stage
arrears.
Our Unsecured lending book coverage ratio of 575bps includes 602bps of
coverage for our credit card portfolio which is focused on more affluent
customers, and 412bps of coverage for our smaller personal loans and
overdrafts book. In addition to the impact of current macroeconomics, the
modelled provision increased due to a modest weakening of credit bureau data,
and early-stage arrears compared with prior periods. Overall arrears levels
remain modest across the portfolio with 97.5% of balances in stage 1 or stage
2 not past due.
In Business, the coverage ratio of 145bps reflects a 14bps decrease in the
period, driven mainly by lower MAs, higher balances and lower specific
provisions primarily due to provision utilisation. There has been limited
change in underlying asset quality performance and, as yet, no significant
increase in specific provision recognition. The lending book continues to be
biased away from sectors likely to experience more disruption from higher cost
of living such as hospitality and retail, towards sectors expected to be
resilient, such as agriculture, health and social care.
Business and financial review
Chief Financial Officer's review
Adjusting items and statutory profit
6 months to
Restated Restated
31 Mar 2023 31 Mar 2022 30 Sep 2022
£m £m £m
Underlying profit on ordinary activities before tax 312 371 405
Adjusting items
- Restructuring charges (53) (46) (36)
- Acquisition accounting unwinds (3) (14) (21)
- Legacy conduct costs (4) (5) (3)
- Hedge ineffectiveness((1)) (16) 17 (4)
- Other items - (8) (61)
Statutory profit on ordinary activities before tax 236 315 280
Tax (expense)/credit (56) (77) 19
Statutory profit for the period 180 238 299
Underlying RoTE((1)) 8.3% 11.1% 15.2%
Statutory RoTE 6.1% 9.1% 11.3%
TNAV per share 350.5p 313.2p 383.0p
(1) Hedge ineffectiveness is now presented as an adjustment to underlying as
detailed on page 90. The comparative periods have been adjusted accordingly.
This restatement does not impact the statutory results of the Group.
Overview
The Group made a statutory profit before tax of £236m after deducting £76m
of adjusting items. The adjusting items charged in H1 2023 mainly reflect the
Group's continued investment in its digital growth strategy as well as
acquisition unwind costs, legacy conduct charges, hedge ineffectiveness and
other items. Overall adjusting items were £20m higher than those incurred in
H1 2022, primarily reflecting higher hedge ineffectiveness offsetting lower
acquisition accounting unwinds, while restructuring charges were modestly
higher.
TNAV per share decreased 32.6p in H1 2023 relative to H2 2022, to 350.5p. The
key drivers of the decrease were 5.3p of retained earnings net of dividends,
6.0p from share buybacks, offset by (22.5)p from a reduction in the cash flow
hedge reserve, (19.5)p from a lower overall actuarial pension surplus and
(1.8)p of FVOCI and other movements.
Restructuring charges
The Group incurred £53m of restructuring charges, related to the Group's
digital investment programme. During the period, the Group moderated some
restructuring activity, reducing the pace of change in order to underpin
customer service. Accordingly, charges during the period were broadly stable
relative to last year and included c.£27m related to the delivery of IT
changes and c.£25m related to changes to the operating model and property
footprint. The Group has now incurred £135m of restructuring charges since
the start of FY22 and expects to incur the majority of the remaining c.£140m
of the c.£275m expected at FY21, in H2 2023.
Acquisition accounting unwinds
The Group recognised fair value accounting adjustments at the time of the
Virgin Money acquisition that unwind through the income statement over the
remaining life of the related assets and liabilities. £3m was reflected in H1
2023 and the Group expects a further c.£25m of total acquisition accounting
unwind charges by end of FY25.
Legacy conduct
Charges of £4m were incurred, mainly in respect of legal proceedings and
claims arising in the ordinary course of the Group's business.
Hedge ineffectiveness
As a result of recent changes in interest rates and increased volatility, the
Group has taken the decision to exclude hedge ineffectiveness from
non-interest income and will now report it within Adjusting items. Hedge
ineffectiveness largely represents timing differences that will reverse out
over the lives of derivatives that are used in economic hedges but can result
in volatility between reporting periods.
Charges of £16m were incurred in respect of hedge ineffectiveness and rate
volatility in the period.
Taxation
There was a £56m tax charge in respect of £236m of statutory profit before
tax reflecting an effective tax rate of 24%.
During the full year to September 2022, the most recent period for which
annual tax data is available, the Group paid cash tax totalling £175m to HMRC
(principally corporation tax including banking surcharge and irrecoverable
VAT), with a further £84m (largely payroll taxes and national insurance
contributions) collected on HMRC's behalf.
Business and financial review
Chief Financial Officer's review
Balance sheet
As at
31 Mar 2023 30 Sep 2022
£m £m Change
Mortgages 57,687 58,155 (1)%
Unsecured 6,152 6,163 -%
Business((1)) 8,596 8,247 4%
Total customer lending 72,435 72,565 -%
Relationship deposits((2)) 35,643 34,649 3%
Non-linked savings 12,196 17,048 (28)%
Term deposits 19,191 13,663 40%
Total customer deposits 67,030 65,360 3%
Wholesale funding 16,896 17,012 (1)%
of which TFSME 7,000 7,200 (3)%
LDR 108% 111% (3)%pts
LCR 153% 138% 15%pts
(1) Of which, £778m government lending (30 September 2022: £963m)
(2) Current account and linked savings balances.
Overview
At an aggregate level, Group lending reduced 0.2% to £72.4bn as growth in
Business lending was more than offset by a reduction in Mortgages and broadly
stable Unsecured lending. Total customer deposits increased 2.6% to £67.0bn,
including a 2.9% growth in relationship deposits. This performance reflected
the Group executing against its strategy to develop a lower cost, stable
funding base.
Mortgage balances reduced 0.8% to £57.7bn as market activity slowed down
during the first half of the year, owing to continued rate volatility,
seasonality and stressed affordability pressure. Completions spreads remained
below back book levels throughout the period, while front book application
spreads remained competitive.
Unsecured balances were broadly stable at £6.2bn, as 1.9% growth in credit
card balances was offset by a reduction in personal loans. In cards, the Group
has benefitted from strong activity levels, innovative new product features
and ongoing investment in its overall, digitally-led proposition. The Group
moderated the pace of growth during H1 2023, given the weaker credit
environment and to drive improved profitability.
Business lending increased by 4.2% in H1 2023 to £8.6bn as a reduction in
Government-scheme balances was more than offset by 7.3% growth in BAU balances
in a subdued market. BAU performance reflected the strength of our national
franchise and sector specialisms in resilient market segments.
Government-scheme balances declined 19% to £0.8bn as expected, as borrowers
made contractual repayments.
Customer deposits increased by £1.7bn or 2.6% in the first half of the
financial year to £67.0bn, including 1.3% growth in the second quarter. The
Group continued to execute against its strategy and improved its mix of
deposits during the period, as relationship deposits grew by £1.0bn,
supported by strong customer propositions and competitive rates. Term deposits
increased by £5.5bn as the Group acquired new term deposits at attractive
spreads, locking in term funding at pricing below swaps. Non-linked saving
balances reduced by £4.9bn during the period, given higher attrition and
churn from the back book and as the Group prioritised the good value
opportunities available in the term deposit market.
Wholesale funding and liquidity
The Group has a stable funding base with customer deposits representing c.80%
of total funding. The Group's customer deposits are weighted towards retail
customers (76%), with the balance being from business customers, predominantly
small and medium-sized enterprises. 79% of the Group's PCA customers and 65%
of BCA customers have balances of less than £5k.
Of the total customer deposit book, 72% is insured via the Financial Services
Compensation Scheme. Of balances that are uninsured, a proportion are fixed
term and/or would incur a charge if customers wanted to withdraw their money.
During the period, customer deposits increased by 2.6% to £67.0bn. With
lending balances declining slightly, the Group's LDR reduced 3% points in the
period to 108% (FY22: 111%).
The Group has a number of well-established wholesale funding programmes and
proven markets access. During the period, the Group successfully issued
€500m of MREL senior notes, while at the same time repaying £0.2bn of its
TFSME drawings (£7.0bn outstanding as at 31 March 2023). On an overall basis,
wholesale funding reduced marginally to £16.9bn as at H1 2023 (FY22:
£17.0bn). Of our total debt securities in issue, only c.20% (£1.9bn) has
less than 1-year to effective maturity, reflecting term issuance roll-downs
(the Group has negligible short-term wholesale funding). Following its
recently announced MREL call, the Group has no further capital or MREL call
dates or maturities ahead of FY23. The Group has £1.1bn of TFSME maturing in
FY24, £2.45bn maturing in FY25, and £2.55bn maturing in FY26, with the
remaining £0.9bn subject to term extension beyond FY26.
Business and financial review
Chief Financial Officer's review
Given the strong deposit performance in H1 2023 and wholesale issuances during
the period, the Group expects to issue towards the lower end of the
£1.5-2.5bn of secured issuance communicated at FY22, subject to ongoing
deposit flows and relative cost. The Group plans to continue to repay TFSME
about 1 year ahead of contractual maturity to reduce the refinancing risk
further. The stability of the Group's funding sources is highlighted in its
NSFR ratio, which remained stable at 136%.
In light of recent market volatility following issues at Silicon Valley Bank
as well as other US regional banks and some European banks, the Group
prudently held more liquidity during the period, with the LCR increasing 15%
points to 153% (FY22 138%), continuing to comfortably exceed both regulatory
requirements and the Group's more prudent internal risk appetite metrics. The
Group's c.£14bn prime liquid asset portfolio is primarily comprised of cash
at the BoE (c.70%), UK Government securities (Gilts) (c.10%) and AAA rated
listed securities (e.g. bonds issued by supra-nationals and corporate covered
bonds) (c.20%). The liquid asset portfolio is fully hedged from an interest
rate, inflation and FX risk perspective and any movements in fair value are
recognised in CET1 via the Income Statement or FVOCI reserve.
The Group also has unencumbered pre-positioned collateral at the BoE
representing c.£5bn of secondary liquidity drawing capacity via the Bank's
Sterling Monetary Framework, which does not form part of the liquid asset
portfolio for LCR or internal stressed outflow purposes. Over time the stock
of unencumbered pre-positioned collateral will increase as remaining TFSME
drawings are repaid. In addition, the Group has a further c.£19bn of
unencumbered assets eligible and readily available but not currently
pre-positioned at the BoE.
Business and financial review
Chief Financial Officer's review
Capital As at
31 Mar 2023 30 Sep 2022 Change
CET1 ratio (IFRS 9 transitional) 14.7% 15.0% (0.3)%pts
CET1 ratio (IFRS 9 fully loaded) 14.4% 14.6% (0.2)%pts
Total capital ratio 21.2% 22.0% (0.8)%pts
MREL ratio 31.0% 32.1% (1.1)%pts
UK leverage ratio 5.0% 5.1% (0.1)%pts
RWAs (£m) 24,703 24,148 2.3%
of which Mortgages (£m) 9,359 9,155 2.2%
of which Unsecured (£m) 4,721 4,817 (2.0)%
of which Business (£m) 6,579 6,196 6.2%
(1) Unless where stated, data in the table shows the capital position on a Capital
Requirements Directive (CRD) IV 'fully loaded' basis with IFRS 9 transitional
adjustments applied.
(2) The capital ratios include unverified profits.
Overview
The Group maintained a robust capital position with a CET1 ratio (IFRS 9
transitional basis) of 14.7% and a total capital ratio of 21.2%. The Group's
CET1 ratio on an IFRS 9 fully loaded basis was 14.4%. The Group's latest
Pillar 2A requirement has a CET1 element of 1.7%. Overall, the Group continues
to maintain a significant surplus above its CRD IV minimum CET1 capital
requirement (or MDA threshold) of 9.7%.
During the period, the Group was classified as an 'Other' Systemically
Important Institution (O-SII) by the PRA. This is not expected to have a
material impact on the Group's capital framework laid out in May 2022.
CET1 capital
CET1 reduced by c.30bps in the period with the movements set out in the table
below. This includes c.£0.4bn additional RWAs through a management adjustment
(MA) for the anticipated impact of implementing mortgage hybrid models.
CET1 Capital movements 6 months to
31 Mar 2023
%/bps
Opening CET1 ratio 15.0%
Capital generated (bps) 89
RWA growth (bps) (9)
AT1 distributions (bps) (8)
Underlying capital generated (bps) 72
Restructuring charges (bps) (16)
Acquisition accounting unwind (bps) (1)
Conduct (bps) (1)
Hedge ineffectiveness (bps) (5)
Hybrid mortgage impact (bps) (28)
Foreseeable ordinary dividends (bps) (18)
Share buyback (bps) (20)
Other (bps) (19)
Net capital absorbed (bps) (36)
Closing CET1 ratio 14.7%
(1) The table shows the capital position on a CRD IV 'fully loaded' basis with
IFRS 9 transitional adjustments applied.
MREL
The Group's transitional MREL ratio remained broadly stable during the period
at 9.1% (FY22: 9.2%) of Leverage Exposures, or 31.0% when expressed as a
percentage of RWAs (FY22: 32.1%). This provides prudent headroom of £1.3bn or
1.6% above the binding loss-absorbing capacity (LAC) requirement of 7.5% of
Leverage Exposures, or 5.4% above the binding LAC requirement of 25.6% when
expressed as a percentage of RWAs. Capital and MREL issuance during the
remainder of FY23 is still expected to be broadly limited to refinancing and
maintaining the surplus to regulatory requirements.
Business and financial review
Chief Financial Officer's review
Outlook and guidance
FY23 financial guidance
NIM
NIM expected to be c.190bps, with stable performance in H2 compared to H1
Cost: income ratio
Underlying cost: income ratio to be in the range 51-52%
Cost of risk
c.35-40bps
Capital return
30% dividend payout; buybacks subject to ongoing assessment of surplus
capital, market conditions and regulatory approval
Medium-term outlook:
Assuming no significant further deterioration in the economic outlook, Virgin
Money has a clear path to delivering sustainable double digit statutory
returns on tangible equity in FY24
Based on the latest outlook and the good momentum in NIM in H1, the Group
expects NIM for FY23 to be around 190bps, with stable performance in H2
compared to H1.
The Group continues to invest in its digital strategy, which will drive
improved efficiency and cost reduction over time. In line with this, the Group
expects the majority of the remaining c.£140m of restructuring costs to be
incurred in FY23, which will support a less than 50% underlying cost: income
ratio in FY24. In FY23, the Group expects the underlying cost: income ratio to
be in the range 51-52%, reflecting higher costs from our investment in
mortgage digitisation and temporary costs to support service.
Following the update to credit provisioning levels in the first half of the
year, the cost of risk is now expected to be in the range of c.35-40bps for
FY23, assuming no further changes in the macroeconomic outlook.
Following the full recognition of historical losses, the Group expects its
effective tax rate to be maintained in the mid 20%s based on enacted
legislation.
At FY22, the Group announced it expects to return to its CET1 target range of
13-13.5% in FY24. During FY23, the Group continues to expect to operate above
14%, given the level of macroeconomic uncertainty. In line with the Company's
capital framework and dividend policy, the Group expects a 30% full year
dividend payout level, supplemented with buybacks subject to ongoing
assessment of surplus capital, market conditions and regulatory approval. We
expect further buybacks subject to the outcome of the BoE's Annual Cyclical
Scenario (ACS) stress test.
In the medium term, the Group will continue to target diversification on both
sides of the balance sheet, delivering growth in Unsecured and Business
lending, while maintaining our Mortgage market share. We continue to target
strong growth in new PCA and BCA customer numbers, improving the overall cost
of funds.
Assuming no significant further deterioration in the economic outlook, Virgin
Money has a clear path to delivering sustainable double digit statutory
returns on tangible equity in FY24.
Clifford Abrahams, Chief Financial Officer - 3 May 2023
Business and financial review
Financial review - statutory basis
Summary income statement
6 months to 6 months to 6 months to
31 Mar 2023 31 Mar 2022 Change 30 Sep 2022 Change
£m £m % £m %
Net interest income 852 777 10 799 7
Non-interest income 62 67 (7) 73 (15)
Total operating income 914 844 8 872 5
Operating and administrative expenses (534) (508) 5 (561) (5)
Operating profit before impairment losses 380 336 13 311 22
Impairment losses on credit exposures (144) (21) 586 (31) 365
Statutory profit on ordinary activities before tax 236 315 (25) 280 (16)
Tax (expense)/credit (56) (77) (27) 19 n/a
Statutory profit after tax 180 238 (24) 299 (40)
The Group has recognised a statutory profit before tax of £236m (H1 2022:
profit before tax of £315m). The reduction in statutory profit is largely
reflective of an increase in impairment losses.
Performance metrics((1))
6 months to 6 months to 12 months to
31 Mar 2023 31 Mar 2022 Change 30 Sep 2022((2)) Change
Profitability:
Statutory RoTE 6.1% 9.1% (3.0)%pts 10.3% (4.2)%pts
Statutory cost: income ratio 58% 60% (2)%pts 62% (4)%pts
Statutory EPS 11.0p 13.7p (2.7)p 32.4p (21.4)p
(1) For definitions of the performance metrics, refer to 'Measuring the Group's
performance' on pages 344 to 352 of the Group's 2022 Annual Report and
Accounts.
(2) Profitability measures are provided with a full year to 30 September 2022
comparative in line with the statutory income statement presentation in the
financial statements and as previously reported in the Group's 2022 Annual
Report and Accounts.
Business and financial review
Reconciliation of statutory to underlying results
The statutory basis presented within this section reflects the Group's results
as reported in the financial statements. The underlying basis reflects the
Group's financial performance as presented to the CEO, Executive Leadership
Team and Board and excludes certain items that are part of the statutory
results. The table below reconciles the statutory results to the underlying
results, and full details on the adjusted items to the underlying results are
included on page 90.
Statutory results Restructuring charges Acquisition accounting unwinds Legacy Hedge ineffectiveness((1)) Other Underlying basis
conduct
6 months to 31 Mar 2023 £m £m £m £m £m £m £m
Net interest income 852 - 3 - - - 855
Non-interest income 62 - - - 16 - 78
Total operating income 914 - 3 - 16 - 933
Total operating and administrative expenses before impairment losses (534) 53 - 4 - - (477)
Operating profit before impairment losses 380 53 3 4 16 - 456
Impairment losses on credit exposures (144) - - - - - (144)
Profit on ordinary activities before tax 236 53 3 4 16 - 312
Financial performance measures
RoTE 6.1% 1.5% 0.1% 0.1% 0.5% -% 8.3%
Cost: income ratio 58.5% (5.1)% (0.3)% (0.4)% (1.6)% -% 51.1%
Basic EPS 11.0p 2.8p 0.1p 0.2p 0.8p -p 14.9p
Statutory results Restructuring charges Acquisition accounting unwinds Legacy Hedge ineffectiveness((1)) Other Restated
conduct underlying basis
6 months to 30 Sep 2022 £m £m £m £m £m £m £m
Net interest income 799 - 11 - - - 810
Non-interest income 73 - 8 - 4 (1) 84
Total operating income 872 - 19 - 4 (1) 894
Total operating and administrative expenses before impairment losses (561) 36 2 3 - 62 (458)
Operating profit before impairment losses 311 36 21 3 4 61 436
Impairment losses on credit exposures (31) - - - - - (31)
Profit on ordinary activities before tax 280 36 21 3 4 61 405
Financial performance measures
RoTE 11.3% 1.1% 0.7% 0.1% 0.1% 1.9% 15.2%
Cost: income ratio 64.3% (3.8)% (2.2)% (0.3)% (0.4)% (6.4)% 51.2%
Basic EPS 18.7p 1.8p 1.1p 0.2p 0.2p 3.1p 25.1p
Statutory results Restructuring charges Acquisition accounting unwinds Legacy Hedge ineffectiveness((1)) Other Restated
conduct underlying basis
6 months to 31 Mar 2022 £m £m £m £m £m £m £m
Net interest income 777 - 5 - - - 782
Non-interest income 67 - 8 - (17) 8 66
Total operating income 844 - 13 - (17) 8 848
Total operating and administrative expenses before impairment losses (508) 46 1 5 - - (456)
Operating profit before impairment losses 336 46 14 5 (17) 8 392
Impairment losses on credit exposures (21) - - - - - (21)
Profit on ordinary activities before tax 315 46 14 5 (17) 8 371
Financial performance measures
RoTE 9.1% 1.6% 0.5% 0.2% (0.6)% 0.3% 11.1%
Cost: income ratio 60.2% (5.2)% (1.6)% (0.6)% 1.9% (0.9)% 53.8%
Basic EPS 13.7p 2.5p 0.7p 0.3p (0.9)p 0.4p 16.7p
(1) Hedge ineffectiveness is now presented as an adjustment to underlying earnings
as detailed on page 90. The comparative periods have been adjusted
accordingly. This restatement does not impact the statutory results of the
Group.
Risk management
Risk Report
Risk overview 24
Credit risk 26
Financial risk 47
Risk management
Risk overview
Effective risk management is critical to realising the Group's strategy of
pioneering growth. The safety and soundness of the Group is aligned to Our
Purpose and is fundamental to enabling our customers and stakeholders to be
'happier about money'.
Changes to the risks that the Group is exposed to and how those risks are
managed are disclosed in this report. Where there has been no update to the
way the Group manages and assesses risk, from that disclosed at year end, this
information has not been repeated. These risk disclosures support, and should
be read in conjunction with, the Risk report in the Annual Report and Accounts
2022.
Principal risks
Principal risks are those which could result in events or circumstances that
might threaten the Group's business model, future performance, solvency,
liquidity or reputation. The Group's principal risks are listed below and
remain as disclosed in the 2022 Annual Report and Accounts, with the following
exceptions: "Operational and resilience risk" and "Financial crime risk" have
been renamed "Operational risk" and "Economic crime risk" respectively, to
more clearly define the risk types. "People risk" and "Technology and cyber
risk" are now classified under the wider "Operational risk" principal risk to
align with our Operational Risk Management Framework.
Principal risks Definitions
Credit risk The risk that a borrower or counterparty fails to pay the interest
or capital due on a loan or other financial instrument. Credit risk
manifests in the financial instruments and products that the Group offers and
in which it invests and can arise in respect of both on- and off-balance
sheet exposures.
Financial risk Financial risk includes capital risk, funding risk, liquidity risk,
market risk and pension risk, all of which have the ability to impact
the financial performance of the Group, if not managed correctly.
Model risk The potential for adverse consequences from decisions based on incorrect or
misused model outputs and reports.
Regulatory and compliance risk The risk of failing to comply with relevant laws and regulation or not
keeping the regulators informed of relevant issues or responding
effectively to regulatory requests, leading to regulatory sanction.
Conduct risk The risk of undertaking business in a way that is contrary to the interests of
customers, resulting in customer harm, regulatory censure, redress costs and
reputational damage.
Operational risk Operational risk is defined as the risk of loss resulting from inadequate or
failed internal processes, people and systems or from external events. This
definition includes legal risk but excludes strategic and reputational risk.
Economic crime risk The risk that products and services will be used to facilitate financial
crime, resulting in harm to customers, the Group, or third parties. This
includes money laundering, counter terrorist financing, sanctions, fraud, and
bribery and corruption.
Strategic and enterprise risk The risk of significant loss of earnings or damage from decisions or actions
that impact the long-term interests of the Group's stakeholders or from an
inability to adapt to external developments, including potential execution
risk as a result of transformation activity.
Climate risk The risk of exposure to physical and transition risks arising from climate
change.
Risk management
Risk overview
Emerging and evolving risks
Emerging and evolving risks are current or future risks arising from internal
or external events, with a material unknown or unpredictable component, and
the potential to significantly impact the future performance of the Group or
result in customer harm. Emerging and evolving risks may encompass attributes
of, and/or correlate to, multiple principal risks. The Group's emerging and
evolving risks are continually reassessed and reviewed through a horizon
scanning process, with escalation and reporting to the Board. The horizon
scanning process fully considers all relevant internal and external factors
and is designed to capture those risks which are current but have not yet
fully crystallised, as well as those which are expected to crystallise in
future periods.
The emerging and evolving risk classifications reported in the Group's 2022
Annual Report and Accounts have been retained, with the exception of Potential
for Scottish independence which is now expanded to UK political risks in
recognition of the wider UK political risk themes. Risk descriptions have been
refreshed since the year-end disclosure where appropriate, with important
developments and areas most relevant to the Group's strategy shown.
Risks Trend Description Risk trend since 2022: ▲ Increase ►Unchanged
Externally driven
Economic risk ▲ Inflationary pressures and base rate rises in the UK combined with global
responses to low economic growth, present risks to the Group's strategic plan
and ability to grow. In aggregate, these risks could impact customer
resilience and consequently debt affordability, and drive increases in the
Group's credit provisions, as well as creating higher competitive pressure.
Additionally, difficulties experienced by international banks have created
volatility, which has impacted funding markets, increased the likelihood of
regulatory interventions and risks eroding trust in the banking sector.
UK political risks ► UK political risks, such as those linked to the possibility of a Scottish
independence referendum and the outcome of an expected 2024 general election,
could have financial, operational, and regulatory impacts for the Group. A
UK general election is due no later than 2024 and this creates uncertainty
about the future direction of policy.
Geopolitical tensions ► Geopolitical tensions, including the war in Ukraine, are creating volatility
within domestic and global markets, leading to impacts on global trade and
consumer confidence.
Regulatory change ► The Group remains subject to high levels of oversight as the regulatory
landscape continues to evolve, with the requirement to respond to ongoing
prudential and conduct driven initiatives, the outcomes of which are difficult
to predict. Financial crime and anti-money laundering failures in the banking
sector continue to be a particular area of regulatory focus, and the Group is
subject to high levels of scrutiny and the risk of fines for non-compliance.
Technological change ▲ The rapid pace of technological change, coupled with changing customer
requirements, creates increasing demands on systems resilience and our people.
This could be heightened by the Group's accelerated digital strategy, as new
service propositions and products are launched.
ESG risk ► While climate risk is treated as a principal risk, this emerging risk
acknowledges the uncertainty around the exact nature and impact of climate
change on the Group's strategy, performance, and operating model, as well as
capturing the continued focus on how companies report the impact of their
activities on the environment and on the social challenges to which company
business models must respond.
Internally driven
Change risk ▲ The Group manages a range of complex change programmes which are required to
support the delivery of strategic priorities and regulatory obligations and
can be subject to heightened execution risk given time and resource
constraints. Failure to deliver key change projects could have wide-ranging
impacts.
Third-party risk ▲ The Group's accelerated digitisation strategy relies on a significant number
of third-party services required to maintain day-to-day operations without
interruption, which could create vulnerabilities if not managed and affect
the Group's ability to support our customers and meet regulatory
expectations.
Data stewardship ▲ The Group's accelerated digitisation strategy, combined with changing
regulatory requirements and technological advancements such as Cloud
solutions, places increasing importance on the effective and ethical use of
data. Data is integral to the Group's operations and delivery of strategy, and
significant risks could arise if data is misused, incomplete, absent or not
protected.
Changing skills and talent attraction ► Skill shortages continue to affect the Group's ability to attract, develop
and retain talent in certain sectors, with the backdrop of a highly
competitive labour market and internal cost pressures adding to challenges.
The Group's success is dependent on attracting and retaining skilled and
highly performing personnel.
Risk management
Credit risk
Section Page Tables Page
Credit risk overview 27
Group credit risk exposures 27 Maximum exposure to credit risk on financial assets, contingent liabilities 28
and credit-related commitments
Key credit metrics 28 Key credit metrics 28
Gross loans and advances ECL and coverage 29
Stage 2 balances 30
Credit risk exposure, by internal probability of default (PD) rating, by IFRS 31
9 stage allocation
Movement in gross balances and impairment loss allowance 32
Mortgage credit performance 33 Breakdown of Mortgage portfolio 33
Forbearance 33
Collateral 34 Average LTV of Mortgage portfolio by staging 34
IFRS 9 staging 35 IFRS 9 staging 35
Unsecured credit performance 36 Breakdown of Unsecured credit portfolio 36
Forbearance 36
IFRS 9 staging 37 IFRS 9 staging 37
Business credit performance 38 Breakdown of Business credit portfolio 38
Forbearance 39
IFRS 9 staging 40 IFRS 9 staging 40
Macroeconomic assumptions, scenarios, and weightings 41
Macroeconomic assumptions 41 Scenarios 41
Five-year simple averages on unemployment, GDP and HPI 43
The use of estimates, judgements and sensitivity analysis 43
The use of estimates 43 Economic scenarios 43
ECL impact of HPI changes 44
ECL impact of unemployment rate changes 44
The use of judgements 44 Impact of changes to significant increase in credit risk (SICR) thresholds 44
on staging
Impact of management adjustments (MAs) on the Group's ECL allowance and 45
coverage ratio
Macroeconomic assumptions 46
Risk management
Credit risk
Credit risk overview
Credit risk is the risk that a borrower or counterparty fails to pay the
interest or capital due on a loan or other financial instrument. Credit risk
manifests itself in the financial instruments and products that the Group
offers and in which it invests and can arise in respect of both on- and
off-balance sheet exposures. This remains consistent with the Group's position
as described in the 2022 Annual Report and Accounts (FY22 ARA), and not all of
that information has been replicated in this Interim Financial Report (refer
to the Group's FY22 ARA for further detail).
Close monitoring, clear policies and a disciplined approach to credit risk
management support the Group's operations and have underpinned its resilience
in recently challenging times. The significant inflationary headwinds and cost
of living pressures together with economic and geopolitical factors that have
prevailed over the past 12 months have the potential to affect customer
resilience and debt affordability. The Group continually reviews the steps
that are being taken to support customers through this period of heightened
affordability pressure and ensure that its credit risk framework and
associated policies remain effective and appropriate.
The Group has continued to maintain a relatively stable lending book, with
gross lending to customers decreasing slightly to £73.0bn at 31 March 2023
(30 September 2022: £73.1bn). While the Mortgage portfolio reduced slightly
and the Unsecured portfolio remained stable, underlying growth has been
maintained in the business portfolio, as the Group continues to reduce the
government backed loan schemes and support new and existing customers' lending
needs.
Asset quality remains robust and most of the key asset quality ratios remained
resilient with some weakening in the pre default and delinquency metrics being
monitored.
Within the total ECL provision, the modelled and IA provision has increased to
£455m at 31 March 2023 (30 September 2022: £372m) primarily driven by
updated macroeconomic inputs. MAs have reduced in the period to £71m (30
September 2022: £85m). The net increase in provision is in addition to an IA
impairment charge of £63m in the period (12 months to 30 September 2022:
£106m, 6 months to 31 March 2022: £53m), resulting in a total impairment
charge to the income statement of £144m (12 months to 30 September 2022:
£52m, 6 months to 31 March 2022: £21m), and an associated cost of risk of
40bps (12 months to 30 September 2022: 7bps, 6 months to 31 March 2022: 6bps).
Credit impairments have increased significantly, mainly reflective of higher
modelled ECL, driven by updated macroeconomic inputs and credit bureau data,
in anticipation of a continued increase in arrears.
The selection of appropriate MAs is a component in determining the Group's
ECL, with updates made to some of the MAs held as detailed in the respective
product performance section on the following pages. Taking these factors into
account, the Group has recorded a total impairment provision of £526m at 31
March 2023, an increase of £69m from the £457m held at 30 September 2022 and
a corresponding increase in coverage ratio from 62bps to 72bps.
Group credit risk exposures
The Group is exposed to credit risk across all of its financial asset classes,
however its principal exposure to credit risk arises on customer lending
balances.
Given the significance of customer lending exposures to the Group's overall
credit risk position, the disclosures that follow are focused principally on
customer lending.
The Group is also exposed to credit risk on its other banking and
treasury-related activities, and holds £12.3bn of cash and balances with
central banks and £0.6bn due from other banks at amortised cost (30 September
2022: £12.2bn and £0.7bn respectively), with a further £5.9bn (30 September
2022: £5.1bn) of financial assets at fair value through other comprehensive
income (FVOCI). £11.2bn of cash is held with the BoE (30 September 2022:
£11.0bn), and balances with other banks and financial assets at FVOCI are
primarily held with investment grade counterparties. All other banking and
treasury related financial assets are classed as Stage 1 with no material ECL
provision held.
The following tables show the levels of concentration of the Group's loans and
advances, contingent liabilities and credit-related commitments.
Risk management
Credit risk
Maximum exposure to credit risk on financial assets, contingent liabilities
and credit-related commitments
Gross loans and advances to customers Contingent liabilities and credit-related commitments Total
31 March 2023
£m £m £m
Mortgages 57,998 2,920 60,918
Unsecured 6,481 11,138 17,619
Business 8,523 4,043 12,566
Total 73,002 18,101 91,103
Impairment provisions held on credit exposures ((1)) (522) (4) (526)
Fair value hedge adjustment (601) - (601)
Maximum credit risk exposure on lending assets 71,879 18,097 89,976
Cash and balances with central banks 12,328
Financial assets at FVOCI 5,869
Due from other banks 583
Other financial assets at fair value 76
Derivative financial assets 201
Maximum credit risk exposure on all financial assets ((2)) 109,033
30 September 2022
Mortgage 58,464 4,200 62,664
Unsecured 6,513 11,057 17,570
Business 8,169 4,102 12,271
Total 73,146 19,359 92,505
Impairment provisions held on credit exposures ((1)) (454) (3) (457)
Fair value hedge adjustment (941) - (941)
Maximum credit risk exposure on lending assets 71,751 19,356 91,107
Cash and balances with central banks 12,221
Financial assets at FVOCI 5,064
Due from other banks 656
Other financial assets at fair value 78
Derivative financial assets 342
Maximum credit risk exposure on all financial assets ((2)) 109,468
(1) The total ECL provision covers both on and off-balance sheet exposures
which are reflected in notes 3.1 and 3.6 respectively. All tables and ratios
that follow are calculated using the combined on- and off-balance sheet ECL,
which is consistent for all periods reported.
(2) Unless otherwise noted, the amount that best represents the maximum
credit exposure at the reporting date is the carrying value of the financial
asset.
Key credit metrics
6 months to 12 months to 6 months to
31 Mar 2023 30 Sep 2022 31 Mar 2022
£m £m £m
Impairment charge/(credit) on credit exposures
Mortgage lending 3 (30) (21)
Unsecured lending 126 178 69
Business lending 15 (96) (27)
Total Group impairment charge 144 52 21
Underlying impairment charge ((1)) to average customer loans (cost of risk) 0.40% 0.07% 0.06%
6 months to 12 months to
31 Mar 2023 30 Sep 2022
Key asset quality ratios
% Loans in Stage 2 9.68% 7.76%
% Loans in Stage 3 1.45% 1.41%
Total book coverage ((2)) 0.72% 0.62%
Stage 2 coverage ((2)) 4.94% 4.72%
Stage 3 coverage ((2)) 12.10% 11.24%
(1) Inclusive of gains/losses on assets held at fair value and elements of fraud
loss.
(2)
This excludes the government-backed portfolio of BBLs, Recovery Loan Scheme
(RLS), Coronavirus business interruption loan scheme (CBILs) and Coronavirus
large business interruption loan scheme (CLBILs).
Risk management
Credit risk
Credit quality of loans and advances
The following tables outline the staging profile of the Group's customer
lending portfolios which is key to understanding their asset quality.
Gross loans and advances ((1)) ECL and coverage
Unsecured
31 March 2023
Mortgages Cards Loans and Overdrafts Combined Business ((2)) To
ta
l(
(2
))
£m % £m % £m % £m % £m % £m %
Stage 1 53,711 92.6% 4,434 78.6% 483 57.2% 4,917 75.6% 6,190 72.6% 64,818 88.8%
Stage 2 - total 3,734 6.4% 1,116 19.8% 352 41.8% 1,468 22.9% 1,917 22.5% 7,119 9.7%
Stage 2: 0 DPD 3,365 5.8% 1,057 18.8% 347 41.2% 1,404 21.9% 1,891 22.2% 6,660 9.1%
Stage 2: < 30 DPD 197 0.3% 30 0.5% 3 0.3% 33 0.5% 8 0.1% 238 0.3%
Stage 2: > 30 DPD 172 0.3% 29 0.5% 2 0.3% 31 0.5% 18 0.2% 221 0.3%
Stage 3((3)) 553 1.0% 88 1.6% 8 1.0% 96 1.5% 416 4.9% 1,065 1.5%
57,998 100.0% 5,638 100.0% 843 100.0% 6,481 100.0% 8,523 100.0% 73,002 100.0%
ECLs((4))
Stage 1 6 10.2% 35 11.0% 5 14.3% 40 11.3% 19 16.8% 65 12.4%
Stage 2 - total 38 64.4% 239 74.9% 24 68.6% 263 74.3% 48 42.5% 349 66.3%
Stage 2: 0 DPD 33 55.9% 208 65.2% 21 60.0% 229 64.7% 48 42.5% 310 58.9%
Stage 2: < 30 DPD 2 3.4% 15 4.7% 1 2.9% 16 4.5% - - 18 3.4%
Stage 2: > 30 DPD 3 5.1% 16 5.0% 2 5.7% 18 5.1% - - 21 4.0%
Stage 3((3)) 15 25.4% 45 14.1% 6 17.1% 51 14.4% 46 40.7% 112 21.3%
59 100.0% 319 100.0% 35 100.0% 354 100.0% 113 100.0% 526 100.0%
Coverage
Stage 1 0.01% 0.85% 1.04% 0.87% 0.33% 0.10%
Stage 2 - total 0.99% 22.82% 6.69% 18.70% 2.57% 4.94%
Stage 2: 0 DPD 0.97% 20.88% 6.03% 16.98% 2.58% 4.68%
Stage 2: < 30 DPD 0.84% 56.47% 37.09% 54.60% 1.04% 7.79%
Stage 2: > 30 DPD 1.74% 59.84% 59.47% 59.80% 1.26% 10.01%
Stage 3((3)) 2.70% 53.55% 75.16% 55.52% 17.07% 12.10%
0.10% 6.02% 4.12% 5.75% 1.45% 0.72%
Unsecured
30 September 2022
Mortgages Cards Loans and Overdrafts Combined Business ((2)) Total((2))
£m % £m % £m % £m % £m % £m %
Stage 1 54,791 93.7% 4,712 84.8% 612 64.1% 5,324 81.8% 6,270 76.7% 66,385 90.8%
Stage 2 - total 3,090 5.3% 774 13.9% 335 35.1% 1,109 17.0% 1,526 18.7% 5,725 7.8%
Stage 2: 0 DPD 2,763 4.7% 723 13.0% 327 34.3% 1,050 16.1% 1,499 18.4% 5,312 7.2%
Stage 2: < 30 DPD 158 0.3% 27 0.5% 3 0.3% 30 0.5% 9 0.1% 197 0.3%
Stage 2: > 30 DPD 169 0.3% 24 0.4% 5 0.5% 29 0.4% 18 0.2% 216 0.3%
Stage 3((3)) 583 1.0% 72 1.3% 8 0.8% 80 1.2% 373 4.6% 1,036 1.4%
58,464 100.0% 5,558 100.0% 955 100.0% 6,513 100.0% 8,169 100.0% 73,146 100.0%
ECLs
Stage 1 10 17.9% 57 23.2% 6 15.8% 63 22.2% 12 10.3% 85 18.6%
Stage 2 - total 32 57.1% 156 63.4% 25 65.8% 181 63.7% 55 47.0% 268 58.6%
Stage 2: 0 DPD 28 49.9% 129 52.4% 22 57.9% 151 53.1% 55 47.0% 234 51.2%
Stage 2: < 30 DPD 2 3.6% 14 5.7% 1 2.6% 15 5.3% - - 17 3.7%
Stage 2: > 30 DPD 2 3.6% 13 5.3% 2 5.3% 15 5.3% - - 17 3.7%
Stage 3((3)) 14 25.0% 33 13.4% 7 18.4% 40 14.1% 50 42.7% 104 22.8%
56 100.0% 246 100.0% 38 100.0% 284 100.0% 117 100.0% 457 100.0%
Coverage
Stage 1 0.02% 1.29% 1.06% 1.26% 0.22% 0.13%
Stage 2 - total 1.02% 21.94% 7.29% 17.22% 3.75% 4.72%
Stage 2: 0 DPD 1.02% 19.41% 6.41% 15.09% 3.76% 4.43%
Stage 2: < 30 DPD 0.81% 57.37% 33.67% 54.48% 3.57% 8.53%
Stage 2: > 30 DPD 1.25% 59.03% 52.92% 58.01% 1.47% 8.57%
Stage 3((3)) 2.28% 50.96% 73.14% 53.51% 19.96% 11.24%
0.09% 4.81% 3.88% 4.66% 1.59% 0.62%
(1) Excludes loans designated at FVTPL and balances due from customers on
acceptances.
(2) Business and total coverage ratio excludes the guaranteed element of
government-backed loans.
(3) Stage 3 includes POCI for gross loans and advances of £51m for Mortgages and
£1m for Unsecured (30 September 2022: £56m and £1m respectively); and ECL
of (£1m) for Mortgages and (£1m) for Unsecured (30 September 2022: (£1m)
and (£2m) respectively). There is no POCI for Business in either period.
(4) Includes MAs of £31m for Mortgages, £24m for Unsecured and £16m for
Business (30 September 2022: £34m Mortgages, £33m Unsecured, £18m Business)
which is primarily held in Stage 1 and 2.
Risk management
Credit risk
Credit quality of loans and advances (continued)
Stage 2 balances
There can be a number of reasons that require a financial asset to be subject
to a Stage 2 lifetime ECL calculation other than reaching the 30 DPD
backstop. The following table highlights the relevant trigger point leading to
a financial asset being classed as Stage 2:
31 March 2023 Unsecured
Mortgages Cards Loans & Overdrafts Combined Business To
ta
l
£m % £m % £m % £m % £m % £m %
PD deterioration 2,711 72% 661 59% 349 99% 1,010 69% 1,198 63% 4,919 69%
Forbearance 96 3% 12 1% 1 - 13 1% 235 12% 344 5%
AFD or Watch List ((1)) 5 - - - - - - - 466 24% 471 7%
> 30 DPD 172 5% 29 3% 2 1% 31 2% 18 1% 221 3%
Other ((2)) 750 20% 414 37% - - 414 28% - - 1,164 16%
3,734 100% 1,116 100% 352 100% 1,468 100% 1,917 100% 7,119 100%
ECLs((3))
PD deterioration 24 63% 121 50% 22 92% 143 54% 24 50% 191 56%
Forbearance 3 8% 4 2% - - 4 2% 12 25% 19 5%
AFD or Watch List ((1)) - - - - - - - - 12 25% 12 3%
> 30 DPD 3 8% 16 7% 2 8% 18 7% - - 21 6%
Other ((2)) 8 21% 98 41% - - 98 37% - - 106 30%
38 100% 239 100% 24 100% 263 100% 48 100% 349 100%
30 September 2022 Unsecured
Mortgages Cards Loans & Overdrafts Combined Business Tot
al
£m % £m % £m % £m % £m % £m %
PD deterioration 2,084 69% 401 52% 329 99% 730 66% 826 55% 3,640 64%
Forbearance 106 3% 9 1% 1 - 10 1% 235 15% 351 6%
AFD or Watch List ((1)) 6 - - - - - - - 447 29% 453 8%
> 30 DPD 169 5% 24 3% 5 1% 29 3% 18 1% 216 4%
Other ((2)) 725 23% 340 44% - - 340 30% - - 1,065 18%
3,090 100% 774 100% 335 100% 1,109 100% 1,526 100% 5,725 100%
ECLs((3))
PD deterioration 18 55% 73 47% 23 92% 96 53% 26 47% 140 53%
Forbearance 5 16% 3 2% - - 3 2% 12 22% 20 7%
AFD or Watch List ((1)) - - - - - - - - 17 31% 17 6%
> 30 DPD 2 6% 13 8% 2 8% 15 8% - - 17 6%
Other ((2)) 7 23% 67 43% - - 67 37% - - 74 28%
32 100% 156 100% 25 100% 181 100% 55 100% 268 100%
(1) Approaching Financial Difficulty (AFD) and Watch markers are early warning
indicators of Business customers who may be approaching financial
difficulties. If these indicators are not reversed, they may lead to a
requirement for more proactive management by the Group.
(2) Other includes high indebtedness, county court judgement and previous arrears,
as well as a number of smaller value drivers.
(3) Includes MAs.
Risk management
Credit risk
Credit risk exposure, by internal PD rating, by IFRS 9 stage allocation
The distribution of the Group's credit exposures by internal PD rating is
analysed below:
Stage 1 Stage 2 Stage 3((1)) Total
31 March 2023 Lending ECL((2)) Lending £m ECL((2)) Lending £m ECL((2)) Lending £m ECL((2))
£m £m £m £m £m
Mortgages PD range
Strong 0 - 0.74 49,905 3 2,051 7 - - 51,956 10
Good 0.75 - 2.49 3,359 2 905 8 - - 4,264 10
Satisfactory 2.50 - 99.99 447 1 778 23 - - 1,225 24
Default 100 - - - - 553 15 553 15
Total 53,711 6 3,734 38 553 15 57,998 59
Unsecured
Strong 0 - 2.49 4,484 28 446 28 - - 4,930 56
Good 2.50 - 9.99 429 11 715 122 - - 1,144 133
Satisfactory 10.00 - 99.99 4 1 307 113 - - 311 114
Default 100 - - - - 96 51 96 51
Total 4,917 40 1,468 263 96 51 6,481 354
Business
Strong 0 - 0.74 2,500 2 130 - - - 2,630 2
Good 0.75 - 9.99 3,680 17 1,649 39 - - 5,329 56
Satisfactory 10.00 - 99.99 10 - 138 9 - - 148 9
Default 100 - - - - 416 46 416 46
Total 6,190 19 1,917 48 416 46 8,523 113
Stage 1 Stage 2 Stage 3((1)) Total
30 September 2022 Lending £m ECL((2)) Lending £m ECL((2)) Lending £m ECL((2)) Lending £m ECL((2))
£m £m £m £m
Mortgages PD range
Strong 0 - 0.74 52,184 6 1,864 10 - - 54,048 16
Good 0.75 - 2.49 2,302 2 641 5 - - 2,943 7
Satisfactory 2.50 - 99.99 305 2 585 17 - - 890 19
Default 100 - - - - 583 14 583 14
Total 54,791 10 3,090 32 583 14 58,464 56
Unsecured
Strong 0 - 2.49 4,795 42 413 26 - - 5,208 68
Good 2.50 - 9.99 524 20 459 72 - - 983 92
Satisfactory 10.00 - 99.99 5 1 237 83 - - 242 84
Default 100 - - - - 80 40 80 40
Total 5,324 63 1,109 181 80 40 6,513 284
Business
Strong 0 - 0.74 4,808 5 719 17 - - 5,527 22
Good 0.75 - 9.99 1,455 7 751 31 - - 2,206 38
Satisfactory 10.00 - 99.99 7 - 56 7 - - 63 7
Default 100 - - - - 373 50 373 50
Total 6,270 12 1,526 55 373 50 8,169 117
(1) Stage 3 includes POCI for gross lending of £51m for Mortgages and £1m for
Unsecured (30 September 2022: £56m and £1m respectively); and ECL of (£1m)
for Mortgages and (£1m) for Unsecured (30 September 2022: (£1m) and (£2m)
respectively).
(2) Includes MAs of £31m for Mortgages, £24m for Unsecured and £16m for
Business (30 September 2022: £34m Mortgages, £33m Unsecured, £18m Business)
which is primarily held in Stage 1 and 2.
Risk management
Credit risk
Movement in gross lending balances and impairment loss allowance
The following table shows the changes in the loss allowance and gross carrying
value of the portfolios. Values are calculated using the individual customer
account balances, and the stage allocation is taken as at the end of each
month. The monthly position of each account is aggregated to report a net
closing position for the period, thereby incorporating all movements an
account has made during the period.
6 months to 31 March 2023 Stage 1 Stage 2 Stage 3((1)) Total Total provisions((4))
gross £m
loans
£m
Gross ecl Gross ecl Gross ecl
loans £m loans £m loans £m
£m £m £m
Opening balance at 1 October 2022 66,385 85 5,725 268 1,036 104 73,146 457
Transfers from Stage 1 to Stage 2 (4,584) (28) 4,573 215 - - (11) 187
Transfers from Stage 2 to Stage 1 2,315 9 (2,334) (56) - - (19) (47)
Transfers to Stage 3 (49) - (283) (49) 333 62 1 13
Transfers from Stage 3 73 - 54 1 (132) (4) (5) (3)
Changes to model methodology - - - - - - - -
New assets originated or purchased ((2)) 10,555 20 311 25 69 15 10,935 60
Repayments and other movements ((3)) (1,873) (10) (203) (11) 70 - (2,006) (21)
Repaid or derecognised (8,004) (11) (724) (44) (218) (53) (8,946) (108)
Write-offs - - - - (93) (93) (93) (93)
Recoveries - - - - - 18 - 18
Individually assessed impairment charge - - - - - 63 - 63
Closing balance at 31 March 2023 64,818 65 7,119 349 1,065 112 73,002 526
12 months to 30 September 2022 Stage 1 Stage 2 Stage 3((1)) Total Total provisions
gross £m
loans
£m
Gross ecl Gross ecl Gross ecl
loans £m loans £m loans £m
£m £m £m
Opening balance at 1 October 2021 61,416 111 10,178 302 957 91 72,551 504
Transfers from Stage 1 to Stage 2 (8,287) (45) 8,227 294 - - (60) 249
Transfers from Stage 2 to Stage 1 10,218 27 (10,282) (145) - - (64) (118)
Transfers to Stage 3 (91) - (562) (84) 650 101 (3) 17
Transfers from Stage 3 42 - 137 8 (187) (12) (8) (4)
Changes to model methodology 443 1 (442) (8) - - 1 (7)
New assets originated or purchased ((2)) 22,162 187 2,055 159 187 32 24,404 378
Repayments and other movements ((3)) (3,434) (42) (155) (65) 56 (15) (3,533) (122)
Repaid or derecognised (16,084) (154) (3,431) (193) (498) (101) (20,013) (448)
Write-offs - - - - (129) (129) (129) (129)
Recoveries - - - - - 30 - 30
Individually assessed impairment charge - - - - - 107 - 107
Closing balance at 30 September 2022 66,385 85 5,725 268 1,036 104 73,146 457
(1) Stage 3 includes POCI for gross loans and advances of £51m for Mortgages and
£1m for Unsecured (30 September 2022: £56m and £1m respectively), and ECL
of (£1m) for Mortgages and (£1m) for Unsecured (30 September 2022: (£1m)
and (£2m) respectively). There is no POCI for Business in either period.
(2) Includes assets where the term has ended, and a new facility has been
provided.
(3) 'Repayments' comprises payments made on customer lending which are not yet
fully paid at the reporting date and the customer arrangement remains live at
that date. 'Repaid' refers to payments made on customer lending which is
either fully repaid or derecognised by the reporting date and the customer
arrangement is therefore closed at that date.
(4) Includes MAs of £31m for Mortgages, £24m for Unsecured and £16m for
Business (30 September 2022: £34m Mortgages, £33m Unsecured, £18m Business)
which is primarily held in Stage 1 and 2.
In addition to the above on-balance sheet position, the Group also has
£18,101m of loan commitments and financial guarantee contracts (30 September
2022: £19,359m) of which £16,989m (93.9%) are held under Stage 1, £1,048m
in Stage 2 and £64m in Stage 3 (30 September 2022: £18,454m (95.3%) held
under Stage 1, £865m in Stage 2 and £40m in Stage 3). ECLs of £4m (30
September 2022: £3m) are included in the table above, of which £1m (30
September 2022: £1m) is held under Stage 1 and £3m (30 September 2022: £2m)
under Stage 2.
The overall net increase in Stage 2 and Stage 3 is driven by a variety of
factors at individual product portfolio levels, with further detail provided
in the following portfolio performance pages. Overall portfolio activity
remains strong, with sustained levels of new lending and customer repayments.
The levels of default across the portfolio remain low.
The contractual amount outstanding on loans and advances that were written off
during the reporting period or still subject to enforcement activity was
£4.7m (30 September 2022: £4.3m). The Group has not purchased any lending
assets in the period (30 September 2022: none). Further information on staging
profile is provided at a portfolio level in the respective portfolio
performance section on the following pages.
Risk management
Credit risk
Mortgage credit performance
The table below presents key information which is important for understanding
the asset quality of the Group's Mortgage portfolio and should be read in
conjunction with the supplementary data presented in the following pages of
this section.
Breakdown of Mortgage portfolio
Gross lending Modelled & IA ECL MA Total ECL Net lending Coverage Average LTV
31 March 2023 £m £m £m £m £m % %
Residential - capital repayment 35,908 16 4 20 35,888 0.05% 55.9%
Residential - interest only 7,299 5 1 6 7,293 0.08% 47.4%
Buy-to-let (BTL) 14,791 7 26 33 14,758 0.22% 53.5%
Total Mortgage portfolio 57,998 28 31 59 57,939 0.10% 53.6%
30 September 2022
Residential - capital repayment 36,417 13 5 18 36,399 0.05% 54.2%
Residential - interest only 7,041 3 1 4 7,037 0.05% 45.4%
BTL 15,006 6 28 34 14,972 0.22% 52.4%
Total Mortgage portfolio 58,464 22 34 56 58,408 0.09% 52.7%
Mortgage lending reduced in the period to £58.0bn (30 September 2022:
£58.5bn) as the Group continued to prioritise margin in an increasingly
competitive environment.
The portfolio continues to evidence good underlying credit performance, with
the majority (98%) of lending not yet past due at the balance sheet date (30
September 2022: 98%), and 93% of loans held in Stage 1 (30 September 2022:
94%). Stage 3 balances have remained consistently low at 1.0% (30 September
2022: 1.0%) and 89% of the portfolio has an LTV of less than 75% (30 September
2022: 93%), with the weighted average LTV increasing slightly in the period to
53.6% (30 September 2022: 52.7%). A significant proportion of the portfolio
(90%) is rated Strong at the balance sheet date (30 September 2022: 92%)
All of these key metrics evidence a high quality mortgage portfolio, with
relatively low risk of default, driven by sound lending decisions and
underwriting criteria. Further detail on LTV bandings is provided on the
following pages.
The revised model economic scenarios (MES) have contributed to an increase of
£6m in the modelled and IA ECL, taking the total modelled and IA ECL
provision to £28m (30 September 2022: £22m). Total MAs have reduced in the
period, as detailed below, from £34m at 30 September 2022 to £31m at 31
March 2023. The total Mortgage portfolio impairment provision is £59m (30
September 2022: £56m).
The Group has maintained MA's for the Mortgage portfolio to address the
ongoing heightened uncertainty over anticipated future default rates across
the portfolio. The most significant of these is the MA on the BTL portfolio
which has held stable at £25m (30 September 2022: £25m) and reflects that
the Group continues to take a cautious approach on this component of the loan
book. The £6m MA introduced for cost-of-living shocks that were not yet fully
observed and incorporated in the modelled ECL, has been released as it is now
considered that the increase in modelled provisioning during the period,
driven by the updated MES, reflects the potential impact on portfolio asset
quality, debt affordability from rising base rates and other inflationary
impacts, for which this MA was initially held.
Other small MAs totalling £6m (30 September 2022: £3m) have also been
retained, including a new economic resilience MA of £3m.
The increase of modelled provisions is the primary driver of the impairment
charge in the income statement of £3m (12 months to 30 September 2022: credit
of £30m, 6 months to 31 March 2022: credit of £21m) and associated cost of
risk of 1bps for the period (12 months to 30 September 2022: (4) bps, 6 months
to 31 March 2022: (7)bps).
The total book coverage has increased to 10bps, higher than the pre-pandemic
level of 7bps.
Forbearance
The volume and value of loans in forbearance has reduced to 4,032/£531m from
4,636/£640m, primarily due to customers successfully completing the
forbearance reporting probation period and returning to fully performing
status.
When all other avenues of resolution, including forbearance, have been
explored, the Group will take steps to repossess and sell underlying
collateral. In the 6 month period to 31 March 2023, there were 30
repossessions (12 months to 30 September 2022:73). The Group remains committed
to supporting the customer and places good outcomes for them at the centre of
this strategy.
Risk management
Credit risk
Mortgage credit performance (continued)
Collateral
The quality of the Group's Mortgage portfolio can be considered in terms of
the average LTV of the portfolio and the staging of the portfolio, as set out
in the following tables:
Average LTV of Mortgage portfolio by staging
31 March 2023 Stage 1 Stage 2 Stage 3((2)) Total
LTV ((1)) Loans % ECL Loans % ECL Loans % ECL Loans % ECL((3))
£m £m £m £m £m £m £m £m
Less than 50% 21,099 39% 1 1,805 48% 4 278 51% 2 23,182 40% 7
50% to 75% 26,370 49% 2 1,587 43% 20 211 38% 2 28,168 48% 24
76% to 80% 3,153 6% 1 183 5% 7 22 4% 1 3,358 6% 9
81% to 85% 1,526 3% 1 70 2% 1 8 1% - 1,604 3% 2
86% to 90% 1,000 2% 1 52 1% 2 11 2% 1 1,063 2% 4
91% to 95% 468 1% - 30 1% 1 7 1% 1 505 1% 2
96% to 100% 63 - - 3 - - 6 1% - 72 - -
Greater than 100% 32 - - 4 - 3 10 2% 8 46 - 11
53,711 100% 6 3,734 100% 38 553 100% 15 57,998 100% 59
30 September 2022 Stage 1 Stage 2 Stage 3((2)) Total
LTV ((1)) Loans % ECL Loans % ECL Loans % ECL Loans % ECL
£m £m £m £m £m £m £m £m
Less than 50% 23,069 43% 2 1,659 54% 3 288 49% 2 25,016 43% 7
50% to 75% 27,452 50% 5 1,270 41% 19 242 42% 2 28,964 50% 26
76% to 80% 2,412 4% 1 103 3% 3 17 3% 1 2,532 4% 5
81% to 85% 1,108 2% 1 26 1% 1 11 2% 1 1,145 2% 3
86% to 90% 547 1% 1 25 1% 1 6 1% - 578 1% 2
91% to 95% 154 - - 4 - 1 8 1% 1 166 - 2
96% to 100% 16 - - - - - 3 1% - 19 - -
Greater than 100% 33 - - 3 - 4 8 1% 7 44 - 11
54,791 100% 10 3,090 100% 32 583 100% 14 58,464 100% 56
(1) LTV of the Mortgage portfolio is defined as Mortgage portfolio weighted by
balance. The portfolio is indexed using the MIAC Acadametrics indices at a
given date.
(2) Stage 3 includes £51m (30 September 2022: £56m) of POCI gross loans and
advances.
(3) Includes MAs of £31m (30 September 2022: £34m) which is primarily held in
Stage 1 and 2.
The Mortgage portfolio remains highly secured with 88.5% of mortgages, by loan
value, having an indexed LTV of less than 75% (30 September 2022: 92.3%), and
an average portfolio LTV of 53.6% (30 September 2022: 52.7%).
The three primary influences on the LTV profile are customer drawdowns,
repayments, and the MIAC index. There has been a reduction in the volume of
drawdowns in the period as customers have been more cautious in the dynamic
pricing environment following the mini budget last autumn. This has been most
notable in the BTL portfolio which typically has a lower LTV profile. The
level of existing customer repayment has been sustained during the period and
the movements in the MIAC index were not as favourable as prior updates and
ultimately resulted in an upward movement in the average LTV.
Risk management
Credit risk
Mortgage credit performance (continued)
IFRS 9 staging
The Group closely monitors the staging profile of the Mortgage portfolio over
time which can be indicative of general trends in book health. Movements in
the staging profile of the portfolio in the current and prior period are
presented in the tables below.
6 months to 31 March 2023 Stage 1 Stage 2 Stage 3((1)) Total Total provision((4))
gross £m
loans
£m
Gross ecl Gross ecl Gross ecl
loans £m loans £m loans £m
£m £m £m
Opening balance at 1 October 2022 54,791 10 3,090 32 583 14 58,464 56
Transfers from Stage 1 to Stage 2 (2,749) (2) 2,731 33 - - (18) 31
Transfers from Stage 2 to Stage 1 1,710 1 (1,720) (17) - - (10) (16)
Transfers to Stage 3 (30) - (124) (2) 152 3 (2) 1
Transfers from Stage 3 67 - 44 1 (113) (1) (2) -
Changes to model methodology - - - - - - - -
New assets originated or purchased ((2)) 4,833 1 - - - - 4,833 1
Repayments and other movements ((3)) (1,438) (3) (44) (5) (5) - (1,487) (8)
Repaid or derecognised (3,473) (1) (243) (4) (64) (1) (3,780) (6)
Write-offs - - - - - - - -
Recoveries - - - - - - - -
Individually assessed impairment charge - - - - - - - -
Closing balance at 31 March 2023 53,711 6 3,734 38 553 15 57,998 59
Stage 1 Stage 2 Stage 3((1)) Total
gross
loans
£m
12 months to 30 September 2022 Gross ecl Gross ecl Gross ecl Total provisions
loans £m loans £m loans £m £m
£m £m £m
Opening balance at 1 October 2021 50,596 4 7,192 64 653 19 58,441 87
Transfers from Stage 1 to Stage 2 (5,854) (1) 5,821 55 - - (33) 54
Transfers from Stage 2 to Stage 1 8,820 3 (8,851) (55) - - (31) (52)
Transfers to Stage 3 (49) - (191) (5) 238 4 (2) (1)
Transfers from Stage 3 29 - 108 5 (140) (3) (3) 2
Changes to model methodology - - - - - - - -
New assets originated or purchased ((2)) 9,971 1 7 - 1 - 9,979 1
Repayments and other movements ((3)) (2,484) 4 (154) (23) (26) (3) (2,664) (22)
Repaid or derecognised (6,238) (1) (842) (9) (142) (2) (7,222) (12)
Write-offs - - - - (1) (1) (1) (1)
Recoveries - - - - - - - -
Individually assessed impairment charge - - - - - - - -
Closing balance at 30 September 2022 54,791 10 3,090 32 583 14 58,464 56
(1) Stage 3 includes POCI for gross loans and advances of £51m and ECL of (£1m)
(30 September 2022: £56m and (£1m) respectively).
(2) Includes assets where the term has ended, and a new facility has been
provided.
(3) 'Repayments' comprises payments made on customer lending which are not yet
fully paid at the reporting date and the customer arrangement remains live at
that date. 'Repaid' refers to payments made on customer lending which is
either fully repaid or derecognised by the reporting date and the customer
arrangement is therefore closed at that date.
(4) Includes MAs of £31m (30 September 2022: £34m) which is primarily held in
Stage 1 and 2.
Despite the economic uncertainty, the Mortgage portfolio continues to evidence
strong performance with low levels of customer deterioration. The revised MES
inputs are the primary driver of the slight change in lending classed as Stage
1 to 92.6% (30 September 2022: 93.7%), with a corresponding increase in assets
in Stage 2 from 5.3% to 6.4%. Within the Stage 2 category, 5.8% is not yet
past due at the balance sheet date (30 September 2022: 4.7%) but falls into
the Stage 2 classification due predominantly to PD deterioration. The
proportion of mortgages classified as Stage 3 remains modest at 1.0% (30
September 2022: 1.0%).
There has been a slight decrease in assets classed as 'Strong' from 92.4% at
30 September 2022 to 89.6% at 31 March 2023, although the proportion of the
portfolio classed as 'Good' or 'Strong' remains stable at 96.9% (30 September
2022: 97.0%).
The sustained quality in the internal PD ratings and high quality of
collateral underpinning the book are key factors supporting the lower level of
provision coverage required.
Risk management
Credit risk
Unsecured credit performance
The table below presents key information which is important for understanding
the asset quality of the Group's Unsecured lending portfolio and should be
read in conjunction with the supplementary data presented in the following
pages of this section.
Breakdown of Unsecured credit portfolio
Gross lending Modelled & IA ECL MA Total ECL Net lending Coverage
31 March 2023 £m £m £m £m £m %
Credit cards 5,638 296 23 319 5,319 6.02%
Personal loans 815 31 1 32 783 3.83%
Overdrafts 28 3 - 3 25 12.09%
Total Unsecured lending portfolio 6,481 330 24 354 6,127 5.75%
30 September 2022
Credit cards 5,558 216 30 246 5,312 4.81%
Personal loans 925 32 2 34 891 3.57%
Overdrafts 30 4 - 4 26 12.57%
Total Unsecured lending portfolio 6,513 252 32 284 6,229 4.66%
Unsecured gross lending balances remained stable at £6.5bn (30 September
2022: £6.5bn) with underlying growth in the credit card portfolio offset by
the personal loan portfolio which continues to contract.
While there has been evidence of a slight deterioration in early stage
delinquency metrics in the portfolio against a backdrop of a downturn in the
broader UK economy, the credit quality of the Unsecured portfolio remains
high, with 97.5% of the portfolio in Stage 1 or Stage 2 not past due (30
September 2022: 97.9%), and a modest 1.5% in Stage 3 (30 September 2022:
1.2%).
There has been an increase in the modelled provision to £330m (30 September
2022: £252m), primarily in the Cards portfolio where the downturn has been
reflected through the updated MES and credit bureau data, in anticipation of a
continued increase in arrears.
The £20m MA introduced at September 2022 for cost-of-living shocks that were
not yet fully observed and incorporated in the modelled ECL, has been released
as it is now considered that the increase in modelled provisioning reflects
the cost of living pressures during the period for which the MA was initially
held. The MA held for debt sale has increased to £23.9m (30 September 2022:
£10.5m) reflecting the terms of the new contract entered into during the
period which have not yet been incorporated into the model. Once the model has
completed the relevant revision, governance, approval and implementation
stages, the MA will be removed.
There are two other MAs totalling £0.4m (30 September 2022: three totalling
£1.8m). The overall MAs in the Unsecured portfolio have therefore decreased
to £24m at 31 March 2023 (30 September 2022: £32m).
Taking these together, the total ECL provision held as at 31 March 2023 is
£354m (30 September 2022: £284m), which in addition to an IA impairment
charge of £55m, give rise to a total impairment charge in the income
statement in the period of £126m (12 months to 30 September 2022: £178m, 6
months to 31 March 2022: £69m).
Total book coverage of 575bps has increased from 466bps as at 30 September
2022 and remains higher than pre-pandemic levels of 342bps. The increase has
been primarily driven by the credit card portfolio, where coverage has
increased from 481bps at 30 September 2022 to 602bps at 31 March 2023.
Forbearance
The level of forbearance in the Unsecured portfolio remains low at 1.31% of
total portfolio lending at 31 March 2023 (30 September 2022: 1.12%). The level
of impairment coverage on forborne lending has increased to 42.5% from 39.5%
at 30 September 2022.
Credit cards forbearance totalled £73m (18,305 accounts), an increase from
the 30 September 2022 position of £62m (15,872 accounts) reflective of the
current environment. This represents 1.39% of total credit cards balances (30
September 2022: 1.19%).
Limited forbearance is exercised in relation to Personal loans and overdrafts
and it remains relatively stable at £3m which equates to 0.51% of the
portfolio (30 September 2022: £3m, 0.54%).
Risk management
Credit risk
Unsecured credit performance (continued)
IFRS 9 staging
The Group closely monitors the staging profile of its Unsecured lending
portfolio over time which can be indicative of general trends in book health.
Movements in the staging profile of the portfolio in the current and prior
period are presented in the tables below:
Stage 1 Stage 2 Stage 3((1)) Total Total provisions((4))
gross £m
loans
£m
6 months to 31 March 2023 Gross ecl Gross ecl Gross ecl
loans £m loans £m loans £m
£ £m £m
Opening balance at 1 October 2022 5,324 63 1,109 181 80 40 6,513 284
Transfers from Stage 1 to Stage 2 (808) (24) 818 159 - - 10 135
Transfers from Stage 2 to Stage 1 257 7 (265) (31) - - (8) (24)
Transfers to Stage 3 (7) - (80) (45) 90 54 3 9
Transfers from Stage 3 - - - - (2) (2) (2) (2)
Changes to model methodology - - - - - - - -
New assets originated or purchased ((2)) 482 6 - - 1 1 483 7
Repayments and other movements ((3)) (215) (10) (97) 4 68 - (244) (6)
Repaid or derecognised (116) (2) (17) (5) (68) (41) (201) (48)
Write-offs - - - - (73) (73) (73) (73)
Recoveries - - - - - 17 - 17
Individually assessed impairment charge - - - - - 55 - 55
Closing balance at 31 March 2023 4,917 40 1,468 263 96 51 6,481 354
12 months to 30 September 2022 Stage 1 Stage 2 Stage 3((1)) Total Total provisions
gross £m
loans
£m
Gross ecl Gross ecl Gross ecl
loans £m loans £m loans £m
£m £m £m
Opening balance at 1 October 2021 5,148 41 553 118 69 35 5,770 194
Transfers from Stage 1 to Stage 2 (1,051) (31) 1,059 210 - - 8 179
Transfers from Stage 2 to Stage 1 504 16 (523) (62) - - (19) (46)
Transfers to Stage 3 (19) - (116) (69) 139 83 4 14
Transfers from Stage 3 1 - 2 1 (8) (7) (5) (6)
Changes to model methodology - - - - - - - -
New assets originated or purchased ((2)) 1,708 20 11 4 7 5 1,726 29
Repayments and other movements ((3)) (508) 26 166 (8) 104 (4) (238) 14
Repaid or derecognised (459) (9) (43) (13) (117) (72) (619) (94)
Write-offs - - - - (114) (114) (114) (114)
Recoveries - - - - - 26 - 26
Individually assessed impairment charge - - - - - 88 - 88
Closing balance at 30 September 2022 5,324 63 1,109 181 80 40 6,513 284
(1) Stage 3 includes POCI for gross loans and advances of £1m and ECL of (£1m)
(30 September 2022: (£1m) and (£2m) respectively).
(2) Includes assets where the term has ended, and a new facility has been
provided.
(3) 'Repayments' comprises payments made on customer lending which are not yet
fully paid at the reporting date and the customer arrangement remains live at
that date. 'Repaid' refers to payments made on customer lending which is
either fully repaid or derecognised by the reporting date and the customer
arrangement is therefore closed at that date.
(4) Includes MAs of £24m (30 September 2022: £33m) which is primarily held in
Stage 1 and 2.
The level of write offs in the Unsecured portfolio has increased slightly with
an increase in the volume of credit card balances reaching 180 days past due
being the primary driver, although the level of post write off recoveries
remains robust. The total ECL held on balance sheet has increased from £284m
to £354m with an underlying increase in the modelled ECL being the primary
driver. Modelled provision coverage alone is now 536bps (30 September 2022:
413bps).
The credit card portfolio is the primary driver of the decrease in the balance
of Unsecured lending classed as Stage 1 to 75.7% (30 September 2022: 81.5%),
with a corresponding increase in assets in Stage 2 from 17.3% to 22.9%. Within
the Stage 2 category, 95.7% is not yet past due (30 September 2022: 94.8%) but
falls into the Stage 2 classification due predominantly to PD deterioration.
The proportion classified as Stage 3 increased slightly to 1.5% (30 September
2022: 1.2%).
Risk management
Credit risk
Business credit performance
The table below presents key information which is important for understanding
the asset quality of the Group's Business lending portfolio and should be read
in conjunction with the supplementary data presented in the following pages of
this section.
Breakdown of Business credit portfolio
Gross lending Govern-ment ((1)) Total gross Model-led & IA ECL MA((3)) Total ECL Net lending Cover-age ((2))
31 March 2023 £m £m £m £m £m £m £m %
Agriculture 1,335 58 1,393 4 1 5 1,388 0.35%
Business services 1,087 245 1,332 30 3 33 1,299 2.99%
Commercial Real Estate 666 7 673 4 1 5 668 0.60%
Government, health & education 1,131 46 1,177 8 2 10 1,167 0.89%
Hospitality 747 69 816 3 1 4 812 0.46%
Manufacturing 685 92 777 13 3 16 761 2.24%
Resources 189 6 195 2 - 2 193 1.19%
Retail and wholesale trade 717 171 888 5 1 6 882 0.86%
Transport and storage 300 37 337 3 1 4 333 1.11%
Other 762 173 935 25 3 28 907 3.74%
Total Business portfolio 7,619 904 8,523 97 16 113 8,410 1.45%
30 September 2022
Agriculture 1,392 66 1,458 5 1 6 1,452 0.45%
Business services 980 286 1,266 22 4 26 1,240 2.53%
Commercial Real Estate 597 10 607 3 - 3 604 0.54%
Government, health & education 1,008 54 1,062 8 2 10 1,052 0.95%
Hospitality 652 78 730 4 1 5 725 0.80%
Manufacturing 640 109 749 23 3 26 723 3.96%
Resources 133 8 141 3 1 4 137 2.37%
Retail and wholesale trade 330 128 458 7 1 8 450 2.51%
Transport and storage 291 56 347 4 1 5 342 1.44%
Other 1,089 262 1,351 20 4 24 1,327 2.11%
Total Business portfolio 7,112 1,057 8,169 99 18 117 8,052 1.59%
(1) Government includes all lending provided to business customers under UK
Government schemes including Bounce back loan scheme (BBLS), CBILS, CLBILS and
RLS. When onboarding, some new borrowers for BBLS loans were coded as business
services; a portion of these may be reclassified over time. This excludes
£110m (30 September 2022: £66m) of guarantee claim funds received from
British Business Bank (BBB).
(2) Coverage ratio excludes the guaranteed element of government-backed loan
schemes.
(3) The MA is primarily held in Stage 1 and 2.
Gross Business lending increased to £8.5bn (30 September 2022: £8.2bn). The
government-guaranteed lending portfolio continues to reduce as borrowers repay
balances. Growth remains targeted to sectors and sub sectors where we have
well established expertise. The sector mix remained fairly constant with
lending to the agriculture, business services and government, health and
education sectors continuing to account for almost half of the total book, at
46% (30 September 2022: 46%)
Whilst there is some weakening in the pre and early delinquency metrics being
monitored, there has been no significant deterioration in asset quality
metrics across the portfolio and, as yet, no significant increase in specific
provision recognition. Coverage for certain sectors above has reduced in the
period as previously held provisions have been utilised. A range of external
risks have remained prevalent throughout the period including geopolitical,
general inflationary pressures, interest rate rises, ongoing supply chain
distribution and labour market disruption, in addition to customer fatigue
from crisis management.
The proportion of loans in Stage 1 has reduced from 76.8% at 30 September 2022
to 72.6% at 31 March 2023. Total balances in Stage 1 and Stage 2 not past due
represents 94.8% of the portfolio (30 September 2022: 95.1%). Of the Stage 2
loans, 93% were rated 'Strong' or 'Good' (30 September 2022: 95%). Stage 3
loans remain modest at 4.9% (30 September 2022: 4.6%).
Risk management
Credit risk
Business credit performance (continued)
The updated MES resulted in an increase of £9m in modelled provisions to
£77m. The MAs are broadly unchanged at £16m (30 September 2022: £18m)
although the composition has changed, this is covered in more detail on the
following pages. The specific provisions held on balance sheet have reduced to
£20m (30 September 2022: £31m) primarily due to provision utilisation. This
results in an overall provision of £113m (30 September 2022: £117m) which
has driven an impairment charge in the income statement of £15m in the period
(12 months to 30 September 2022: credit of £96m).
Overall, portfolio coverage remains prudent at 145bps (30 September 2022:
159bps), reflecting the quality of the portfolio and little evidence of
deterioration in asset quality to date.
Forbearance
Forbearance is considered to exist where customers are experiencing, or about
to experience, financial difficulty and the Group grants a concession on a
non-commercial basis. The Group reports business forbearance at a customer
level and at a value which incorporates all facilities and the related
impairment allowance, irrespective of whether each individual facility is
subject to forbearance. Authority to grant forbearance measures for business
customers is held by the Group's Strategic Business Services unit and is
exercised, where appropriate, on the basis of detailed consideration of the
customer's financial position and prospects.
Where a customer is part of a larger group, forbearance is exercised and
reported across the Group at the individual entity level. Where modification
of the terms and conditions of an exposure meeting the criteria for
classification as forbearance results in derecognition of loans and advances
from the balance sheet and the recognition of a new exposure, the new exposure
shall be treated as forborne.
All balances subject to forbearance are classed as either Stage 2 or Stage 3
for ECL purposes.
Business portfolio forbearance has increased from £448m (289 customers) at 30
September 2022 to £496m (293 customers) at 31 March 2023.
As a percentage of the Business portfolio, forborne balances have increased to
5.48% (30 September 2022: 5.16%) with impairment coverage reducing to 8.87%
(30 September 2022: 9.71%).
Changes at this level are primarily driven by a small number of customers
rather than indicative of a portfolio trend.
The majority of forbearance arrangements relate to term extensions allowing
customers a longer term to repay their obligations in full than initially
contracted.
Risk management
Credit risk
Business credit performance (continued)
IFRS 9 staging
The Group closely monitors the staging profile of its Business lending
portfolio over time which can be indicative of general trends in book health.
Movements in the staging profile of the portfolio in the current and prior
period are presented in the tables below.
Stage 1 Stage 2 Stage 3 Total Total provisions((3))
gross £m
loans
£m
6 months to 31 March 2023 Gross ecl Gross ecl Gross ecl
loans £m loans £m loans £m
£m £m £m
Opening balance at 1 October 2022 6,270 12 1,526 55 373 50 8,169 117
Transfers from Stage 1 to Stage 2 (1,027) (2) 1,024 23 - - (3) 21
Transfers from Stage 2 to Stage 1 348 1 (349) (8) - - (1) (7)
Transfers to Stage 3 (12) - (79) (2) 91 5 - 3
Transfers from Stage 3 6 - 10 - (17) (1) (1) (1)
Changes to model methodology - - - - - - - -
New assets originated or purchased ((1)) 5,240 13 311 25 68 14 5,619 52
Repayments and other movements ((2)) (220) 3 (62) (10) 7 - (275) (7)
Repaid or derecognised (4,415) (8) (464) (35) (86) (11) (4,965) (54)
Write-offs - - - - (20) (20) (20) (20)
Recoveries - - - - - 1 - 1
Individually assessed impairment charge - - - - - 8 - 8
Closing balance at 31 March 2023 6,190 19 1,917 48 416 46 8,523 113
12 months to 30 September 2022 Stage 1 Stage 2 Stage 3 Total Total provisions
gross £m
loans
£m
Gross ecl Gross ecl Gross ecl
loans £m loans £m loans £m
£m £m £m
Opening balance at 1 October 2021 5,672 66 2,433 120 235 37 8,340 223
Transfers from Stage 1 to Stage 2 (1,382) (13) 1,347 29 - - (35) 16
Transfers from Stage 2 to Stage 1 894 8 (908) (28) - - (14) (20)
Transfers to Stage 3 (23) - (255) (10) 273 14 (5) 4
Transfers from Stage 3 12 - 28 2 (39) (2) 1 -
Changes to model methodology 443 1 (443) (8) - - - (7)
New assets originated or purchased ((1)) 10,483 166 2,037 155 179 27 12,699 348
Repayments and other movements ((2)) (442) (72) (167) (34) (22) (8) (631) (114)
Repaid or derecognised (9,387) (144) (2,546) (171) (239) (27) (12,172) (342)
Write-offs - - - - (14) (14) (14) (14)
Recoveries - - - - - 4 - 4
Individually assessed impairment charge - - - - - 19 - 19
Closing balance at 30 September 2022 6,270 12 1,526 55 373 50 8,169 117
(1) Includes assets where the term has ended, and a new facility has been
provided.
(2) 'Repayments' comprises payments made on customer lending which are not yet
fully paid at the reporting date and the customer arrangement remains live at
that date. 'Repaid' refers to payments made on customer lending which is
either fully repaid or derecognised by the reporting date and the customer
arrangement is therefore closed at that date.
(3) Includes MAs of £16m (30 September 2022: £18m) which is primarily held in
Stage 1 and 2.
The level of write offs in the portfolio remains low on a volume basis, with a
small number of connections driving the majority of the £20m of balances
written off in the period. These provisions were raised in prior periods. The
level of provision recognition in the period remaining subdued as the levels
of IA customer impairment remain low. The impact of the revised MES has
affected the staging of the business portfolio in a similar manner to the
other portfolios with the level of Business lending classed as Stage 1
decreasing to 72.6% (30 September 2022: 76.8%), with an increase in Stage 2
from 18.7% at 30 September 2022 to 22.5% at 31 March 2023. The majority of the
balances in Stage 2 (22.2%) are not past due and is primarily in Stage 2 due
to PD deterioration, in addition to proactive management measures such as
early intervention, heightened monitoring and forbearance concessions. Stage 3
loans have increased slightly to 4.9% (30 September 2022: 4.6%) and is
primarily comprised of bounce back loan defaults.
The PDs for Business lending combine both internal ratings information and
forward-looking economic forecasts. The material drivers of the PD and stage
migrations in the period are the economic forecasts, rather than internal
downgrades or the emergence of arrears or defaults. The proportion of assets
classed as 'Strong' has decreased to 31% (30 September 2022: 68%), although
assets classed as 'Strong' or 'Good' remained relatively stable at 93% (30
September 2022: 95%).
Risk management
Credit risk
Macroeconomic assumptions, scenarios and weightings
The Group's ECL allowance at 31 March 2023 was £526m (30 September 2022:
£457m).
Macroeconomic assumptions
The Group engages Oxford Economics to provide a wide range of future
macroeconomic assumptions, which are used in the scenarios over the five-year
forecast period, reflecting the best estimate of future conditions under each
scenario outcome. The macroeconomic assumptions were provided by Oxford
Economics on 28 February 2023 and changes in macroeconomic assumptions between
then and 31 March 2023 have been considered in concluding on the quantum of
the management adjustments (MAs). The Group has identified the following key
macroeconomic drivers as the most significant: UK GDP growth, inflation, house
prices, base rates, and unemployment rates. The external data provided is
assessed and reviewed on a quarterly basis to ensure appropriateness and
relevance to the ECL calculation, with more frequent updates provided as and
when the circumstances require them. Further adjustments supplement the
modelled output when it is considered that not all the risks identified in a
product segment have been accurately reflected within the models or for other
situations where it is not possible to provide a modelled outcome.
Although fuel prices have begun to fall, the effects of their recent peak can
still be felt through heightened inflation and elevated bank base rates.
Despite signs that monetary policy tightening may be slowing or even coming to
a halt, the effects of bank rate rises are yet to feed through fully into the
real economy. We expect inflation to continue to fall back from the
historically high levels observed in recent times, although we also expect to
see real consumer incomes squeezed in the short run and asset prices to
suffer. In the short term, factors such as higher than normal inflation, the
ongoing freeze of most tax allowances and the scaling back of support to help
households and businesses pay their energy bills (meaning that energy costs
next winter are likely to be about £400 higher than last winter) are all
playing a part in negatively impacting household incomes. Against this
environment, the Group has continued to assess the possible IFRS 9 economic
scenarios to select appropriate forecasts and weightings. The selection of
scenarios and the appropriate weighting to apply are considered and debated by
an internal review panel each quarter with final proposed recommendations for
use in the IFRS 9 models made to the Asset and Liability Committee (ALCO) for
formal approval. The three scenarios selected, together with the weightings
applied, have been updated to reflect the current economic environment and
are:
Scenario 31 Mar 2023 30 Sept 2022
(%) (%)
Upside 10 10
Base 60 55
Downside 30 35
The Group continued to select three scenarios with the largest weighting
applied to the base scenario. In the current period, there is a 5% shift in
the weightings from the Downside scenario in favour of the Base scenario,
reflecting greater confidence in the Base scenario as a result of the updated
macroeconomic assumptions. The Group is comfortable with the current low
weighting applied to the Upside scenario and sees no significant justification
for this to be adjusted at this time.
The key macroeconomic assumptions used in the scenarios in the period
are((1)):
( )
Base (60%) Upside (10%) Downside (30%)
GDP · moderate decreases in all quarters in 2023 compared to 2022 · modest decrease of 0.1% in the first quarter of 2023 (Q1 2023 v · slightly negative GDP of 0.1% (Q1 2023 v Q1 2022) before more
before recovering in 2024 Q1 2022), before rising in each of the remaining quarters in 2023 profound negative growth for the three remaining quarters in 2023 to (6.6%) by
the end of 2023 (Q4 2023 v Q4 2022)
· overall year-on-year negative growth in 2023 forecast at (0.4%) · overall year-on-year growth in 2023 is forecast at 1.3% which
with a modest recovery in 2024 to 1.5% rises sharply to 3.5% in 2024 before reversing over the remainder of the · remains sluggish over the remaining forecast period but turning
forecast period and finishing at 1.5% for 2027 positive in 2025 and remaining positive for the remaining forecast period
· GDP further increases to over 2% in both 2025 and 2026 before
falling back to 1.5% in 2027 · the overall year-on-year negative growth of 4.2% in 2023 returns
positive in 2025 at 1.6% and increases to 1.9% in 2026 before falling back
modestly in 2027 to 1.7%
(1) The time periods referenced in this section relate to calendar years
unless otherwise stated.
( )
Risk management
Credit risk
Base (60%) Upside (10%) Downside (30%)
Inflation · peaks at 9.9% in Q1 2023 before scaling back and reverting to · peaks at 9.9% in Q1 2023 from a low base of 0.6% at Q1 2021 · peaks at 9.9% in Q1 2023 before declining and turning negative in
under 2% in Q2 2024
Q1 2024 and remains negative for the remainder of 2024
· reverts back to sub 2.0% levels from Q2 2025 for much of the
· rises slightly from there for a few quarters then falls back to remaining forecast period, going as low as 0.4% in Q4 2025 rising to 1.9% by · inflation turns positive in Q1 2025 and rises steadily each
under 2% from Q1 2025 for the remaining forecast period Q2 2027 quarter reaching 1.4% in Q4 2026, rising to 1.8% in Q1 2027 and remaining at
that level during the rest of 2027
Base rate · BoE base rate hits 4.2% in Q2 2023 · BoE base rate rises are anticipated throughout 2023 peaking at · BoE base rate peak at 3.8% for the first two quarters in 2023
5.3% in Q4 2023 and remaining there until Q3 2024 before starting to gradually before steadily falling back quarter by quarter to 0.5% in Q3 2026
· falls back from there over the forecast period reaching under 2% recede and reaching 2.5% by Q4 2026
in Q2 2026 and remaining there throughout the remaining forecast period
· unchanged from there for the remaining forecast period
· base rate falls modestly in Q1 2027 to 2.3% and remains there for
the rest of the year
HPI · shows steady decline between Q1 2023 to Q1 2024 before rebounding · falls steadily in each quarter to Q3 2024 before reversing and · falls steadily and deeply from Q1 2023 to Q1 2026 but then
slowly in each quarter after this until the end of the forecast period rising in each quarter over the remaining forecast period experiences modest increases in each quarter until the end of the forecast
period but finishes well below the levels experienced in 2022
· overall Q4 v Q4 year-on-year negative growth of 8.1% in 2023 · overall, HPI sees Q4 v Q4 negative growth of 5.4% in 2023 which
which improves but still negative growth of 3.8% in 2024 improves slightly but remains negative at 1.6% in 2024 · overall, HPI sees a Q4 v Q4 decline of (15.1%) in 2023
· further improves to show modest positive growth in 2025 and · returns to positive growth of 4.1% in 2025 and closes at 5.9% in · steadily recovers, but remaining negative for the next two years
increases to c.6% growth for both 2026 and 2027 2027 before turning positive for 2026 and 2027
Unemployment · peaks at 4.5% in Q4 2023 and drops to 4.2% by Q3 2024 · peaks in Q3 2023, at 4.2%, and remains at that level in the · peaks at 7.4% in Q4 2025 and remains at 7.0% or more for the next
following quarter six consecutive quarters
· from then, there is no significant movement with unemployment
averaging at 4.3% in 2024 · from then, there is a steady decline quarter on quarter reaching · unemployment averages at 4.9% in 2023 rising to 7.2% by 2025 and
3.7% in Q3 2025 remains at that level for 2026
· steadily declines and reaches 3.8% in Q1 2026 and remains there
throughout 2026 and falling to 3.7% in 2027 · further modest fall to 3.6% in Q3 2026 and remains there for the · falls modestly to finish at 7.0% in 2027
remainder of the forecast period
Risk management
Credit risk
Five-year simple averages on unemployment, GDP and HPI
31 March 2023 Unemployment GDP HPI
% % %
Upside 3.8 2.4 1.9
Base 4.0 1.5 0.5
Downside 6.5 (0.2) (4.4)
30 September 2022
Upside 3.9 3.1 3.3
Base 4.1 2.1 2.0
Downside 6.3 0.4 (3.4)
The use of estimates, judgements and sensitivity analysis
The following are the main areas where estimates and judgements are applied to
the ECL calculation:
The use of estimates
Economic scenarios
The calculation of the Group's impairment provision is sensitive to changes in
the chosen weightings as highlighted above. The effect on the closing
modelled provision of each portfolio as a result of applying a 100% weighting
to each of the selected scenarios is shown below:
31 March 2023((4)) Probability
Weighted((1)) Upside Base Downside
£m £m £m £m
Mortgages 21 17 18 33
Unsecured of which: 331 326 313 371
Cards 297 298((3)) 284 326
Personal loans and overdrafts((2)) 34 28 29 45
Business 77 64 69 111
Total 429 407 400 515
(1) In addition to the probability weighted modelled provision shown in the table,
the Group holds £71m relative to MAs and £26m of IA provision (30 September
2022: £85m and £38m respectively).
(2) Salary Finance contributes more than 50% of the combined Personal loans and
overdrafts ECL.
(3) Due to a minor model interaction effect, the 100% ECL for Upside is marginally
higher than the Base case.
(4)
The impact of rounding means that the combination of the probability weighted
total and IA provision will not fully align to the portfolio sections.
30 September 2022
Probability Upside Base Downside
Weighted £m £m £m
£m
Mortgages 15 12 13 23
Unsecured of which: 251 236 237 279
Cards 216 209 208 233
Personal loans and overdrafts 35 27 29 46
Business((1)) 53 39 43 97
Total 319 287 293 399
(1) Business and total ECLs in the above table were calculated using the new LGD
model and while this was not fully implemented in the prior year, the
impact of this was incorporated into the total Business ECLs via the use of
MAs. Consequently, the probability weighted Business and total ECLs reported
in the above table are £15m lower than the actual figures for the prior year.
One of the criteria for moving exposures between stages is the PD which
incorporates macroeconomic factors. As a result, the stage allocation will be
different in each scenario and so the probability weighted ECL cannot be
recalculated using the scenario ECL provided and the scenario weightings.
Certain asset classes are less sensitive to specific macroeconomic factors. To
ensure appropriate levels of ECL, the relative lack of sensitivity is
compensated for through the application of MAs, further detail of which can be
found on page 44.
Risk management
Credit risk
Within each portfolio, the following are the macroeconomic inputs which are
more sensitive and therefore more likely to drive the move from Stage 1 to
Stage 2 under a stress scenario:
Mortgages: Unemployment and HPI
Unsecured: Unemployment
Business: Unemployment and HPI
In addition to assessing the ECL impact of applying a 100% weighting to each
of the three chosen scenarios, the Group has also considered what the effect
of changes to a few key economic inputs would make to the modelled ECL output.
The Group considers that the unemployment rate and HPI are the inputs that
would have the most significant and sensitive ECL impact and has assessed how
these would change the ECL across the relevant portfolios, with the reported
output assessed against the base case. There are no material differences to
the sensitivity disclosures on Unemployment and HPI changes in the period from
those disclosed in the Group's FY22 ARA.
The use of judgement
SICR
Judgement is required in determining the point at which a SICR has occurred,
as this is the point at which a 12-month ECL is replaced by a lifetime ECL.
The Group has developed a series of triggers that indicate when a SICR has
occurred when assessing exposures for the risk of default occurring at each
reporting date compared to the risk at origination. There is no single factor
that influences this decision, rather a combination of different criteria that
enables the Group to make an assessment based on the quantitative and
qualitative information available. This includes the impact of forward-looking
macroeconomic factors but excludes the existence of any collateral
implications.
Indicators of a SICR include deterioration of the residual lifetime PD by set
thresholds which are unique to each product portfolio, non-default forbearance
programmes, and watch list status. The Group adopts the backstop position that
a SICR will have taken place when the financial asset reaches 30 DPD.
The Group does not have a set absolute threshold by which the PD would have to
increase by in establishing that a SICR has occurred, and has implemented an
approach with the required SICR threshold trigger varying on a portfolio and
product basis according to the origination PD.
Changes to the overall SICR thresholds can also impact staging, driving
accounts into higher stages with the resultant impact on the ECL allowance:
31 Mar 2023 30 Sept 2022
£m £m
A 10% movement in the mortgage portfolio from Stage 1 to Stage 2 +12 +9
A 10% movement in the credit card portfolio from Stage 1 to Stage 2 +86 +87
A 10% movement in the business portfolio from Stage 1 to Stage 2 +10 +18
A PD stress which increases PDs upwards by 20% for all portfolios +127 +106
Definition of default
The PD of a credit exposure is a key input to the measurement of the ECL
allowance. Default under Stage 3 occurs when there is evidence that a customer
is experiencing significant financial difficulty which is likely to affect the
ability to repay amounts due. The Group utilises the 90 DPD backstop for
default purposes.
MAs
At 31 March 2023, £71m of MAs (30 September 2022: £85m) are included within
the total ECL provision of £526m (30 September 2022: £457m).
These are management judgements which impact the ECL provision by increasing
(or decreasing) the collectively assessed modelled output where not all of the
known risks identified in a particular product segment have been reflected
within the models. This also takes into account any time lag between the date
the macroeconomic assumptions were received and the reporting date.
Risk management
Credit risk
The impact of these judgemental adjustments and how they impact the Group's
total reported ECL allowance and coverage ratio for each portfolio is:
31 March 2023((1))
Mortgages Unsecured Business Total
£m £m £m £m
ECL before judgemental adjustments (A) 27.7 330.4 96.6 454.7
Judgemental adjustments:
To address the cost-of-living crisis - - - -
To address economic resilience 3.2 - 15.0 18.2
Impact of new LGD model - - - -
Additional buy-to-let impact 25.1 - - 25.1
Other credit card adjustments - 22.5 - 22.5
Other judgemental adjustments 2.8 1.8 1.3 5.9
Total judgemental adjustments (B) 31.1 24.3 16.3 71.7
Total reported ECL (A + B) 58.8 354.7 112.9 526.4
% of total ECL (B / total reported ECL) 53% 7% 14% 14%
Coverage - total 0.10% 5.75% 1.45% 0.72%
Coverage - total ex MAs 0.05% 5.36% 1.24% 0.62%
30 September 2022((1))
Mortgages Unsecured Business Total
£m £m £m £m
ECL before judgemental adjustments (A) 21.6 251.5 99.0 372.1
Judgemental adjustments:
To address the cost-of-living crisis 6.3 20.2 - 26.5
To address economic resilience - - 30.0 30.0
Impact of new LGD model - - (15.4) (15.4)
Additional buy-to-let impact 25.1 - - 25.1
Other credit card adjustments - 10.5 - 10.5
Other judgemental adjustments 2.8 1.8 3.3 7.9
Total judgemental adjustments (B) 34.2 32.5 17.9 84.6
Total reported ECL (A + B) 55.8 284.0 116.9 456.7
% of total ECL (B / total reported ECL) 61% 11% 15% 19%
Coverage - total 0.09% 4.66% 1.59% 0.62%
Coverage - total ex MAs 0.02% 4.13% 0.93% 0.45%
(1) The impact of rounding means that the combination of the probability
weighted total and IA provision may not fully align to the portfolio sections.
The Group assesses and reviews the need for and quantification of MAs on a
quarterly basis, with the CFO recommending the level of MAs to the Board Audit
Committee twice a year at each external reporting period. The Model Risk
Oversight and Group Credit Oversight teams review the methodology supporting
material MAs and present their findings to the Board Audit Committee.
In the absence of significant events that might impact ECLs going forward, the
Group expects the current level of MAs to materially reduce over the next
18-24 months.
Risk management
Credit risk
Macroeconomic assumptions
Annual macroeconomic assumptions used over the five-year forecast period in
the scenarios and their weighted averages are as follows:((1))
31 March 2023
Scenario VMUK weighting Economic measure ((2)) 2023 2024 2025 2026 2027
% % % % %
Upside 10% Base rate 4.7 5.2 4.4 2.8 2.3
Unemployment 4.1 4.0 3.8 3.7 3.6
GDP 1.3 3.5 3.3 2.7 1.5
Inflation 7.0 3.7 1.3 0.8 1.8
HPI (5.4) (1.6) 4.1 6.6 5.9
Base 60% Base rate 4.1 3.7 2.7 1.9 1.7
Unemployment 4.2 4.3 4.0 3.8 3.7
GDP (0.4) 1.5 2.5 2.3 1.5
Inflation 6.6 2.3 0.9 0.9 1.9
HPI (8.1) (3.8) 2.0 6.1 6.0
Downside 30% Base rate 3.6 2.8 1.6 0.6 0.5
Unemployment 4.9 6.4 7.2 7.2 7.0
GDP (4.2) (2.2) 1.6 1.9 1.7
Inflation 5.5 (0.4) 0.4 1.0 1.8
HPI (15.1) (11.5) (6.0) 4.2 6.7
Weighted average Base rate 4.1 3.6 2.6 1.6 1.4
Unemployment 4.4 4.9 4.9 4.8 4.7
GDP (1.4) 0.6 2.3 2.2 1.6
Inflation 6.3 1.7 0.8 0.9 1.8
HPI (9.9) (5.9) (0.2) 5.6 6.2
30 September 2022
Scenario VMUK weighting Economic measure ((2)) 2022 2023 2024 2025 2026
% % % % %
Upside 10% Base rate 1.4 3.0 2.5 2.3 2.3
Unemployment 3.8 4.2 4.0 3.7 3.6
GDP 3.9 2.8 3.2 3.4 2.1
Inflation 9.5 8.5 1.8 0.7 1.3
HPI 8.3 (2.3) (1.8) 5.7 6.5
Base 55% Base rate 1.4 2.2 1.8 1.8 1.7
Unemployment 3.9 4.6 4.4 3.8 3.8
GDP 3.6 0.3 2.1 2.7 2.1
Inflation 9.4 7.5 0.6 0.7 1.5
HPI 6.8 (4.6) (3.0) 4.4 6.7
Downside 35% Base rate 1.3 1.7 0.6 0.5 0.5
Unemployment 4.0 6.0 7.1 7.3 7.1
GDP 2.6 (5.6) 0.8 2.1 2.1
Inflation 9.3 5.0 (1.0) 0.7 1.5
HPI 3.5 (13.3) (11.6) (2.7) 7.4
Weighted average Base rate 1.4 2.1 1.4 1.4 1.4
Unemployment 3.9 5.0 5.3 5.0 4.9
GDP 3.3 (1.5) 1.7 2.5 2.1
Inflation 9.4 6.7 0.2 0.7 1.5
HPI 5.8 (7.4) (5.9) 2.0 6.9
(1) Macroeconomic assumptions provided by Oxford Economics on 28 February 2023 and
reported on a calendar year basis unless otherwise stated. Any changes in
macroeconomic assumptions between this date and 31 March 2023 have been
considered as part of the MAs.
(2) The percentages shown for base rate, unemployment and inflation are averages.
GDP is the year-on-year movement, with HPI the Q4 v Q4 movement.
Risk management
Financial risk
Section Page Tables Page
Financial risk summary 48
Capital risk 48
Regulatory capital developments 48
Capital resources 49 Regulatory capital 49
Regulatory capital flow of funds 50
Risk weighted assets 51 Minimum capital requirements 51
RWA movements 51
IFRS 9 transitional arrangements 52 IFRS 9 transitional arrangements 52
Capital requirements 52 Minimum requirements 52
Minimum Requirement for Own Funds and Eligible Liabilities (MREL) 53 MREL position 53
Dividend 53
Share buyback 54
Leverage 54 Leverage ratio 54
Funding and liquidity risk 55
Sources of funding 55 Sources of funding 55
Liquid assets 56 Liquidity coverage ratio 56
Liquid asset portfolio 56
Analysis of debt securities in issue by residual maturity 56
External credit ratings 57 External credit ratings 57
Net interest income 57 Net interest income 57
London Interbank Offered Rate (LIBOR) replacement 58 Amounts yet to be transitioned 58
Risk management
Financial risk
Financial risk covers several categories of risk which impact the way in which
the Group can support its customers in a safe and sound manner. They include
capital risk, funding risk, liquidity risk, market risk and pension risk.
Market risk and pension risk show no significant changes in the period, with
other financial risk developments detailed below.
Capital risk
Capital is held by the Group to cover inherent risks in a normal and stressed
operating environment, to protect unsecured creditors and investors and to
support the Group's strategy of sustainable growth. Capital risk is the risk
that the Group has or forecasts insufficient capital and other loss-absorbing
debt instruments to operate effectively. This includes meeting minimum
regulatory requirements, operating within Board approved risk appetite and
supporting its strategic goals.
Regulatory capital developments
The regulatory landscape for capital is subject to a number of changes, some
of which can lead to uncertainty on eventual outcomes. In order to mitigate
this risk, the Group actively monitors emerging regulatory change, assesses
the impact and puts plans in place to respond.
Designation as an Other Systemically Important Institution
On 29 November 2022 the PRA formally designated VMUK PLC as an Other
Systemically Important Institution (O-SII). This is not expected to have a
material impact on the Group's capital framework, first laid out in May 2022.
IRB Model Changes
Following the BoE's announcements in 2020 regarding supervisory and prudential
policy measures to address the challenges of COVID-19, the requirements
relating to compliance with updates to definition of default and mortgage IRB
models were extended. The Group did not adopt hybrid mortgage models in FY22
but submitted them for approval by the PRA in January 2023 and it is
anticipated that new models will be implemented later in 2023.
Ahead of the Group's implementation of mortgage IRB models (including Hybrid
PD), an MA has been applied to increase RWAs by £404m and expected losses by
£9m in advance of formal approval of models. This impact is lower than the
estimate given in the Group's 2022 Annual Report and Accounts following
further development work during the period refining the estimate.
Basel 3.1
Following the publication of final reforms to the Basel III framework in
December 2017, the PRA published CP16/22 at the end of November 2022, covering
its consultation on the UK implementation of these reforms.
There are a number of key amendments to the standardised approaches to credit
and operational risks together with the introduction of a new standardised RWA
output floor, the latter of which will be introduced gradually over a
five-year transition period. There are also amendments to IRB approaches,
Credit Valuation Adjustments, Credit Risk Mitigation rules and associated
reporting and disclosure requirements.
An initial estimation of the impact of these reforms on the Group indicates
they will have no material day 1 impact on the capital position, with no
constraint from the output floor expected until late in the transition period.
The PRA is due to consider feedback over the next few months with the final
reforms expected to become effective on 1 January 2025.
Solvency Stress Test and ACS
The Group was a participant in the BoE SST for the first time in 2021 and will
be an on-going participant in the BoE's Annual ACS.
The 2022 ACS was postponed to enable lenders to focus on managing the
disruption in the financial markets driven by the uncertainty caused by the
Russian invasion of Ukraine. Following the delay, the Group completed the 2022
ACS exercise in Q2 FY23. The scenario tests the resilience of the UK Banking
system to deep simultaneous recessions in the UK and global economies,
real income shocks, large falls in asset prices and higher global interest
rates, as well as a separate stress of conduct costs. The results will be
published in July 2023.
Risk management
Financial risk
Capital resources
The Group's capital resources position as at 31 March 2023 is summarised
below:
31 Mar 2023 30 Sep 2022
Regulatory capital((1)) £m £m
Statutory total equity 5,630 6,340
CET1 capital: Regulatory adjustments((2))
Unconsolidated losses arising from joint venture (6) -
Other equity instruments (594) (666)
Defined benefit pension fund assets (396) (650)
Prudent valuation adjustment (6) (5)
Intangible assets (230) (256)
Goodwill (11) (11)
Deferred tax asset relying on future profitability (290) (302)
Cash flow hedge reserve (381) (699)
AT1 coupon accrual (12) (13)
Foreseeable dividend on ordinary shares (45) (106)
Excess expected losses (122) (100)
Share buyback - (13)
IFRS 9 transitional adjustments 90 114
Total regulatory adjustments to CET1 (2,003) (2,707)
Total CET1 capital 3,627 3,633
AT1 capital
AT1 capital instruments 594 666
Total AT1 capital 594 666
Total Tier 1 capital 4,221 4,299
Tier 2 capital
Subordinated debt 1,021 1,020
Total Tier 2 capital 1,021 1,020
Total regulatory capital 5,242 5,319
(1) This table shows the capital position on a CRD IV 'fully loaded' basis and
transitional IFRS 9 basis.
(2) A number of regulatory adjustments to CET1 capital are required under CRD IV
regulatory capital rules.
Risk management
Financial risk
Capital resources (continued)
( )
6 months to 12 months to
31 Mar 2023 30 Sep 2022
30CRD IV 2022
Regulatory capital flow of funds((1)) £m £m
CET1 capital((2))
CET1 capital at 1 October 3,633 3,616
Share issuance 3 2
Share buyback (50) (76)
Unconsolidated losses arising from joint venture (6) -
Retained earnings and other reserves (including special purpose entities) (154) 502
Prudent valuation adjustment (1) -
Amendment to software asset deduction rules((3)) - (151)
Intangible assets 26 103
Deferred tax asset relying on future profitability 12 (44)
Defined benefit pension fund assets 254 (99)
Movement in AT1 foreseeable distribution 1 6
Foreseeable dividend on ordinary shares (45) (106)
Excess expected losses (22) (100)
IFRS 9 transitional adjustments (24) (20)
Total CET1 capital at 31 March 3,627 3,633
AT1 capital
AT1 capital at 1 October 666 697
AT1 instrument issued net of costs - 346
AT1 instrument repurchased (72) (377)
Total AT1 capital at 31 March 594 666
Total Tier 1 capital at 31 March 4,221 4,299
Tier 2 capital
Tier 2 capital at 1 October 1,020 1,019
Amortisation of issue costs 1 1
Tier 2 capital at 31 March 1,021 1,020
Total capital at 31 March 5,242 5,319
(1) Data in the table is reported under CRD IV as implemented by the PRA on a
fully loaded basis with IFRS 9 transitional arrangements applied.
(2) CET1 capital is comprised of shares issued and related share premium, retained
earnings and other reserves less specified regulatory adjustments.
(3) The full deduction treatment for software assets was reinstated by the PRA in
January 2022.
The Group's CET1 capital showed a small reduction of £6m during the period.
The Group reported a profit after tax of £180m in the period. The capital
benefits of the profit in the period were more than fully offset, with the
material items including: a second share buyback programme of £50m which was
announced and completed in the period; a deduction of £45m for foreseeable
dividends in respect of these interim results; and further reductions arising
due to an increase in excess expected losses of £22m and the tapering down
effect of IFRS 9 transitional relief of £24m.
In December 2022, the Group redeemed £72m of AT1 securities (note 4.1.2).
Risk management
Financial risk
Risk weighted assets
31 March 2023 30 September 2022
Minimum capital requirements Exposure RWA Minimum capital requirement Exposure RWA Minimum capital requirement
£m £m £m £m £m £m
Retail mortgages 60,793 9,359 749 62,545 9,155 732
Business lending 12,305 6,579 526 11,959 6,196 497
Other retail lending 17,342 4,721 377 17,408 4,817 385
Other lending 19,022 315 25 18,165 277 22
Other((1)) 626 725 58 584 637 51
Total credit risk RWA 110,088 21,699 1,735 110,661 21,082 1,687
Credit valuation adjustment 183 15 258 21
Operational risk 2,623 210 2,623 210
Counterparty credit risk 198 16 185 15
Total RWA 110,088 24,703 1,976 110,661 24,148 1,933
(1) The items included in the Other exposure class that attract a capital charge
include items in the course of collection, fixed assets, prepayments, other
debtors and deferred tax assets that are not deducted.
RWA movements
6 months to 31 March 2023 6 months to 30 September 2022
RWA movements IRB STD Non-credit risk((2)) Total Minimum capital required £m IRB STD Non- Total Minimum capital
RWA RWA RWA £m RWA RWA credit risk((2)) £m required £m
£m £m £m £m £m RWA
£m
Opening RWA 14,943 6,139 3,066 24,148 1,933 15,648 5,885 2,651 24,184 1,935
Asset size 33 (80) - (47) (4) 325 258 - 583 47
Asset quality 157 22 - 179 14 (497) 21 - (476) (38)
Model updates((1)) 395 - - 395 31 (533) - - (533) (42)
Other - 90 (62) 28 2 - (25) 415 390 31
Closing RWA 15,528 6,171 3,004 24,703 1,976 14,943 6,139 3,066 24,148 1,933
(1) Model updates include MAs in the current and prior period, and mortgage
quarterly PD calibrations in the prior period.
(2) Non-credit risk RWA includes operational risk, credit valuation adjustment and
counterparty credit risk.
RWA increased c.£0.6bn to £24.7bn primarily due to the introduction of the
£0.4bn MA in advance of the introduction of Hybrid IRB models.
Further RWA increases have arisen following a decrease in HPI leading to
higher LGD, as well as the impact of higher risk weights associated with new
business lending.
Risk management
Financial risk
IFRS 9 transitional arrangements
This table shows a comparison of capital resources, requirements and ratios
with and without the application of transitional arrangements for IFRS 9:
31 March 2023 (£m)
Available capital (amounts) IFRS 9 Transitional basis IFRS 9 Fully loaded basis
CET1 capital 3,627 3,537
Tier 1 capital 4,221 4,131
Total capital 5,242 5,152
RWA (amounts)
Total RWA 24,703 24,632
Capital ratios
CET1 (as a percentage of risk exposure amount) 14.7% 14.4%
Tier 1 (as a percentage of risk exposure amount) 17.1% 16.8%
Total capital (as a percentage of risk exposure amount) 21.2% 20.9%
Leverage ratio
Leverage ratio total exposure measure 84,472 84,382
UK leverage ratio 5.0% 4.9%
Transitional arrangements in CRR mean the regulatory capital impact of ECL is
being phased in over time. Following the CRR Quick Fix amendments package,
which applied from 27 June 2020, relevant provisions raised from 1 January
2020 through to 2024 have a CET1 add-back percentage of 50% in 2023, reducing
to 25% in 2024.
At 31 March 2023, £90m of IFRS 9 transitional adjustments (30 September 2022:
£114m) have been applied to the Group's capital position in accordance with
CRR: £3m of static and £87m of dynamic adjustments (30 September 2022: £7m
static and £107m dynamic).
Capital requirements
The Group measures the amount of capital it is required to hold by applying
CRD IV as implemented in the UK by the PRA. The table below summarises the
amount of capital in relation to RWA the Group is currently required to hold,
excluding any PRA Buffer.
As at 31 March 2023
Minimum requirements CET1 Total capital
Pillar 1((1)) 4.5% 8.0%
Pillar 2A 1.7% 3.0%
Total capital requirement 6.2% 11.0%
Capital conservation buffer 2.5% 2.5%
UK countercyclical capital buffer 1.0% 1.0%
Total (excluding PRA buffer)((2)) 9.7% 14.5%
(1) The minimum amount of total capital under Pillar 1 of the regulatory framework
is determined as 8% of RWA, of which at least 4.5% of RWA is required to be
covered by CET1 capital.
(2) The Group may be subject to a PRA buffer as set by the PRA but is not
permitted to disclose the level of any buffer.
The Group continues to maintain a significant surplus above its capital
requirements. At 31 March 2023 the Group maintained CET1 capital in excess of
its maximum distributable amount requirements equal to 5.0% of RWAs
(equivalent to £1,238m).
The PRA sets a Group specific Pillar 2A requirement for risks which are not
captured within the Pillar 1 requirement. Together Pillar 1 and Pillar 2A
represent the Group's Total Capital Requirement (TCR), which is the minimum
requirement which must be met at all times.
In October 2022 the PRA communicated an update to the Group's Pillar 2A
requirement setting it as 2.97% of RWAs, of which 1.67% must be met with
CET1 capital (30 September 2022: £744m, of which £419m had to be met with
CET1 capital). In line with previous guidance this requirement has been set as
a percentage of RWAs, rather than the fixed nominal Pillar 2A requirements set
during 2020 and 2021 in response to COVID-19. Applying this updated
requirement in March 2023 resulted in a modest reduction in total capital
requirements of £11m and CET1 requirements of £7m. At 31 March 2023 this
resulted in a TCR of 11.0% of RWAs (equivalent to £2,710m) of which 6.2% must
be met with CET1 capital (equivalent to £1,524m).
Risk management
Financial risk
Capital requirements (continued)
The regulatory capital buffer framework is intended to ensure firms maintain a
sufficient amount of capital above their regulatory minimum in order to
withstand periods of stress and mitigate against firm specific and systemic
risks. The UK has implemented the provisions on capital buffers outlined in
CRD IV which introduced a combined capital buffer. This includes a Capital
Conservation Buffer, a Countercyclical Capital Buffer (CCyB) and where
applicable a Global Systemically Important Institution (G-SII) Buffer or an
Other Systemically Important Institution (O-SII) Buffer.
The Group's CCyB reflects an exposure weighted average of the CCyB
rates applicable in the geographies in which the Group operates. Currently
this reflects only the UK. The FPC increased the UK CCyB rate to 1% from
December 2022, and this will rise to 2% from July 2023 to align with its
guidance for the CCyB rate under standard risk conditions. This was
anticipated by the Group and fully factored in to the 13-13.5% medium term
CET1 range. The FPC has noted the considerable uncertainties in relation to
the economic outlook and will continue to monitor the situation and stands
ready to vary the UK CCyB rate - in either direction - in line with the
evolution of economic conditions, underlying vulnerabilities and the overall
risk environment.
In 2022, the Group has been designated as an O-SII, but is not currently
required to hold a related capital buffer.
Distributable reserves are determined as required by the Companies Act 2006 by
reference to a company's individual financial statements. At 31 March 2023,
the Company had accumulated distributable reserves of £1,045m (30 September
2022: £1,056m).
Minimum Requirement for Own Funds and Eligible Liabilities (MREL)
Under the Bank Recovery and Resolution Directive the Group is required to hold
additional loss-absorbing instruments to support an effective resolution.
The MREL establishes a minimum amount of equity and eligible debt to
recapitalise the Group. An analysis of the Group's current MREL position is
provided below:
As at
31 Mar 2023 30 Sep 2022
£m £m
Total capital resources((1)(2)) 5,242 5,319
Eligible senior unsecured securities issued by Virgin Money UK PLC((2)) 2,420 2,423
Total MREL resources 7,662 7,742
Risk-weighted assets 24,703 24,148
Total MREL resources available as a percentage of risk-weighted assets 31.0% 32.1%
UK leverage exposure measure 84,472 83,771
Total MREL resources available as a percentage of UK leverage exposure measure 9.1% 9.2%
(1) The capital position reflects the application of the transitional arrangements
for IFRS 9.
(2) Includes MREL instrument maturity adjustments, the add-back of regulatory
amortisation and the deduction of instruments with less than 1 year to
maturity. From September 2022, unamortised costs are also deducted.
The BoE as the UK Resolution Authority has published its framework for setting
MREL. This requires the Group to hold capital resources and eligible debt
instruments equal to the greater of two times the Total Capital Requirement
(TCR) or two times the UK Leverage Ratio requirement. In addition to MREL, the
Group must also hold any applicable capital buffers, which together with MREL
represent the Group's loss-absorbing capacity (LAC) requirement.
As at 31 March 2023, the Group's Leverage based LAC requirement of 7.5% of
Leverage Exposures (or 25.6% when expressed as a percentage of RWAs) was
greater than the RWA based LAC requirement of 25.4% of RWAs, meaning the
Leverage measure is the binding requirement.
MREL resources were £7.7bn (30 September 2022: £7.7bn) equivalent to 9.1% of
Leverage Exposures (30 September 2022: 9.2%) or 31.0% when expressed as a
percentage of RWAs (30 September 2022: 32.1%). This provides prudent headroom
of £1.3bn or 1.6% above the LAC requirement of 7.5% of Leverage Exposures, or
5.4% above the LAC requirement of 25.6% when expressed as a percentage of
RWAs.
Dividend
The Board has recommended an interim dividend for the financial year ending 30
September 2023 of 3.3p per share. The interim dividend represents one-third
of last year's total dividends and the Group will continue to target a 30%
full year dividend payout ratio in scaling any full year final dividend.
Dividends will be supplemented by buybacks, subject to ongoing assessment of
surplus capital, market conditions and regulatory approval.
Risk management
Financial risk
Share buyback
At the end of June 2022, the Group announced a share buyback programme with an
initial repurchase of £75m in aggregate between ordinary shares of £0.10
each listed on the London Stock Exchange and CHESS Depository Interests
(CDIs), each representing one share listed on the Australian Securities
Exchange. On 21 November 2022 an extension to the share buyback programme was
announced with an intent to repurchase a further £50m in aggregate of
shares and CDIs. The Group completed the initial share buyback in December
2022 with the extension completed in March 2023; the repurchase of shares and
CDIs across the programme was achieved in materially equal proportions.
Further details are disclosed in note 4.1.1.
Leverage
31 Mar 2023 30 Sep 2022
Leverage ratio £m £m
Total Tier 1 capital for the leverage ratio
Total CET1 capital 3,627 3,633
AT1 capital 594 666
Total Tier 1 capital 4,221 4,299
Exposures for the leverage ratio
Total assets 92,496 91,907
Adjustment for off-balance sheet items 3,054 3,204
Adjustment for derivative financial instruments((3)) 624 522
Adjustment for securities financing transactions 2,597 2,974
Adjustment for qualifying central bank claims (12,062) (11,955)
Regulatory deductions and other adjustments((3)) (2,237) (2,881)
UK leverage ratio exposure((1)) 84,472 83,771
UK leverage ratio((1)) 5.0% 5.1%
Average UK leverage ratio exposure((2)) 85,056 83,985
Average UK leverage ratio((2)) 4.8% 5.0%
(1) The UK leverage ratio and exposure measure are calculated after applying the
IFRS 9 transitional arrangements of the CRR.
(2) The average leverage exposure measure is based on the daily average of
on-balance sheet items and month-end average of off-balance sheet and capital
items over the quarter (1 January 2023 to 31 March 2023).
(3) The comparative figures include a reclassification between adjustment for
derivative financial instruments and regulatory deductions and other
adjustments in relation to the cash variation margin.
The leverage ratio is monitored against a Board-approved Risk Appetite
Statement, with the responsibility for managing the ratio delegated to ALCO,
which monitors it on a monthly basis.
The leverage ratio is the ratio of Tier 1 capital to total exposures, defined
as:
− capital: Tier 1 capital defined on an IFRS 9 transitional basis;
and
− exposures: total on- and off-balance sheet exposures (subject to
credit conversion factors) as defined in the delegated act amending CRR
article 429 (Calculation of the Leverage Ratio), which includes deductions
applied to Tier 1 capital.
Other regulatory adjustments consist of adjustments that are required under
CRD IV to be deducted from Tier 1 capital. The removal of these from the
exposure measure ensures consistency is maintained between the capital and
exposure components of the ratio.
The Group's UK leverage ratio of 5.0% (30 September 2022: 5.1%) exceeds the UK
minimum ratio of 3.25%.
Risk management
Financial risk
Funding and liquidity risk
Funding risk occurs where the Group is unable to raise or maintain funds of
sufficient quantity and quality to support the delivery of the business plan
or sustain lending commitments. Prudent funding risk management reduces the
likelihood of liquidity risks occurring, increases the stability of funding
sources, minimises concentration risks and ensures future balance sheet growth
is sustainable.
Liquidity risk occurs when the Group is unable to meet its current and future
financial obligations as they fall due or at acceptable cost, or when the
Group reduces liquidity resources below internal or regulatory stress
requirements.
Sources of funding
The table below provides an overview of the Group's sources of funding as at
31 March 2023:
31 Mar 2023 30 Sep 2022
£m £m
Total assets 92,496 91,907
Less: Other liabilities((1)) (2,741) (3,122)
Funding requirement 89,755 88,785
Funded by:
Customer deposits 67,229 65,434
Debt securities in issue 8,780 8,509
Due to other banks 8,116 8,502
of which:
Secured loans 7,067 7,230
Securities sold under agreements to repurchase 1,006 1,205
Transaction balances with other banks 7 17
Deposits with other banks 36 50
Equity 5,630 6,340
Total funding 89,755 88,785
(1) Other liabilities include derivative financial instruments, deferred
tax liabilities, provisions for liabilities and charges, and other liabilities
as per the balance sheet line item.
The Group's funding objective is to prudently manage the sources and tenor of
funds in order to provide a sound base from which to support sustainable
lending growth. At 31 March 2023, the Group had a funding requirement of
£89,755m (30 September 2022: £88,785m) with the majority being used to
support loans and advances to customers. The Group measures the sustainability
and stability of funding through the NSFR. The Group has sufficient stable
funding to meet NSFR regulatory requirements and internal risk appetite.
Customer deposits
The majority of the Group's funding requirement was met by customer deposits
of £67,229m (30 September 2022: £65,434m), of which around three quarters
are insured through FSCS. Customer deposits comprise interest-bearing
deposits, term deposits and non-interest-bearing demand deposits from a range
of sources including Personal and Business customers. Throughout the period,
strong deposit growth has been used to manage customer lending volumes,
increase liquidity and reduced the proportion of wholesale funding.
Equity
Equity of £5,630m (30 September 2022: £6,340m) was also used to meet the
Group's funding requirement. Equity comprises ordinary share capital, retained
earnings, other equity investments and a number of other reserves. For full
details on equity refer to note 4.1 within the interim consolidated financial
statements.
Risk management
Financial risk
Liquid assets
The quantity and quality of the Group's liquid assets are calibrated to the
Board's view of liquidity risk appetite and remain at a prudent level above
regulatory requirements.
Liquidity coverage ratio 31 Mar 2023 30 Sep 2022
£m £m
Eligible liquidity buffer 14,252 13,139
Net stress outflows 9,288 9,537
Surplus 4,964 3,602
Liquidity coverage ratio 153% 138%
In response to recent market volatility, the Group has increased liquidity
levels. This has provided additional headroom to both internal and regulatory
requirements, with the LCR increasing by 15 percentage points compared to
FY22. The liquid asset portfolio provides a buffer against sudden and
potentially sharp outflows of funds. Liquid assets must therefore be
high-quality so they can be realised for cash and cannot be encumbered for any
other purpose (e.g. to provide collateral for payments systems).
The volume and quality of the Group's liquid asset portfolio is defined
through a series of internal stress tests across a range of time horizons and
stress conditions. The Group's c.£14bn prime liquid asset portfolio is
primarily comprised of cash at the BoE (c.70%), UK Government securities
(Gilts) (c.10%) and AAA rated listed securities (e.g. bonds issued by
supra-nationals and corporate covered bonds) (c.20%).
The liquid asset portfolio is marked to market and fully hedged from an
interest rate, inflation and FX risk perspective. All fair value movements are
therefore recognised in CET1 via the Income Statement (market risk) or FVOCI
reserve (credit risk). The IRRBB stress tested framework includes limits to
manage the stressed credit spread risk arising from hedging the fixed rate
securities in the Group's liquid asset portfolio. This ensures the composition
of total portfolio is controlled and the exposure will not exceed internal
appetite or the amount of capital allocated.
31 Mar 2023 30 Sep 2022 Change Average at 31 Mar 2023 Average at
30 Sep 2022
Liquid asset portfolio((1)) £m £m % £m £m
Level 1
Cash and balances with central banks 9,996 9,795 2.1 8,577 7,632
UK Government treasury bills and gilts 1,442 512 181.6 999 905
Other debt securities 2,609 2,827 (7.7) 2,813 2,993
Total level 1 14,047 13,134 7.0 12,389 11,530
Level 2((2)) 343 117 193.2 145 32
Total LCR eligible assets 14,390 13,251 8.6 12,534 11,562
(1) Excludes encumbered assets.
(2) Includes Level 2A and Level 2B.
The NSFR was implemented by the PRA on 1 January 2022 based on Basel
standards. The ratio as at 31 March 2023 is 136% (30 September 2022: 136%)
comfortably in excess of the binding minimum requirement of 100%.
Analysis of debt securities in issue by residual maturity
The table below shows the residual maturity of the Group's debt securities in
issue:
3 months 3 to 12 months 1 to 5 Over 5 Total at Total at
or less £m years years 31 Mar 2023 30 Sep 2022
£m £m £m £m £m
Covered bonds 6 634 2,886 - 3,526 3,467
Securitisation 34 463 1,047 - 1,544 1,880
Medium-term notes 442 17 2,297 - 2,756 2,249
Subordinated debt 13 250 691 - 954 913
Total debt securities in issue 495 1,364 6,921 - 8,780 8,509
Of which issued by Virgin Money UK PLC 455 267 2,988 - 3,710 3,162
Risk management
Financial risk
External credit ratings
The Group's long-term credit ratings are summarised below:
Outlook as at As at
31 Mar 2023((1)) 31 Mar 2023 30 Sep 2022
Virgin Money UK PLC
Moody's Stable Baa1 Baa1
Fitch Stable BBB+ BBB+
Standard & Poor's Stable BBB- BBB-
Clydesdale Bank PLC
Moody's((2)) Stable A3 A3
Fitch Stable A- A-
Standard & Poor's Stable A- A-
(1) For detailed background on the latest opinion by Standard & Poor's, Fitch
and Moody's, please refer to the respective rating agency website.
(2) Long-term deposit rating.
In November 2022, Standard & Poor's affirmed Virgin Money UK PLC's and
Clydesdale Bank PLC's ratings with a stable outlook, reflecting their view
that the bank will maintain sound capital and earnings and strong asset
quality metrics in line with the broader economic environment and peers, even
as the UK macroeconomic environment deteriorates.
Net interest income
Earnings sensitivity measures calculate the change in NII over a 12-month
period resulting from an instantaneous and parallel change in interest rates.
+/- 25 basis point shocks and +/- 100 basis point shocks represent the primary
NII sensitivities assessed internally, though a range of scenarios are
assessed on a monthly basis.
12 months NII sensitivity 31 Mar 2023 30 Sep 2022
£m £m
+25 basis point parallel shift 10 18
+100 basis point parallel shift 41 66
-25 basis point parallel shift 7 5
Sensitivities disclosed reflect the expected mechanical response to a movement
in rates and represent a prudent outcome. The sensitivities are indicative
only and should not be viewed as a forecast. The key assumptions and
limitations are outlined below:
− the sensitivities are calculated based on a static balance sheet
and it is assumed there is no change to margins on reinvestment of maturing
fixed rate products;
− there are no changes to basis spreads with the rate change
passed on in full to all interest rate bases;
− administered rate products receive a full rate pass on in the
rate fall scenario, subject to internal product floor assumptions. In the rate
rise scenario administered products receive a rate pass on in line with
internal scenario specific pass on assumptions;
− additional commercial pricing responses and management actions
are not included; and
− while in practice hedging strategy would be reviewed in light of
changing market conditions, the sensitivities assume no changes over the
12-month period.
Risk management
Financial risk
LIBOR replacement
As of 31 March 2023, 1- and 6-month GBP synthetic LIBOR ceased to exist.
During April 2023, the remaining c70 VM Business 1- month GBP loans were
transitioned to BoE Base Rate to coincide with their next interest rate roll
period. There are no 6-month loans.
10 loans on 3-month GBP LIBOR remain on the balance sheet, equating to £1.2m.
Throughout 2023 all loans are expected to have transitioned to an alternative
reference rate or repaid ahead of the March 2024 cessation date.
The USD LIBOR transition is well underway for the small business loan book,
with the expectation there will be no need to use USD synthetic LIBOR from 1
July 2023.
Financial instruments that have yet to transition to alternative benchmark
rates are summarised below:
Amounts yet to be transitioned
Non derivative Non derivative Derivatives -
financial assets - financial liabilities - nominal amount((2))
carrying value((1)) carrying value
31 March 2023 £m £m £m
GBP LIBOR 9 - 46
Other((3)) 187 - -
Total 196 - 46
Non derivative Non derivative Derivatives -
financial assets - financial liabilities - nominal amount((2))
carrying value((1)) carrying value
30 September 2022 £m £m £m
GBP LIBOR 94 - 67
Other((3)) 164 - -
Total 258 - 67
(1) Gross carrying amount excluding allowances for ECL.
(2) The IBOR exposures for derivative nominal amounts include undrawn loan
commitments shown as GBP LIBOR. This is materially the case although some
facilities allow drawdowns in a number of different currencies.
(3) Comprises financial instruments referencing other IBOR rates yet to transition
to alternative benchmark rates (Euro, USD).
Statement of Directors' responsibilities
The Directors confirm that to the best of their knowledge these interim
condensed consolidated financial statements have been prepared in accordance
with UK adopted International Accounting Standard 34 'Interim Financial
Reporting' (IAS 34) and that the interim management report includes a fair
review of the information required by Disclosure Guidance and Transparency
Rules (DTR) 4.2.7R and DTR 4.2.8R, namely:
a) an indication of important events that have occurred during the six months
ended 31 March 2023 and their impact on the condensed consolidated interim
financial statements and a description of the principal risks and
uncertainties for the remaining six months of the financial year; and
b) material related party transactions in the six months ended 31 March 2023 and
any material changes in the related party transactions described in the last
Annual Report of Virgin Money UK PLC.
Signed by order of the Board
David Duffy
Chief Executive Officer
3 May 2023
Independent review report to Virgin Money UK PLC
Conclusion
We have been engaged by Virgin Money UK PLC (the Company) to review the
condensed set of financial statements in the interim financial report for the
six months ended 31 March 2023 which comprises the Interim condensed
consolidated income statement, Interim condensed consolidated statement of
comprehensive income, Interim condensed consolidated balance sheet, Interim
condensed consolidated statement of changes in equity, Interim condensed
consolidated statement of cash flows and the related explanatory notes 1.1 to
5.3. We have read the other information contained in the interim financial
report and considered whether it contains any apparent misstatements or
material inconsistencies with the information in the condensed set of
financial statements.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the interim
financial report for the six months ended 31 March 2023 is not prepared, in
all material respects, in accordance with UK adopted International Accounting
Standard 34 and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements 2410 (UK) "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" (ISRE) issued by the Financial
Reporting Council. A review of interim financial information consists of
making enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express an audit
opinion.
As disclosed in note 1, the annual financial statements of the Company
together with its subsidiary undertakings (which together comprise the Group)
are prepared in accordance with UK adopted international accounting standards.
The condensed set of financial statements included in this interim financial
report has been prepared in accordance with UK adopted International
Accounting Standard 34, "Interim Financial Reporting".
Conclusions Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis of Conclusion section of this report,
nothing has come to our attention to suggest that management have
inappropriately adopted the going concern basis of accounting or that
management have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
this ISRE, however future events or conditions may cause the entity to cease
to continue as a going concern.
Responsibilities of the Directors
The Directors are responsible for preparing the interim financial report in
accordance with the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
In preparing the interim financial report, the directors are responsible for
assessing the company's ability to continue as a going concern, disclosing, as
applicable, matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the company or
to cease operations, or have no realistic alternative but to do so.
Auditor's Responsibilities for the review of the financial information
In reviewing the interim financial report, we are responsible for expressing
to the Company a conclusion on the condensed set of financial statements in
the interim financial report. Our conclusion, including our Conclusions
Relating to Going Concern, are based on procedures that are less extensive
than audit procedures, as described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the Company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK) "Review of
Interim Financial Information Performed by the Independent Auditor of the
Entity" issued by the Financial Reporting Council. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other
than the Company, for our work, for this report, or for the conclusions we
have formed.
Ernst & Young LLP
London
3 May 2023
Financial statements
Interim condensed consolidated income statement
6 months to 6 months to 12 months to
31 Mar 2023 31 Mar 2022 30 Sep 2022
(unaudited) (unaudited) (audited)
Note £m £m £m
Interest income 1,708 1,013 2,215
Other similar interest 2 1 2
Interest expense and similar charges (858) (237) (641)
Net interest income 2.2 852 777 1,576
Gains less losses on financial instruments at fair value (14) (5) (17)
Other operating income 76 72 157
Non-interest income 2.3 62 67 140
Total operating income 914 844 1,716
Operating and administrative expenses before impairment losses 2.4 (534) (508) (1,069)
Operating profit before impairment losses 380 336 647
Impairment losses on credit exposures (144) (21) (52)
Profit on ordinary activities before tax 236 315 595
Tax expense 2.5 (56) (77) (58)
Profit for the period 180 238 537
Attributable to:
Ordinary shareholders 152 198 467
Other equity holders 28 40 70
Profit for the period 180 238 537
Basic earnings per share (pence) 2.6 11.0 13.7 32.4
Diluted earnings per share (pence) 2.6 10.9 13.7 32.3
All material items dealt with in arriving at the profit before tax for the
periods relate to continuing activities.
The notes on pages 66 to 85 form an integral part of these interim condensed
consolidated financial statements.
Financial statements
Interim condensed consolidated statement of comprehensive income
6 months to 6 months to 12 months to
31 Mar 2023 31 Mar 2022 30 Sep 2022
(unaudited) (unaudited) (audited)
Note £m £m £m
Profit for the period 180 238 537
Items that may be reclassified to the income statement
Change in cash flow hedge reserve
(Losses)/gains during the period 4.1.5 (430) 73 962
Transfers to the income statement 4.1.5 (9) (5) (13)
Taxation thereon - deferred tax credit/(charge) 4.1.5 121 (17) (260)
Taxation thereon - current tax charge - (1) -
(318) 50 689
Change in FVOCI reserve
(Losses)/gains during the period (48) 9 15
Transfers to the income statement (1) - (4)
Taxation thereon - deferred tax credit/(charge) 14 (1) (1)
(35) 8 10
Total items that may be reclassified to the income statement (353) 58 699
Items that will not be reclassified to the income statement
Change in defined benefit pension plan (421) 126 122
Taxation thereon - deferred tax credit/(charge) 144 (49) (50)
Taxation thereon - current tax credit 2 4 6
Total items that will not be reclassified to the income statement (275) 81 78
Other comprehensive (losses)/income, net of tax (628) 139 777
Total comprehensive (losses)/income for the period, net of tax (448) 377 1,314
Attributable to:
Ordinary shareholders (476) 337 1,244
Other equity holders 28 40 70
Total comprehensive (losses)/income attributable to equity holders (448) 377 1,314
The notes on pages 66 to 85 form an integral part of these interim condensed
consolidated financial statements.
Financial statements
Interim condensed consolidated balance sheet
31 Mar 2023 30 Sep 2022
(unaudited) (audited)
Note £m £m
Assets
Financial assets at amortised cost
Loans and advances to customers 3.1 71,879 71,751
Cash and balances with central banks 12,328 12,221
Due from other banks 583 656
Financial assets at FVTPL
Loans and advances to customers 3.2 68 70
Derivative financial instruments 3.3 201 342
Other financial assets 3.2 8 8
Financial assets at FVOCI ( ) 5,869 5,064
Property, plant and equipment 218 211
Intangible assets and goodwill 241 267
Deferred tax assets 2.5 262 146
Defined benefit pension assets 3.7 610 1,000
Other assets 229 171
Total assets 92,496 91,907
Liabilities
Financial liabilities at amortised cost
Customer deposits 67,229 65,434
Debt securities in issue 3.4 8,780 8,509
Due to other banks 3.5 8,116 8,502
Financial liabilities at FVTPL
Derivative financial instruments 3.3 255 327
Current tax liabilities 3 1
Deferred tax liabilities 2.5 214 350
Provisions for liabilities and charges 3.6 59 50
Other liabilities 2,210 2,394
Total liabilities 86,866 85,567
Equity
Share capital and share premium 4.1 146 148
Other equity instruments 4.1 594 666
Capital reorganisation reserve 4.1 (839) (839)
Merger reserve 4.1 2,128 2,128
Other reserves 414 766
Retained earnings 3,187 3,471
Total equity 5,630 6,340
Total liabilities and equity 92,496 91,907
The notes on pages 66 to 85 form an integral part of these interim condensed
consolidated financial statements.
These interim condensed consolidated financial statements were approved by the
Board of Directors on 3 May 2023 and were signed on its behalf
by:
David Duffy Clifford Abrahams
Chief Executive Officer Chief Financial Officer
Company name: Virgin Money UK PLC, Company number: 09595911
Financial statements
Interim condensed consolidated statement of changes in equity
Other reserves
Share capital and share premium Capital reorg' reserve Merger reserve Other Capital redemption reserve Deferred shares reserve Equity based comp' reserve FVOCI reserve Cash flow hedge reserve Retained earnings Total equity
equity instruments
Note 4.1.1 4.1.3 4.1.4 4.1.2 4.1.5
£m £m £m £m £m £m £m £m £m £m £m
As at 1 October 2021((1)) 149 (839) 2,128 915 - 14 14 33 10 3,049 5,473
Profit for the period - - - - - - - - - 238 238
Other comprehensive income net of tax - - - - - - - 8 50 81 139
Total comprehensive income for the period - - - - - - - 8 50 319 377
AT1 distributions paid - - - - - - - - - (40) (40)
Dividends paid to ordinary shareholders - - - - - - - - (14) (14)
Ordinary shares issued 3 - - - - - - - - - 3
Transfer from equity based compensation reserve - - - - - - (9) - - 9 -
Equity based compensation expensed - - - - - - 3 - - - 3
Settlement of Virgin Money Holdings (UK) PLC share awards - - - - - (4) - - - - (4)
AT1 redemption - - - (218) - - - - - (12) (230)
As at 31 March 2022((1)) 152 (839) 2,128 697 - 10 8 41 60 3,311 5,568
Profit for the period - - - - - - - - - 299 299
Other comprehensive income/(losses) net of tax - - - - - - - 2 639 (3) 638
Total comprehensive income for the period - - - - - - - 2 639 296 937
AT1 distributions paid - - - - - - - - - (30) (30)
Dividends paid to ordinary shareholders - - - - - - - - (36) (36)
Ordinary shares issued (1) - - - - - - - - - (1)
Share buyback (3) - - - 3 - - - - (63) (63)
Equity based compensation expensed - - - - - - 2 - - - 2
Settlement of Virgin Money Holding (UK) PLC share awards - - - - - 1 - - - 1 2
AT1 issuance - - - 346 - - - - - - 346
AT1 redemption - - - (377) - - - - - (8) (385)
As at 30 September 2022((1)) 148 (839) 2,128 666 3 11 10 43 699 3,471 6,340
Profit for the period - - - - - - - - - 180 180
Other comprehensive losses net of tax - - - - - - - (35) (318) (275) (628)
Total comprehensive losses for the period - - - - - - - (35) (318) (95) (448)
AT1 distributions paid - - - - - - - - - (28) (28)
Dividends paid to ordinary shareholders - - - - - - - - - (103) (103)
Ordinary shares issued 3 - - - - - - - - - 3
Share buyback (5) - - - 5 - - - - (63) (63)
Transfer from equity based compensation reserve - - - - - - (4) - - 4 -
Equity based compensation expensed - - - - - - 5 - - - 5
Settlement of Virgin Money Holdings (UK) PLC share awards - - - - - (5) - - - 1 (4)
AT1 redemption - - - (72) - - - - - - (72)
As at 31 March 2023((1)) 146 (839) 2,128 594 8 6 11 8 381 3,187 5,630
(1) The balances as at 1 October 2021 and 30 September 2022 have been audited; the
movements in the individual six month periods to 31 March 2022 and 31 March
2023 are unaudited.
The notes on pages 66 to 85 form an integral part of these interim condensed
consolidated financial statements.
Financial statements
Interim condensed consolidated statement of cash flows
6 months to 6 months to 12 months to
31 Mar 2023 31 Mar 2022 30 Sep 2022
(unaudited) (unaudited) (audited)
Note £m £m £m
Operating activities
Profit on ordinary activities before tax 236 315 595
Adjustments for:
Non-cash or non-operating items included in profit before tax (662) (673) (1,326)
Changes in operating assets (582) 469 1,212
Changes in operating liabilities 1,149 (2,146) (238)
Payments for short-term and low value leases - - (2)
Interest received 1,457 988 2,112
Interest paid (383) (163) (378)
Tax paid (21) (15) (59)
Net cash provided by/(used in) operating activities 1,194 (1,225) 1,916
Cash flows from investing activities
Interest received 105 26 47
Proceeds from maturity of financial assets at FVOCI 939 436 479
Proceeds from sale of financial assets at FVOCI 32 60 194
Purchase of financial assets at FVOCI (1,602) (712) (2,019)
Purchase of shares issued by UTM - (4) (4)
Proceeds from sale of property, plant and equipment 1 - 1
Purchase of property, plant and equipment (3) (6) (13)
Purchase and development of intangible assets (6) (33) (53)
Net cash used in investing activities (534) (233) (1,368)
Cash flows from financing activities
Interest paid (277) (72) (246)
Repayment of principal portions of lease liabilities 5.3 (14) (13) (26)
Redemption of AT1 securities (72) (230) (614)
Proceeds from issuance of Additional Tier 1 securities - - 347
Redemption and principal repayment on RMBS and covered bonds 5.3 (705) (216) (1,264)
Issuance of RMBS and covered bonds 5.3 400 600 2,480
Issuance of medium-term notes/subordinated debt 5.3 447 - -
Amounts drawn under the TFSME 5.3 - 2,550 2,550
Amounts repaid under the TFSME 5.3 (200) - -
Amounts repaid under the TFS 5.3 - (1,244) (1,244)
Purchase of own shares 4.1 (75) (1) (53)
AT1 distributions 4.1 (28) (40) (70)
Ordinary dividends paid 4.1 (103) (14) (50)
Net cash (used in)/provided by financing activities (627) 1,320 1,810
Net increase/(decrease) in cash and cash equivalents 33 (138) 2,358
Cash and cash equivalents at the beginning of the period 12,611 10,253 10,253
Cash and cash equivalents at the end of the period ( ) 12,644 10,115 12,611
The notes on pages 66 to 85 form an integral part of these interim condensed
consolidated financial statements.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 1: Basis of preparation and accounting policies
Overview
These interim condensed consolidated financial statements for the six months
ended 31 March 2023 have been prepared in accordance with UK adopted IAS 34.
They have also been prepared in accordance with the Disclosure Guidance and
Transparency Rules of the UK's Financial Conduct Authority. They do not
include all the information required by IASs in full annual financial
statements and should therefore be read in conjunction with the Group's 2022
Annual Report and Accounts which was prepared in accordance with UK adopted
IASs. Copies of the 2022 Annual Report and Accounts are available from the
Group's website at
https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/annual-reports/
(https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/annual-reports/)
.
The UK Finance Code for Financial Reporting Disclosure ('the Disclosure Code')
sets out disclosure principles together with supporting guidance in respect of
the financial statements of UK banks. The Group has adopted the Disclosure
Code and these interim condensed consolidated financial statements have been
prepared in compliance with the Disclosure Code's principles. Terminology used
in these interim condensed consolidated financial statements is consistent
with that used in the Group's 2022 Annual Report and Accounts.
The information in these interim condensed consolidated financial statements
is unaudited and does not constitute annual accounts within the meaning of
Section 434 of the Companies Act 2006 ('the Act'). Statutory accounts for the
year ended 30 September 2022 have been delivered to the Registrar of Companies
and contained an unqualified audit report under Section 495 of the Act, which
did not draw attention to any matters by way of emphasis and did not contain
any statements under Section 498 of the Act.
1.1 Going concern
The Group's business activities, together with the factors likely to affect
its future development, performance, and position, are set out in the business
and financial review section of these interim condensed consolidated financial
statements. This should be read in conjunction with the strategic report which
can be found in the Group's 2022 Annual Report and Accounts. The Group's
objectives, policies and processes for managing capital can be found in the
risk management section of this report.
The Directors have a reasonable expectation that the Group has adequate
resources to continue in operational existence for at least the next 12 months
from the date the interim condensed consolidated financial statements are
authorised for issue, and that the Group is well placed to manage its business
risks successfully. Accordingly, they continue to adopt the going concern
basis in preparing these interim condensed consolidated financial statements.
In reaching this assessment, the Directors have considered a wide range of
information relating to present and future conditions, including future
projections of profitability, cash flows, capital requirements and capital
resources. These considerations include potential impacts from top and
emerging risks, stress scenarios, and the related impact on profitability,
capital and liquidity.
1.2 Accounting policies
The accounting policies adopted in the preparation of these interim condensed
consolidated financial statements are consistent with those policies followed
in the preparation of the Group's 2022 Annual Report and Accounts except for
those policies highlighted below and in note 1.4. Comparatives are presented
on a basis that conforms to the current presentation unless stated otherwise.
Investment property
IAS 40 'Investment property' allows an entity to select either the fair value
model or the cost model for subsequent measurement of investment property. The
Group has a historic policy of fair value measurement for investment property
but has not held any on its balance sheet for several years prior to the
current period.
During the period, the Group has classified £43m of lease right-of-use assets
as investment property on initial recognition where there is surplus space
which will be sub-let under an operating lease. The Group has also transferred
freehold land and buildings with a value of £8m to investment property where
there was a change in use. Investment property balances are included within
other assets on the balance sheet.
From 1 October 2022 investment property will be recognised at cost, less
accumulated depreciation and impairment. The holding of investment property is
not a central element of the Group's overarching business model or strategy;
it is an incidental consequence of surplus estate arising from changes in
operational requirements. Considering the relative materiality and nature of
investment property balances, the Group has determined that changing the
accounting policy for investment property to align to the measurement basis
for the Group's other property related assets under IFRS 16 'Leases' and IAS
16 'Property, Plant and Equipment' will provide greater relevance and
consistency to users of the financial statements. This policy change has no
impact on prior periods.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 1: Basis of preparation and accounting policies (continued)
1.3 Critical accounting estimates and judgements
The preparation of financial statements requires the use of certain critical
accounting estimates and judgements that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosed amounts of
contingent liabilities. Assumptions made at each balance sheet date are based
on best estimates at that date. Although the Group has internal control
systems in place to ensure that best estimates can be reliably measured,
actual amounts may differ from those estimated. There has been no change to
the areas where the Group applies critical accounting estimates and judgements
compared to those shown in the Group's 2022 Annual Report and Accounts.
An update on ECLs is provided within the credit risk section of the Risk
report, and an update on the effective interest rate (EIR) is provided below.
There have been no material changes to the main accounting estimates and
judgements for EIR from the detail disclosed in note 2.2 of the Group's Annual
Report and Accounts for the year ended 30 September 2022.
Mortgages
As at 31 March 2023, a total EIR adjustment of £210m (30 September 2022:
£201m) has been recognised for mortgages. This represented 0.4% (30 September
2022: 0.3%) of the balance sheet carrying value of gross loans and advances to
customers for mortgage lending. The net impact of the mortgage EIR adjustments
on the income statement in the period represented 1.1% of gross customer
interest income for mortgages (year to 30 September 2022: (0.7)%).
Sensitivity analysis
There are inter-dependencies between the assumptions which add to the
complexity of the judgements the Group has to make. This means that no single
factor is likely to move independently of others; the sensitivities disclosed
below assume all other assumptions remain unchanged.
Sensitivity impact on the mortgage EIR adjustment 31 Mar 2023 30 Sep 2022
£m £m
+/- 1 month change to the timing of customer repayments, redemptions and 16/(13) 16/(13)
product transfers
50bps increase to the BoE base rate not passed through to the Group's SVR (46) (46)
Credit cards
As at 31 March 2023, a total EIR adjustment of £273m (30 September 2022:
£285m) has been recognised for credit cards. This represented 5.1% (30
September 2022: 5.5%) of the balance sheet carrying value of gross loans and
advances to customers for credit cards. The EIR asset reduced during the
period resulting in a debit to the income statement which represented (6.2%)
of gross customer interest income for credit cards (year to 30 September 2022:
a credit representing 3.3% of gross customer interest income for credit
cards).
At 31 March 2023, there continued to be impacts on customers as a result of
inflationary pressures including high energy and utility costs and base rate
rises. Consequently, the temporary adjustments applied at 30 September 2022 to
the post promotional Interest-Bearing Balance (IBB) and balance attrition have
been retained.
Sensitivity analysis
There are inter-dependencies between the key assumptions which add to the
complexity of the judgements the Group has to make. This means that no single
factor is likely to move independently of others, however, the sensitivities
disclosed below assume all other assumptions remain unchanged.
Sensitivity impact on the credit card EIR adjustment 31 Mar 2023 30 Sep 2022
£m £m
+/- 5 ppts change to post-promotional IBB assumption((1)) (9.1% relative 35/(30) 34/(28)
increase/decrease)
+/- 0.5 ppts change to post-promotional monthly balance attrition rate (21)/24 (20)/23
(33% relative increase/decrease)
(1) Where the IBB assumption is already equal to or less than 50% IBB, no further
adjustment has been made on the basis this already represents a downside
economic stress.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 1: Basis of preparation and accounting policies (continued)
1.3 Critical accounting estimates and judgements (continued)
Model risk reserve (MRR)
The complicated nature of EIR models means the Group exercises prudence on the
modelled outcome and therefore chooses to hold a MRR in relation to both
mortgages and credit cards to mitigate the risk of estimation uncertainty.
1.4 Accounting developments
The Group adopted the following pronouncements from the International
Accounting Standards Board (IASB) in the period, none of which have had a
material impact:
· Amendments to IAS 16 'Property, Plant and Equipment': Proceeds
before Intended Use. This was issued in May 2020 (applicable for accounting
periods beginning on or after 1 January 2022) and received endorsement for use
in the UK in April 2022. The amendments prohibit a company from deducting from
the cost of property, plant and equipment amounts received from selling items
produced while the company is preparing the asset for its intended use.
Instead, a company will recognise such sales proceeds and related cost in
profit or loss.
· Amendments to IAS 37 'Provisions, Contingent Liabilities and
Contingent Assets: Onerous Contracts - Cost of Fulfilling a Contract. This was
issued in May 2020 (applicable for accounting periods beginning on or after 1
January 2022) and received endorsement for use in the UK in April 2022. The
amendments clarify that for the purpose of assessing whether a contract is
onerous, the cost of fulfilling the contract includes both the incremental
costs of fulfilling that contract and an allocation of other costs that relate
directly to fulfilling contracts.
· Amendments to IFRS 3 'Business Combinations'. This was issued in
May 2020 and received endorsement for use in the UK in April 2022. The
amendments update IFRS 3 to refer to the 2018 Conceptual Framework for
Financial Reporting, in order to determine what constitutes an asset or a
liability in a business combination and applies to those business combinations
for which the acquisition date is on or after the start of the first annual
reporting period beginning on or after 1 January 2022.
· Annual Improvements 2018-2020. This was issued in May 2020
(applicable for accounting periods beginning on or after 1 January 2022) and
received endorsement for use in the UK in April 2022. The annual improvements
package includes the following minor Amendments to i) IFRS 1 'First-time
Adoption of IFRS' - Subsidiary as a First-time Adopter; ii) IFRS 9 'Financial
Instruments' - Fees in the '10 per cent' Test for Derecognition of Financial
Liabilities; iii) IFRS 16 'Leases' - Lease Incentives; and iv) IAS 41
'Agriculture' - Taxation in Fair Value Measurements.
During the period, the Group also early adopted Amendments to IAS 1
Presentation of Financial Statements and IFRS Practice Statement 2 Making
Materiality Judgements which was issued by the IASB in February 2021
(applicable for accounting periods beginning on or after 1 January 2023 with
early adoption permitted) and endorsed for use in the UK by the UK Endorsement
Board (UKEB) in November 2022.
The amendments require entities to disclose their material accounting policy
information rather than their significant accounting policies. As part of
this, the IASB has amended IFRS Practice Statement 2 Making Materiality
Judgements by adding guidance and examples of circumstances to help entities
determine when accounting policy information is material and, therefore, needs
to be disclosed.
The Group has assessed the requirements of the amendments and concluded that
the disclosure of certain accounting policies included within the Annual
Report and Accounts for the year ended 30 September 2022 will no longer be
necessary.
As the Group does not disclose the accounting policies adopted in the
preparation of these interim condensed consolidated financial statements,
early adopting the amendment has no impact in the current period. Full details
on the disclosure changes will be made in the Group's 2023 Annual Report and
Accounts.
During the period, there have been no further pronouncements issued by the
IASB that are considered relevant and material to the Group.
1.5 Presentation of risk disclosures
Certain disclosures outlined in IFRS 7 'Financial Instruments: Disclosure'
concerning the nature and extent of risks relating to financial instruments
have been included within the risk management section of this report.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 2: Results for the period
2.1 Segment information
The Group's operating segments are operating units engaged in providing
different products or services and whose operating results and overall
performance are regularly reviewed by the Group's Chief Operating Decision
Maker, the Executive Leadership Team.
The Group operates under four commercial lines: Mortgages, Unsecured,
Business, and Deposits, which are reported through the Chief Commercial
Officer. At this point in time, the business continues to be reported to the
Group's Chief Operating Decision Maker as a single segment and decisions made
on the performance of the Group on that basis. Segmental information will
therefore continue to be presented on this single segment basis.
6 months to 6 months to 12 months to
31 Mar 2023 31 Mar 2022 30 Sep 2022
(unaudited) (unaudited) (audited)
£m £m £m
Net interest income 852 777 1,576
Non-interest income 62 67 140
Total operating income 914 844 1,716
Operating and administrative expenses (534) (508) (1,069)
Impairment losses on credit exposures (144) (21) (52)
Segment profit before tax 236 315 595
Average interest earning assets 89,568 85,729 86,275
2.2 Net interest income
6 months to 6 months to 12 months to
31 Mar 2023 31 Mar 2022 30 Sep 2022
(unaudited) (unaudited) (audited)
£m £m £m
Interest income
Loans and advances to customers 1,436 988 2,095
Loans and advances to other banks 173 12 70
Financial assets at FVOCI 99 13 50
Total interest income 1,708 1,013 2,215
Other similar interest
Financial assets at FVTPL 2 3 5
Derivatives economically hedging interest bearing assets - (2) (3)
Total other similar interest 2 1 2
Less: interest expense and similar charges
Customer deposits (469) (134) (342)
Debt securities in issue (230) (90) (227)
Due to other banks (157) (12) (70)
Other interest expense (2) (1) (2)
Total interest expense and similar charges (858) (237) (641)
Net interest income 852 777 1,576
Financial statements
Notes to the interim condensed consolidated financial statements
Section 2: Results for the period (continued)
2.3 Non-interest income
6 months to 6 months to 12 months to
31 Mar 2023 31 Mar 2022 30 Sep 2022
(unaudited) (unaudited) (audited)
£m £m £m
Gains less losses on financial instruments at fair value
Held for trading derivatives (3) (7) 6
Financial assets at fair value((1)) 5 (7) (19)
Ineffectiveness arising from fair value hedges 14 18 46
Amounts recycled to profit and loss from cash flow hedges((2)) (2) (2) (4)
Ineffectiveness arising from cash flow hedges (28) (7) (46)
(14) (5) (17)
Other operating income
Net fee and commission income 66 67 134
Margin on foreign exchange derivative brokerage 9 9 19
Gain on sale of financial assets at FVOCI 1 - 4
Share of joint venture (JV) loss after tax - (5) (4)
Other income - 1 4
76 72 157
Total non-interest income 62 67 140
(1) Included within financial assets at fair value is a credit risk gain on loans
and advances at fair value of £Nil (period ended 31 March 2022: £1m gain,
year ended 30 September 2022: £1m gain) and a fair value gain on equity
investments of £1m (period ended 31 March 2022: £Nil, year ended 30
September 2022: £2m gain).
(2) In respect of terminated hedges.
The Group's unrecognised share of losses of JVs for the period was £3m
(period ended 31 March 2022: £1m, year ended 30 September 2022: £8m). For
loss-making entities, subsequent profits earned are not recognised until
previously unrecognised losses are extinguished. The Group's unrecognised
share of losses net of unrecognised profits on a cumulative basis of JVs is
£12m (period ended 31 March 2022: £2m, year ended 30 September 2022: £9m).
Non-interest income includes the following fee and commission income
disaggregated by product type:
6 months to 6 months to 12 months to
31 Mar 2023 31 Mar 2022 30 Sep 2022
(unaudited) (unaudited) (audited)
£m £m £m
Current account and debit card fees 52 49 102
Credit cards 28 23 52
Insurance, protection and investments 4 5 8
Other fees((1)) 8 15 26
Total fee and commission income 92 92 188
Total fee and commission expense (26) (25) (54)
Net fee and commission income 66 67 134
(1) Includes mortgages, invoice and asset finance and ATM fees.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 2: Results for the period (continued)
2.4 Operating and administrative expenses before impairment
losses
6 months to 6 months to 12 months to
31 Mar 2023 31 Mar 2022 30 Sep 2022
(unaudited) (unaudited) (audited)
£m £m £m
Staff costs 191 213 435
Property and infrastructure 34 22 38
Technology and communications 62 59 119
Corporate and professional services 109 62 135
Depreciation, amortisation and impairment 53 71 179
Other expenses 85 81 163
Total operating and administrative expenses 534 508 1,069
Staff costs comprise the following items:
6 months to 6 months to 12 months to
31 Mar 2023 31 Mar 2022 30 Sep 2022
(unaudited) (unaudited) (audited)
£m £m £m
Salaries and wages 132 136 254
Social security costs 15 14 30
Defined contribution pension expense 27 25 50
Defined benefit pension credit (24) (12) (24)
Compensation costs 150 163 310
Equity based compensation((1)) 4 2 4
Bonus awards 8 21 27
Performance costs 12 23 31
Redundancy and restructuring 1 7 3
Temporary staff costs 12 6 13
Other 16 14 78
Other staff costs 29 27 94
Total staff costs 191 213 435
(1) Includes National Insurance on equity based compensation.
Phase 2 of the ongoing Pension Increase Exchange (PIE) exercise completed in
FY22, and the third and final phase is planned to be implemented in the second
half of FY23. The defined benefit pension credit in the current period
therefore includes no impact (period ended 31 March 2022: £8m credit, year
ended 30 September 2022: £10m credit) arising from the PIE exercise. A PIE
gives members the option to exchange future increases on their pensions for a
one-off uplift to their current pension.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 2: Results for the period (continued)
2.5 Taxation
6 months to 6 months to 12 months to
31 Mar 2023 31 Mar 2022 30 Sep 2022
(unaudited) (unaudited) (audited)
£m £m £m
Current tax
Current period 27 39 81
Adjustment in respect of prior periods 2 8 4
29 47 85
Deferred tax
Current period 30 38 (21)
Adjustment in respect of prior periods (3) (8) (6)
27 30 (27)
Tax expense for the period 56 77 58
The tax assessed for the period differs from that arising from applying the
standard rate of corporation tax in the UK of 22% (2022: 19%). 22% is the
average standard rate for the full financial year, comprising 19% to 1 April
2023 then 25% to 30 September 2023. A reconciliation from the expense implied
by the standard rate to the actual tax expense is as follows:
6 months to 6 months to 12 months to
31 Mar 2023 31 Mar 2022 30 Sep 2022
(unaudited) (unaudited) (audited)
£m £m £m
Profit on ordinary activities before tax 236 315 595
Tax expense based on the standard rate of corporation tax in the UK of 22% 52 60 113
(March and September 2022: 19%)
Effects of:
Disallowable expenses 1 1 4
Conduct indemnity adjustment - (12) (12)
Deferred tax assets recognised - (19) (83)
Impact of rate changes 5 41 23
AT1 distribution (6) (8) (13)
Banking surcharge 5 14 28
Adjustments in respect of prior periods (1) - (2)
Tax expense for the period 56 77 58
In February 2022, legislation was enacted to reduce the banking surcharge from
8% to 3%, and to increase the threshold below which it is not chargeable to
£100m (previously £25m). The changes are effective for current tax from 1
April 2023. For the purposes of these interim financial statements, the income
tax rate applicable for the annual period has been applied.
The Group's effective tax rate is 23.6%. The impact of the banking surcharge
on profits in excess of the threshold is largely offset by the tax deduction
for AT1 distributions for which the accounting charge is included in the
statement of changes in equity, while the tax effect is, in accordance with
legislation, reflected in the income statement. The current period rate change
charge of £5m arises primarily in relation to the defined benefit pension
scheme, where current period amounts in the income statement are reflected at
22%, while the deferred tax liability on the ultimate accounting surplus is
measured at 35%.
The Group has recognised deferred tax in relation to the following items in
the balance sheet, income statement, and statement of other comprehensive
income:
Movement in deferred tax asset/(liability)
Acquisition Cash flow Gains on financial Tax losses Capital Pension Other Total deferred Defined benefit Total deferred
accounting hedge reserve instruments at carried allowances spreading temporary tax assets pension scheme tax liabilities
adjustments £m FVOCI forward £m £m differences £m surplus £m
£m £m £m £m £m
At 1 October 2021 (10) (9) (15) 255 124 5 27 377 (296) (296)
Income statement credit/(charge) 2 2 - 47 (13) - (2) 36 (9) (9)
Other comprehensive income charge - (260) (1) - - (5) (1) (267) (45) (45)
At 30 September 2022 (8) (267) (16) 302 111 - 24 146 (350) (350)
Income statement credit/(charge) 1 - - (12) (3) - (5) (19) (8) (8)
Other comprehensive income credit - 121 14 - - - - 135 144 144
At 31 March 2023 (7) (146) (2) 290 108 - 19 262 (214) (214)
Financial statements
Notes to the interim condensed consolidated financial statements
Section 2: Results for the period (continued)
2.5 Taxation (continued)
Other temporary differences include the IFRS 9 transitional adjustment of
£10m and equity-based compensation of £4m (30 September 2022: £11m and
£6m, respectively).
The Group has deferred tax assets of £262m (30 September 2022: £146m), the
principal components of which are tax losses of £290m (30 September 2022:
£302m) and capital allowances of £108m (30 September 2022: £111m) offset by
the cash flow hedge reserve deferred tax liability of £146m (30 September
2022: £267m). The Group also has deferred tax liabilities of £214m (30
September 2022: £350m) in relation to the defined benefit pension surplus.
The deferred tax assets and liabilities detailed above arise primarily in
Clydesdale Bank PLC which has a right to offset current tax assets against
current tax liabilities and is party to a Group Payment Arrangement for
payments of tax to HMRC. Therefore, in accordance with IAS 12, deferred tax
assets and deferred tax liabilities have also been offset in this period where
they relate to payments of income tax to this tax authority.
Historic trade tax losses are fully recognised. The Group also has historic
non-trading losses of £9m gross, tax value £2m; a deferred tax asset has not
been recognised in respect of these losses as their use in the reasonably
foreseeable future is uncertain.
The Group has assessed the likelihood of recovery of the deferred tax assets
at 31 March 2023, and considers it probable that sufficient future taxable
profits will be available over the corporate planning horizon against which
the underlying deductible temporary differences can be utilised. Deferred tax
assets are recognised to the extent that they are expected to be utilised
within six years of the balance sheet date. If, instead of six years, the
period were five or seven years, the total recognised deferred tax asset would
be £220m or would remain at £262m, respectively. If Group profit forecasts
were 10% lower than anticipated, the total deferred tax asset would be
£244m. This is only £18m lower than the reported position as there is
excess capacity for losses to be recognised. All tax assets arising will be
used within the UK.
2.6 Earnings per share
6 months to 6 months to 12 months to
31 Mar 2023 31 Mar 2022 30 Sep 2022
(unaudited) (unaudited) (audited)
£m £m £m
Profit attributable to ordinary equity holders for the purposes of 152 198 467
basic and diluted EPS
31 Mar 2023 Number of 31 Mar 2022 Number of 30 Sep 2022
shares shares Number of shares
Weighted-average number of ordinary shares in issue (millions)
- Basic 1,384 1,443 1,441
Adjustment for share awards made under equity based 6 3 3
compensation schemes
- Diluted 1,390 1,446 1,444
Basic earnings per share (pence) 11.0 13.7 32.4
Diluted earnings per share (pence) 10.9 13.7 32.3
Basic earnings per share has been calculated after deducting 0.3m (31 March
2022: 0.2m, 30 September 2022: 0.3m) ordinary shares representing the weighted
average of the Group's holdings of its own shares.
Note 4.1 provides details of the share buyback programme.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 3: Assets and liabilities
3.1 Loans and advances to customers
31 Mar 2023 30 Sep 2022
(unaudited) (audited)
£m £m
Gross loans and advances to customers 73,002 73,146
Impairment provisions on credit exposures((1)) (522) (454)
Fair value hedge adjustment (601) (941)
71,879 71,751
(1) ECLs on off-balance sheet exposures of £4m (30 September 2022: £3m) are
presented as part of the provisions for liabilities and charges balance (note
3.6).
The Group has a portfolio of fair valued business loans of £68m (30 September
2022: £70m) which are classified separately as financial assets at FVTPL
(note 3.2). Combined with the above this is equivalent to total loans and
advances of £71,947m (30 September 2022: £71,821m).
The fair value hedge adjustment represents an offset to the fair value
movement on hedging derivatives transacted to manage the interest rate risk
inherent in the Group's fixed rate mortgage portfolio.
The Group has transferred a proportion of mortgages to the securitisation and
covered bond programmes.
3.2 Financial assets at fair value through profit or loss
Loans and advances
Included in financial assets at FVTPL is a historical portfolio of loans.
Interest rate risk associated with these loans is managed using interest rate
derivative contracts and the loans are recorded at fair value to avoid an
accounting mismatch. The maximum credit exposure of the loans is £68m (30
September 2022: £70m). The cumulative loss in the fair value of the loans
attributable to changes in credit risk amounts to £1m (30 September 2022:
£1m); the change for the current period is £Nil (period ended 31 March 2022:
£Nil, year ended 30 September 2022: decrease of £1m) of which £Nil (period
ended 31 March 2022: £Nil, year ended 30 September 2022: £1m) has been
recognised in the income statement.
Other financial assets
Other financial assets of £8m (30 September 2022: £8m) consists of £7m (30
September 2022: £7m) of unlisted securities and £1m (30 September 2022:
£1m) of debt instruments.
Note 3.8 contains further information on the valuation methodology applied to
financial assets held at fair value and their classification within the fair
value hierarchy. Details of the credit quality of financial assets are
provided in the Risk report.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 3: Assets and liabilities (continued)
3.3 Derivative financial instruments
The tables below analyse derivatives between those designated as hedging
instruments and those classified as held for trading:
31 Mar 2023 30 Sep 2022
(unaudited) (audited)
£m £m
Fair value of derivative financial assets
Designated as hedging instruments 165 277
Designated as held for trading 36 65
201 342
Fair value of derivative financial liabilities
Designated as hedging instruments 177 201
Designated as held for trading 78 126
255 327
Cash collateral totalling £229m (30 September 2022: £241m) has been pledged
and £9m has been received (30 September 2022: £38m) in respect of
derivatives with other banks. These amounts are included within due from and
due to other banks respectively. Net collateral received from clearing houses,
which did not meet offsetting criteria, totalled £117m (30 September 2022:
£149m) and is included within other assets and other liabilities.
The derivative financial instruments held by the Group are further analysed
below. The notional contract amount is the amount from which the cash flows
are derived and does not represent the principal amounts at risk relating to
these contracts.
31 March 2023 (unaudited) 30 September 2022 (audited)
Total derivative contracts Notional contract amount Fair value Fair value Notional contract amount Fair value Fair value
of assets of liabilities of assets of liabilities
£m £m £m £m £m £m
Derivatives designated as hedging instruments
Cash flow hedges
Interest rate swaps (gross) 64,360 1,429 775 35,753 1,988 930
Less: net settled interest rate swaps((1)) (61,795) (1,304) (754) (33,188) (1,803) (900)
Interest rate swaps (net)((2)) 2,565 125 21 2,565 185 30
Fair value hedges
Interest rate swaps (gross)((3)) 14,201 926 894 16,600 1,201 636
Less: net settled interest rate swaps((1)) (12,472) (889) (871) (14,611) (1,144) (570)
Interest rate swaps (net)((2)) 1,729 37 23 1,989 57 66
Cross currency swaps((2)) 2,368 3 133 2,113 35 105
4,097 40 156 4,102 92 171
Total derivatives designated as hedging instruments 6,662 165 177 6,667 277 201
Derivatives designated as held for trading
Foreign exchange rate related contracts
Spot and forward foreign exchange((2)) 751 10 8 599 26 20
Options((2)) 1 - - 1 - -
752 10 8 600 26 20
Interest rate related contracts
Interest rate swaps (gross) 1,435 31 47 1,411 52 66
Less: net settled interest rate swaps((1)) (665) (29) (1) (665) (50) -
Interest rate swaps (net)(()(2)) 770 2 46 746 2 66
Swaptions((2)) 10 - 1 10 - 2
Options((2)) 607 9 9 501 16 17
1,387 11 56 1,257 18 85
Commodity related contracts 199 15 14 199 21 21
Total derivatives designated as held for trading 2,338 36 78 2,056 65 126
(1) Presented within other assets and other liabilities.
(2) Presented within derivative financial instruments.
(3) Includes inflation and interest rate risk related swaps with a notional of
£750m and a fair value liability of £393m. These swaps are centrally cleared
and net settled.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 3: Assets and liabilities (continued)
3.3 Derivative financial instruments (continued)
Derivatives transacted to manage the Group's interest rate exposure on a net
portfolio basis are accounted for as either cash flow hedges or fair value
hedges as appropriate. Derivatives traded to manage interest rate, inflation
and currency risk on certain fixed rate assets held for liquidity management,
including UK Government Gilts, are accounted for as fair value hedges.
The Group hedging positions also include those designated as foreign currency
and interest rate hedges of debt issued from the Group's securitisation and
covered bond programmes. As such, certain derivative financial assets and
liabilities have been booked in structured entities and consolidated within
these financial statements.
The Group has no remaining hedge relationships exposed to LIBOR and as no
uncertainty remains regarding interest rate benchmark reform, the Group no
longer applies the reliefs provided by 'Interest Rate Benchmark Reform - Phase
1 and Phase 2 amendments' to hedge accounting.
3.4 Debt securities in issue
The breakdown of debt securities in issue is shown below:
31 March 2023 (unaudited) Medium-term notes Subordinated debt Securitisation Covered bonds Total
£m £m £m £m £m
Debt securities 2,733 940 1,537 3,485 8,695
Accrued interest 23 14 7 41 85
2,756 954 1,544 3,526 8,780
30 September 2022 (audited) Medium-term notes Subordinated Securitisation Covered bonds Total
debt
£m £m £m £m £m
Debt securities 2,236 899 1,875 3,450 8,460
Accrued interest 13 14 5 17 49
2,249 913 1,880 3,467 8,509
Key movements in the period are shown in the table below((1)). Full details of
all notes in issue can be found at
https://www.virginmoneyukplc.com/investor-relations/debt-investors/.
Period to 31 March 2023 Year to 30 September 2022
Issuances Redemptions Issuances Redemptions
Denomination £m Denomination £m Denomination £m Denomination £m
Securitisation GBP 400 USD, GBP 705 GBP 700 USD, GBP 1,264
Covered bonds - - - - EUR, GBP 1,780 - -
Medium term notes EUR 447 - - - - - -
847 705 2,480 1,264
(1) Other movements relate to foreign exchange and amortisation of issue costs and
acquisition accounting adjustments.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 3: Assets and liabilities (continued)
3.4 Debt securities in issue (continued)
The following tables provide a breakdown of the medium-term notes and
subordinated debt by instrument (excluding accrued interest):
Medium-term notes
31 Mar 2023 30 Sep 2022
(unaudited) (audited)
£m £m
VM UK 3.125% fixed-to-floating rate callable senior notes due 2025 299 299
VM UK 4% fixed rate reset callable senior notes due 2026 465 444
VM UK 3.375% fixed rate reset callable senior notes due 2026 331 317
VM UK 4% fixed rate reset callable senior notes due 2027 353 331
VM UK 2.875% fixed rate reset callable senior notes due 2025 416 413
VM UK 0.375% fixed rate reset callable senior notes due 2024 436 432
VM UK 4.625% fixed rate reset callable senior notes due 2028 433 -
2,733 2,236
Subordinated debt
31 Mar 2023 30 Sep 2022
(unaudited) (audited)
£m £m
VM UK 7.875% fixed rate reset callable subordinated notes due 2028 250 249
VM UK 5.125% fixed rate reset callable subordinated notes due 2030 424 400
VM UK 2.625% fixed rate reset callable subordinated notes due 2031 266 250
940 899
3.5 Due to other banks
31 Mar 2023 30 Sep 2022
(unaudited) (audited)
£m £m
Secured loans 7,067 7,230
Securities sold under agreements to repurchase((1)) 1,006 1,205
Transaction balances with other banks 7 17
Deposits from other banks 36 50
8,116 8,502
(1) The underlying securities sold under agreements to repurchase have a carrying
value of £1,792m (30 September 2022: £1,873m).
Secured loans comprise amounts drawn under the TFSME schemes (including
accrued interest).
Financial statements
Notes to the interim condensed consolidated financial statements
Section 3: Assets and liabilities (continued)
3.6 Provisions for liabilities and charges
Employee related Customer related Property Off-balance sheet Total
costs provision provision provision ECL provisions £m
£m £m £m £m
As at 1 October 2021 22 19 55 8 104
Charge/(credit) to the income statement 2 8 - (5) 5
Utilised (17) (14) (28) - (59)
As at 30 September 2022 7 13 27 3 50
Charge to the income statement 1 1 13 1 16
Utilised (3) (1) (3) - (7)
As at 31 March 2023 5 13 37 4 59
Employee related costs provision
This includes provision for staff redundancies and for NIC on equity based
compensation. During the period, provisions of £1m (30 September 2022: £2m)
were raised relating to staff redundancy costs.
Customer related provision
This relates to customer matters, legal proceedings and claims arising in the
ordinary course of the Group's business. A number of these matters are now
reaching a conclusion and the risk that the final amount required to settle
the Group's potential liabilities in these matters being materially more than
the remaining provision is now considered to be low.
Property provision
This includes costs for stores and office closures. During the period,
provisions of £13m (30 September 2022: £Nil) were raised.
3.7 Retirement benefit obligations
The Group's principal trading subsidiary, Clydesdale Bank PLC, is the
sponsoring employer of the Yorkshire and Clydesdale Bank Pension Scheme ('the
Scheme'), a defined benefit pension scheme, which was closed to future benefit
accrual for the majority of current employees on 1 August 2017. The assets of
the Scheme are held in a trustee administered fund, with the Trustee
responsible for the operation and governance of the Scheme, including making
decisions regarding the funding and investment strategy.
The following table provides a summary of the fair value of Scheme assets and
present value of the defined benefit obligation:
31 Mar 2023 30 Sep 2022
(unaudited) (audited)
£m £m
Fair value of Scheme assets 3,116 3,216
Defined benefit obligation (2,506) (2,216)
Net defined benefit pension asset 610 1,000
On 6 April 2023, the Scheme entered into a longevity swap transaction with
Pacific Life Re International Limited and Zurich Assurance Ltd to manage
longevity risk in relation to c.£1.6b of pensioner liabilities. The
arrangement provides long term protection to the Scheme against costs
resulting from pensioners or their dependants living longer than currently
expected, enhancing security for Scheme members and reducing risk for the
Group.
During 2020 the Trustee concluded the latest triennial valuation for the
Scheme, which was conducted in accordance with Scheme data and market
conditions as at 30 September 2019. The valuation resulted in an improvement
in the Scheme's funding position, with a reported surplus of £144m
(previously deficit of £290m) and a technical provisions funding level of
103% (previously 94%). As the 2019 valuation outcome was a funding surplus,
the future payments to the Scheme were limited solely to those relating to a
payment holiday agreed between the Group and Scheme Trustee in respect of
contributions due under the prior 2016 valuation. These totalled £52m and
were paid in full by the end of September 2021.
The next triennial valuation is due to be conducted this year based on Scheme
data and market conditions as at 30 September 2022.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 3: Assets and liabilities (continued)
3.8 Fair value of financial instruments
This section should be read in conjunction with note 3.15 of the Group's 2022
Annual Report and Accounts, which provides more detail about accounting
policies adopted and valuation methodologies used in calculating fair value.
There have been no changes in the accounting policies adopted or the valuation
methodologies used. Fair value measurements are assigned to Level 1, 2 or 3 of
the fair value hierarchy depending on the significance of the inputs used in
determining fair value (Level 1 being the lowest and Level 3 being the
highest).
(a) Fair value of financial instruments recognised on the balance sheet at
amortised cost
The tables below show a comparison of the carrying amounts of financial assets
and liabilities measured at amortised cost, and their fair values where these
are not approximately equal.
There are various limitations inherent in this fair value disclosure,
particularly where prices are derived from unobservable inputs due to some
financial instruments not being traded in an active market. The methodologies
and assumptions used in the fair value estimates are described in the notes to
the tables in note 3.15 of the Group's 2022 Annual Report and Accounts. The
difference between carrying value and fair value is relevant in a trading
environment but is not relevant to assets such as loans and advances.
31 Mar 2023 30 Sep 2022
(unaudited) (audited)
Carrying value Fair value Carrying value Fair value
£m £m £m £m
Financial assets
Loans and advances to customers((1)) 71,879 71,386 71,751 69,277
Financial liabilities
Customer deposits((2)) 67,229 67,073 65,434 65,069
Debt securities in issue((3)) 8,780 8,806 8,509 8,515
Due to other banks((2)) 8,116 8,153 8,502 8,485
(1) Categorised as Level 3 in the fair value hierarchy with the exception of
£1,124m (30 September 2022: £1,098m) of overdrafts which are categorised as
Level 2.
(2) Categorised as Level 2 in the fair value hierarchy.
(3) Categorised as Level 2 in the fair value hierarchy with the exception of
£3,705m of listed debt (30 September 2022: £3,156m) which is categorised as
Level 1.
( )
(b) Fair value of financial instruments recognised on the balance sheet at
fair value
The following tables provide an analysis of financial instruments that are
measured at fair value, using the fair value hierarchy described above:
Fair value measurement as at Fair value measurement as at
31 Mar 2023 (unaudited) 30 Sep 2022 (audited)
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
£m £m £m £m £m £m £m £m
Financial assets
Held at FVOCI 5,869 - - 5,869 5,064 - - 5,064
Loans and advances to customers - 68 - 68 - 70 - 70
Other financial assets - 4 4 8 - 4 4 8
Derivatives - 201 - 201 - 342 - 342
Total financial assets at fair value 5,869 273 4 6,146 5,064 416 4 5,484
Financial liabilities
Derivatives - 255 - 255 - 327 - 327
Total financial liabilities at fair value - 255 - 255 - 327 - 327
There were no transfers between Level 1 and 2 in the current or prior period.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 3: Assets and liabilities (continued)
3.8 Fair value of financial instruments (continued)
Additional analysis on assets and liabilities measured at fair value based on
valuation techniques for which any significant input is not based on
observable market data:
Level 3 movement analysis: 6 months to 12 months to
31 Mar 2023 30 Sep 2022
(unaudited) (audited)
Other financial assets Other financial assets
Derivatives Derivatives
£m £m £m £m
Balance at the beginning of the period 4 - 6 1
Fair value gains recognised((1))
In profit or loss - unrealised - - - (1)
Settlements - - (2) -
Balance at the end of the period 4 - 4 -
(1) Net gains or losses were recorded in non-interest income.
( )
Financial statements
Notes to the interim condensed consolidated financial statements
Section 4: Capital
4.1 Equity
4.1.1 Share capital and share premium
31 Mar 2023 30 Sep 2022
(unaudited) (audited)
£m £m
Share capital 137 141
Share premium 9 7
146 148
31 Mar 2023 30 Sep 2022
(unaudited) (audited) 31 Mar 2023 30 Sep 2022
Number of Number of (unaudited) (audited)
shares shares £m £m
Ordinary shares of £0.10 each - allotted, called up, and fully paid
Opening ordinary share capital 1,408,530,988 1,439,993,431 141 144
Issued under employee share schemes 3,762,368 2,982,745 1 -
Share buyback programme (46,025,802) (34,445,188) (5) (3)
Closing ordinary share capital 1,366,267,554 1,408,530,988 137 141
The holders of ordinary shares are entitled to dividends as declared and are
entitled to one vote per share at meetings of the shareholders of the Company.
All shares in issue at 31 March 2023 rank equally with regard to the Company's
residual assets.
The following dividends were declared in the current and prior periods:
· A final dividend in respect of the year ended 30 September 2021
of 1p per ordinary share in the Company, amounting to £14m, was paid in March
2022.
· An interim dividend in respect of the year ended 30 September
2022 of 2.5p per ordinary share in the Company, amounting to £36m, was paid
in June 2022.
· A final dividend in respect of the year ended 30 September 2022
of 7.5p per ordinary share in the Company, amounting to £103m, was paid in
March 2023.
· The Directors have declared an interim dividend in respect of the
year ending 30 September 2023 of 3.3p per ordinary share in the Company,
amounting to £45m, to be paid in June 2023.
On 30 June 2022 the Company announced a share buyback programme, with an
initial repurchase of up to £75m in aggregate between its ordinary shares of
£0.10 each listed on the London Stock Exchange and CDIs, each representing
one share, listed on the Australian Securities Exchange. The Company
repurchased shares and CDIs in approximately equal proportions. The buyback
commenced on 30 June 2022 and ended on 9 December 2022.
On 21 November 2022 the Company announced an extension to the share buyback
programme with an intent to repurchase a further £50m in aggregate of
ordinary shares and CDIs. The Company again repurchased the shares and CDIs in
approximately equal proportions. The buyback extension commenced on 21
November 2022 and ended on 7 March 2023.
46m ordinary shares (30 September 2022: 34m ordinary shares), with a nominal
value of £5m (30 September 2022: £3m), were repurchased in the period for a
total consideration of £75m (30 September 2022: £50m). All shares
repurchased were cancelled and the nominal value of the share cancellation
transferred to the capital redemption reserve with the premium paid deducted
from retained earnings.
Share premium represents the aggregate of all amounts that have ever been paid
above par value to the Company when it has issued ordinary shares.
A description of the other equity categories included within the statements of
changes in equity, together with any significant movements during the period,
is provided below.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 4: Capital (continued)
4.1.2 Other equity instruments
Other equity instruments comprises AT1 capital which consists of the following
Perpetual Subordinated Contingent Convertible Notes:
· Perpetual securities (fixed 9.25% up to the first reset date)
issued on 13 March 2019 with a nominal value of £250m and optional redemption
on 8 June 2024.
· Perpetual securities (fixed 8.25% up to the first reset date)
issued on 17 June 2022 with a nominal value of £350m and optional redemption
on 17 June 2027.
On 17 June 2022, perpetual securities (fixed 8% up to the first reset date)
issued on 8 February 2016 totalling £377m (representing 84% of the original
£450m principal amount) were redeemed. The remaining £72m were redeemed on
the optional redemption date of 8 December 2022.
The issues are treated as equity instruments in accordance with IAS 32
'Financial Instruments: Presentation' with the proceeds included in equity,
net of transaction costs of £6m (period ended 31 March 2022: £3m; year ended
30 September 2022: £7m). AT1 distributions of £28m were paid in the period
(period ended 31 March 2022: £40m; year ended 30 September 2022: £70m).
4.1.3 Capital reorganisation reserve
The capital reorganisation reserve of £839m was recognised on the issuance of
the Company's ordinary shares in February 2016 in exchange for the acquisition
of the entire share capital of the Group's previous parent company, CYB
Investments Limited (CYBI). The reserve reflects the difference between the
consideration for the issuance of the Company's shares and CYBI's share
capital and share premium.
4.1.4 Merger reserve
A merger reserve of £633m was recognised on the issuance of the Company's
ordinary shares in February 2016 in exchange for the acquisition of the entire
share capital of CYBI. An additional £1,495m was recognised on the issuance
of the Company's ordinary shares in October 2018 in exchange for the
acquisition of the entire share capital of Virgin Money Holdings (UK) PLC. The
merger reserve reflects the difference between the consideration for the
issuance of the Company's shares and the nominal value of the shares issued.
4.1.5 Cash flow hedge reserve
The cash flow hedge reserve represents the effective portion of cumulative
post-tax gains and losses on derivatives designated as cash flow hedging
instruments that will be recycled to the income statement when the hedged
items affect profit or loss.
6 months to 12 months to
31 Mar 2023 30 Sep 2022
(unaudited) (audited)
£m £m
At 1 October 699 10
Amounts recognised in other comprehensive income:
Cash flow hedge - interest rate risk
Effective portion of changes in fair value of interest rate swaps (430) 962
Amounts transferred to the income statement (9) (13)
Taxation 121 (260)
Closing cash flow hedge reserve 381 699
Financial statements
Notes to the interim condensed consolidated financial statements
Section 5: Other notes
5.1 Contingent liabilities and commitments
The table below sets out the amounts of financial guarantees and commitments
which are not recorded on the balance sheet. Financial guarantees and
commitments are credit-related instruments which include acceptances, letters
of credit, guarantees and commitments to extend credit. The amounts do not
represent the amounts at risk at the balance sheet date but the amounts that
would be at risk should the contracts be fully drawn upon and the customer
default. Since a significant portion of guarantees and commitments is expected
to expire without being drawn upon, the total of the contract amounts is not
representative of future liquidity requirements.
31 Mar 2023 30 Sep 2022
(unaudited) (audited)
£m £m
Guarantees and assets pledged as collateral security:
Due in less than 3 months 25 33
Due between 3 months and 1 year 26 23
Due between 1 year and 3 years 7 9
Due between 3 years and 5 years 1 3
Due after 5 years 39 44
98 112
Other credit commitments
Undrawn formal standby facilities, credit lines and other commitments to lend 18,003 19,247
at call
Other contingent liabilities
Conduct risk related matters
There continues to be uncertainty with judgement required in determining the
quantum of conduct risk related liabilities, with note 3.6 reflecting the
Group's current position where a provision can be reliably estimated. Until
all matters are resolved the final amount required to settle the Group's
potential liabilities for conduct related matters remains uncertain.
The Group will continue to reassess the adequacy of provisions for these
matters and the assumptions underlying the calculations at each reporting date
based upon experience and other relevant factors at that time.
Legal claims
The Group is named in and is defending a number of legal claims arising in the
ordinary course of business. No material adverse impact on the financial
position of the Group is expected to arise from the ultimate resolution of
these legal actions.
5.2 Related party transactions
The Group undertakes activity with the following entities which are considered
to be related party transactions:
Yorkshire and Clydesdale Bank Pension Scheme
The Group provides banking services to the Scheme, with customer deposits of
£8m (30 September 2022: £12m). Pension contributions of £6m were made to
the Scheme in the period (period ended 31 March 2022: £6m; year ended 30
September 2022: £7m).
The Group and the Trustee to the Scheme (note 3.7) have entered into a
contingent Security Arrangement which provides additional support to the
Scheme by underpinning recovery plan contributions and some additional
investment risk. The security is in the form of a pre-agreed maximum level of
assets that are set aside for the benefit of the Scheme in certain trigger
events. These assets are held by Red Grey Square Funding LLP, an insolvency
remote consolidated structured entity.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 5: Other notes (continued)
5.2 Related party transactions (continued)
JVs and associates
The Group holds investments in JVs of £11m (30 September 2022: £10m). The
total share of profit for the period was £Nil (period ended 31 March 2022:
£5m loss; year ended 30 September 2022: £4m loss). In addition, the Group
had the following transactions with JV entities during the period:
· Salary Finance - the Group provides Salary Finance with a
revolving credit facility funding line, of which the current gross lending
balance at 31 March 2023 was £320m (30 September 2022: £318m) and the
undrawn facility was £30m (30 September 2022: £32m). The facility is held
under Stage 2 for credit risk purposes (30 September 2022: Stage 2), with an
ECL allowance of £18m (30 September 2022: £19m) held against the lending.
The lending made via Salary Finance continues to be held as part of the
Group's Unsecured lending portfolio and consists of personal lending to Salary
Finance customers. During the period, the number of customers not maintaining
scheduled loan repayments has reduced slightly with no material change to the
ECL allowance held from that at September 2022. Additionally, the Group
received £8m (period ended 31 March 2022: £4m; year ended 30 September 2022:
£10m) of interest income from Salary Finance in the period. Board approval is
in place for this facility up until December 2025 with £350m being the
approved limit; and
· UTM - the Group provides banking services to UTM which has
resulted in amounts due of £5m (30 September 2022: £4m). Additionally, the
Group received £4m of recharge income in the period (period ended 31 March
2022: £4m; year ended 30 September 2022: £7m) from UTM in accordance with a
Service Level Agreement in respect of resourcing, infrastructure and
marketing. During the period, the Group provided £Nil of additional funding
to UTM (30 September 2022: £4m). The Group has also paid consortium relief to
UTM of £1m (30 September 2022: £Nil) for losses surrendered from UTM in
respect of FY21.
Other related party transactions with Virgin Group((1))
The Group has related party transactions with other Virgin Group companies:
· License fees due to Virgin Enterprises Limited for the use of the
Virgin Money brand trademark resulted in payables of £6m (30 September 2022:
£5m), with expenses incurred in the period of £9m (period ended 31 March
2022: £7m; year ended 30 September 2022: £15m).
· The Group incurs credit card commissions and air mile charges
from Virgin Atlantic Airways Limited (VAA) in respect of an agreement between
the two parties. Amounts payable to VAA totalled £1m (30 September 2022:
£1m) and expenses of £7m were incurred in the period (period ended 31 March
2022: £7m; year ended 30 September 2022: £16m).
· The Group incurs charges and receives commissions concerning the
cashback incentive scheme with Virgin Red Limited in relation to the credit
card and PCA portfolio. Amounts receivable totalled £0.2m (31 March 2022:
£Nil; 30 September 2022: £0.1m), amounts payable totalled £1m (31 March
2022: £Nil; 30 September 2022: £1m) and during the period this resulted in
expenses of £0.5m (period ended 31 March 2022: £0.3m, year ended 30
September 2022: £3m) along with income of £0.2m (period ended 31 March 2022:
£0.2m, year ended 30 September 2022: £0.5m)
· The Group has an arrangement with Virgin Start Up Limited to host
a series of events, podcasts and videos and other digital content. During the
period this resulted in expenses of £0.2m (period ended 31 March 2022:
£0.3m, year ended 30 September 2022: £0.5m).
· The Group paid £14m (period ended 31 March 2022: £2m, year
ended 30 September 2022: £7m) of ordinary dividends to Virgin Group Holdings
Limited.
(1) All companies were incorporated in England and Wales with the exception of
Virgin Group Holdings Limited, which was incorporated in the British Virgin
Islands.
Charities
The Group provides banking services to Virgin Money Foundation which has
resulted in customer deposits of £1m (30 September 2022: £1m). The Group
made donations of £1m in the period (period ended 31 March 2022: £1m; year
ended 30 September 2022: £1m) to the Foundation to enable it to pursue its
charitable objectives. The Group has also provided a number of support
services to the Foundation on a pro bono basis, including use of facilities
and employee time. The estimated gift in kind for support services provided
during the period was £0.3m (period ended 31 March 2022: £0.2m; year ended
30 September 2022: £0.4m)
Financial statements
Notes to the interim condensed consolidated financial statements
Section 5: Other notes (continued)
5.3 Notes to the statement of cash flows
Term funding schemes((1)) Debt securities in issue Lease liabilities Total
£m £m £m £m
At 1 October 2021 5,896 7,678 154 13,728
Cash flows:
Issuances - 2,480 - 2,480
Drawdowns 2,550 - - 2,550
Redemptions - (1,264) - (1,264)
Repayment (1,244) - (26) (1,270)
Non-cash flows
Fair value and other associated adjustments - (400) - (400)
Additions to right-of-use asset in exchange for increased lease liabilities - - 4 4
Remeasurement - - (4) (4)
Movement in accrued interest 28 8 4 40
Unrealised foreign exchange movements - 5 - 5
Unamortised costs - 2 - 2
At 30 September 2022 7,230 8,509 132 15,871
Cash flows:
Issuances - 847 - 847
Redemptions - (705) - (705)
Repayment (200) - (14) (214)
Non-cash flows
Fair value and other associated adjustments - 93 - 93
Additions to right-of-use asset in exchange for increased lease liabilities - - 73 73
Remeasurement - - 2 2
Movement in accrued interest 37 36 2 75
At 31 March 2023 7,067 8,780 195 16,042
(1) This includes amounts drawn under the term funding scheme (TFS) and TFSME.
Additional information
Measuring financial performance - glossary
As highlighted within the Business and financial review and Risk management
sections, a range of metrics are considered that measure and track the Group's
performance. Some of these metrics will be the Group's KPIs, which are a
set of quantifiable measurements used to gauge the Group's overall long-term
performance. Others are not referred to as KPIs, but are still useful
metrics for the Group to reflect on and are disclosed to aid comparisons with
peers.
These metrics fall into two main categories:
· Financial - which are further split into:
o IFRS based - meaning the basis of the calculation is derived from a
measure that can be found and is directly required under generally accepted
accounting principles (GAAP); and
o Non-IFRS based - these are also referred to as APMs and can be derived
from non-GAAP measures.
· Non-Financial - being those that are not directly linked to the
Group's financial performance, but more in relation to other external
factors.
Non-IFRS based financial performance metrics can be calculated on either a
statutory or an 'underlying' basis; further detail on how the underlying
measure is arrived at, along with management's reasoning for excluding the
impact of certain items from the Group's current underlying performance
rationale, can be found on page 90, directly following this section.
Refer to pages 344 to 352 of the Group's 2022 Annual Report and Accounts for a
complete listing of the Group's performance metrics, metric definitions and
why they matter. For financial performance metrics that are arrived at by way
of a calculation, refer below:
Financial performance metrics
Profitability:
Metric KPI Basis Formula
Statutory return on tangible equity (RoTE) Yes Non-IFRS 6 months to 12 months to 6 months to
31 Mar 2023 30 Sep 2022 31 Mar 2022
Statutory profit after tax attributable to ordinary equity holders (a) £152m £467m £198m
Annualised half year statutory profit after tax (b) (a)*(365/182) £304m £467m £397m
Average tangible equity (c) £4,997m £4,539m £4,354m
Statutory RoTE (b)/(c) 6.1% 10.3% 9.1%
Underlying cost: income ratio (CIR) Yes Non-IFRS 6 months to Restated((1)) Restated((1))
31 Mar 2023 12 months to 6 months to
30 Sep 2022 31 Mar 2022
Underlying operating and administrative expenses (a) £477m £914m £456m
Underlying total operating income (b) £933m £1,742m £848m
Underlying CIR (a)/(b) 51.1% 52.5% 53.8%
Net interest margin (NIM) No Non-IFRS 6 months to 12 months to 6 months to
31 Mar 2023 30 Sep 2022 31 Mar 2022
Underlying NII (a) £855m £1,592m £782m
Annualised half year underlying NII (b) (a)*(365/182) £1,715m £1,592m £1,568m
Average interest earning assets (c) £89,568m £86,275m £85,729
Short-term repos used for liquidity management (d) £8m £12m £14m
NIM (b)/((c)-(d)) 1.91% 1.85% 1.83%
Statutory basic earnings per share (EPS) No IFRS 6 months to 12 months to 6 months to
31 Mar 2023 30 Sep 2022 31 Mar 2022
Statutory profit after tax attributable to ordinary equity shareholders (a) £152m £467m £198m
Weighted average number of ordinary shares in issue (b) 1,384m 1,441m 1,443m
Statutory basic earnings per share (a)/(b) 11.0p 32.4p 13.7p
Statutory CIR No Non-IFRS 6 months to 12 months to 6 months to
31 Mar 2023 30 Sep 2022 31 Mar 2022
Statutory operating and administrative expenses (a) £534m £1,069m £508m
Statutory total operating income (b) £914m £1,716m £844m
Statutory CIR (a)/(b) 58.5% 62.3% 60.2%
(1) Hedge ineffectiveness (6 months to 31 March 2022: income of £17m, year to 30
September 2022: income of £13m) is now presented as an adjustment to
underlying earnings. The comparative periods have been adjusted accordingly.
This restatement does not impact the statutory results of the Group.
Underlying cost: income ratio (CIR)
Yes
Non-IFRS
6 months to Restated((1)) Restated((1))
31 Mar 2023 12 months to 6 months to
30 Sep 2022 31 Mar 2022
Underlying operating and administrative expenses (a) £477m £914m £456m
Underlying total operating income (b) £933m £1,742m £848m
Underlying CIR (a)/(b) 51.1% 52.5% 53.8%
Net interest margin (NIM)
No
Non-IFRS
6 months to 12 months to 6 months to
31 Mar 2023 30 Sep 2022 31 Mar 2022
Underlying NII (a) £855m £1,592m £782m
Annualised half year underlying NII (b) (a)*(365/182) £1,715m £1,592m £1,568m
Average interest earning assets (c) £89,568m £86,275m £85,729
Short-term repos used for liquidity management (d) £8m £12m £14m
NIM (b)/((c)-(d)) 1.91% 1.85% 1.83%
Statutory basic earnings per share (EPS)
No
IFRS
6 months to 12 months to 6 months to
31 Mar 2023 30 Sep 2022 31 Mar 2022
Statutory profit after tax attributable to ordinary equity shareholders (a) £152m £467m £198m
Weighted average number of ordinary shares in issue (b) 1,384m 1,441m 1,443m
Statutory basic earnings per share (a)/(b) 11.0p 32.4p 13.7p
Statutory CIR
No
Non-IFRS
6 months to 12 months to 6 months to
31 Mar 2023 30 Sep 2022 31 Mar 2022
Statutory operating and administrative expenses (a) £534m £1,069m £508m
Statutory total operating income (b) £914m £1,716m £844m
Statutory CIR (a)/(b) 58.5% 62.3% 60.2%
(1)
Hedge ineffectiveness (6 months to 31 March 2022: income of £17m, year to 30
September 2022: income of £13m) is now presented as an adjustment to
underlying earnings. The comparative periods have been adjusted accordingly.
This restatement does not impact the statutory results of the Group.
Additional information
Measuring financial performance - glossary
Financial performance metrics continued
Profitability continued:
Metric KPI Basis Formula
Underlying basic EPS No Non-IFRS 6 months to Restated((1)) Restated((1))
31 Mar 2023 12 months to 6 months to
30 Sep 2022 31 Mar 2022
Underlying profit after tax attributable to ordinary equity shareholders £207m £602m £241m
(a)
Weighted average number of ordinary shares in issue (b) 1,384m 1,441m 1,443m
Underlying basic earnings per share (a)/(b) 14.9p 41.8p 16.7p
Underlying profit before tax No Non-IFRS 6 months to Restated((1)) Restated((1))
31 Mar 2023 12 months to 6 months to
30 Sep 2022 31 Mar 2022
Statutory profit before tax (a) £236m £595m £315m
Restructuring charges (b) £53m £82m £46m
Acquisition accounting unwinds (c) £3m £35m £14m
Legacy conduct (d) £4m £8m £5m
Hedge ineffectiveness (e) £16m £(13)m £(17)m
Other (f) - £69m £8m
Underlying profit before tax (a) + (b) + (c) + (d) + (e) + (f) £312m £776m £371m
Underlying profit after tax attributable to ordinary equity shareholders No Non-IFRS 6 months to Restated((1)) Restated((1))
31 Mar 2023 12 months to 6 months to
30 Sep 2022 31 Mar 2022
Underlying profit before tax (a) £312m £776m £371m
Underlying tax charge (b) £77m £104m £90m
AT1 distributions (c) £28m £70m £40m
Underlying profit after tax attributable to ordinary equity shareholders (a) £207m £602m £241m
-(b) - (c)
Underlying RoTE No Non-IFRS 6 months to Restated((1)) Restated((1))
31 Mar 2023 12 months to 6 months to
30 Sep 2022 31 Mar 2022
Underlying profit after tax attributable to ordinary equity holders (a) £207m £602m £241m
Annualised half year underlying profit after tax (b) (a)*(365/182) £415m £602m £483m
Average tangible equity (c) £4,997m £4,539m £4,354m
Underlying RoTE (b)/(c) 8.3% 13.3% 11.1%
(1) Hedge ineffectiveness (6 months to 31 March 2022: income of £17m, year to 30
September 2022: income of £13m) is now presented as an adjustment to
underlying earnings. The comparative periods have been adjusted accordingly.
This restatement does not impact the statutory results of the Group.
Underlying profit before tax
No
Non-IFRS
6 months to Restated((1)) Restated((1))
31 Mar 2023 12 months to 6 months to
30 Sep 2022 31 Mar 2022
Statutory profit before tax (a) £236m £595m £315m
Restructuring charges (b) £53m £82m £46m
Acquisition accounting unwinds (c) £3m £35m £14m
Legacy conduct (d) £4m £8m £5m
Hedge ineffectiveness (e) £16m £(13)m £(17)m
Other (f) - £69m £8m
Underlying profit before tax (a) + (b) + (c) + (d) + (e) + (f) £312m £776m £371m
Underlying profit after tax attributable to ordinary equity shareholders
No
Non-IFRS
6 months to Restated((1)) Restated((1))
31 Mar 2023 12 months to 6 months to
30 Sep 2022 31 Mar 2022
Underlying profit before tax (a) £312m £776m £371m
Underlying tax charge (b) £77m £104m £90m
AT1 distributions (c) £28m £70m £40m
Underlying profit after tax attributable to ordinary equity shareholders (a) £207m £602m £241m
- (b) - (c)
Underlying RoTE
No
Non-IFRS
6 months to Restated((1)) Restated((1))
31 Mar 2023 12 months to 6 months to
30 Sep 2022 31 Mar 2022
Underlying profit after tax attributable to ordinary equity holders (a) £207m £602m £241m
Annualised half year underlying profit after tax (b) (a)*(365/182) £415m £602m £483m
Average tangible equity (c) £4,997m £4,539m £4,354m
Underlying RoTE (b)/(c) 8.3% 13.3% 11.1%
(1)
Hedge ineffectiveness (6 months to 31 March 2022: income of £17m, year to 30
September 2022: income of £13m) is now presented as an adjustment to
underlying earnings. The comparative periods have been adjusted accordingly.
This restatement does not impact the statutory results of the Group.
Lending (Basis - non-IFRS):
Metric KPI Formula
Target lending segment asset growth Yes 6 months to 12 months to 6 months to
31 Mar 2023 30 Sep 2022 31 Mar 2022
Target lending - current year (a) £13,970m £13,448m £12,908m
Target lending - prior year (b) £13,448m £12,573m £12,573m
Target lending growth ((a)-(b))/(b) 3.9% 7.0% 2.7%
Relationship deposits growth No 6 months to 12 months to 6 months to
31 Mar 2023 30 Sep 2022 31 Mar 2022
Total relationship deposits - current year (a) £35,643m £34,649m £31,887m
Total relationship deposits - prior year (b) £34,649m £30,596m £30,596m
Relationship deposit growth ((a)-(b))/(b) 2.9% 13.2% 4.2%
Relationship deposits growth
No
6 months to 12 months to 6 months to
31 Mar 2023 30 Sep 2022 31 Mar 2022
Total relationship deposits - current year (a) £35,643m £34,649m £31,887m
Total relationship deposits - prior year (b) £34,649m £30,596m £30,596m
Relationship deposit growth ((a)-(b))/(b) 2.9% 13.2% 4.2%
Additional information
Measuring financial performance - glossary
Financial performance metrics continued
Asset quality (Basis - non-IFRS):
Metric KPI Formula
Impairment charge to average customer loans No 6 months to 12 months to 6 months to
(cost of risk)
31 Mar 2023 30 Sep 2022 31 Mar 2022
Impairment charge (a) £144m £52m £21m
Annualised half year impairment charge (b) (a)*(365/182) £289m £52m £41m
Average customer loans (c) £72,869m £71,989m £71,771m
Cost of risk (b)/(c) 0.40% 0.07% 0.06%
% of loans in Stage 2((1)) No 31 Mar 2023 30 Sep 2022 31 Mar 2022
Stage 2 loans (a) £7,153m £5,785m £8,081m
Gross loans and advances (b) £73,889m £74,531m £73,229m
%of loans in stage 2 (a)/(b) 9.7% 7.8% 11.0%
% of loans in Stage 3((1)) No 31 Mar 2023 30 Sep 2022 31 Mar 2022
Stage 3 loans (a) £1,075m £1,054m £1,024m
Gross loans and advances (b) £73,889m £74,531m £73,229m
%of loans in stage 3 (a)/(b) 1.5% 1.4% 1.4%
Total book coverage((1)) No 31 Mar 2023 30 Sep 2022 31 Mar 2022
Impairment provisions on credit exposures (a) £526m £457m £479m
Gross loans and advances (b) £73,035m £73,542m £72,123m
Total book coverage (a)/(b) 0.72% 0.62% 0.66%
Stage 2 coverage((1)) No 31 Mar 2023 30 Sep 2022 31 Mar 2022
Stage 2 impairment provisions on credit exposures (a) £349m £268m £247m
Stage 2 gross loans and advances (b) £7,073m £5,682m £7,837m
Total stage 2 book coverage (a)/(b) 4.94% 4.72% 3.15%
Stage 3 coverage((1)) No 31 Mar 2023 30 Sep 2022 31 Mar 2022
Stage 3 impairment provisions on credit exposures (a) £112m £104m £101m
Stage 3 gross loans and advances (b) £925m £927m £944m
Total stage 3 book coverage (a)/(b) 12.10% 11.24% 10.70%
(1) The ratios exclude the government-backed loan portfolio, unearned income,
accrued interest and fair value adjustments.
% of loans in Stage 2((1))
No
31 Mar 2023 30 Sep 2022 31 Mar 2022
Stage 2 loans (a) £7,153m £5,785m £8,081m
Gross loans and advances (b) £73,889m £74,531m £73,229m
% of loans in stage 2 (a)/(b) 9.7% 7.8% 11.0%
% of loans in Stage 3((1))
No
31 Mar 2023 30 Sep 2022 31 Mar 2022
Stage 3 loans (a) £1,075m £1,054m £1,024m
Gross loans and advances (b) £73,889m £74,531m £73,229m
% of loans in stage 3 (a)/(b) 1.5% 1.4% 1.4%
Total book coverage((1))
No
31 Mar 2023 30 Sep 2022 31 Mar 2022
Impairment provisions on credit exposures (a) £526m £457m £479m
Gross loans and advances (b) £73,035m £73,542m £72,123m
Total book coverage (a)/(b) 0.72% 0.62% 0.66%
Stage 2 coverage((1))
No
31 Mar 2023 30 Sep 2022 31 Mar 2022
Stage 2 impairment provisions on credit exposures (a) £349m £268m £247m
Stage 2 gross loans and advances (b) £7,073m £5,682m £7,837m
Total stage 2 book coverage (a)/(b) 4.94% 4.72% 3.15%
Stage 3 coverage((1))
No
31 Mar 2023 30 Sep 2022 31 Mar 2022
Stage 3 impairment provisions on credit exposures (a) £112m £104m £101m
Stage 3 gross loans and advances (b) £925m £927m £944m
Total stage 3 book coverage (a)/(b) 12.10% 11.24% 10.70%
(1)
The ratios exclude the government-backed loan portfolio, unearned income,
accrued interest and fair value adjustments.
Additional information
Measuring financial performance - glossary
Financial performance metrics continued
Capital (Basis - non-IFRS):
Metric KPI Formula
Announced shareholder distributions Yes 6 months to 12 months to 6 months to
31 Mar 2023 30 Sep 2022 31 Mar 2022
Interim dividend (a) £45m £36m £36m
Final dividend (b) n/a £103m n/a
Announced buybacks (c) n/a £125m n/a
Statutory profit after tax attributable to ordinary equity holders (d) £152m £467m £198m
Announced shareholder distributions ((a)+(b)+(c))/(d) 30% 57% 18%
Common Equity Tier 1 (CET1) ratio (IFRS 9 transitional) No 31 Mar 2023 30 Sep 2022 31 Mar 2022
CET1 capital (IFRS 9 transitional) (a) £3,627m £3,633m £3,565m
RWA (IFRS 9 transitional) (b) £24,703m £24,148m £24,184m
CET1 ratio (IFRS 9 transitional) (a)/(b) 14.7% 15.0% 14.7%
CET1 ratio (IFRS 9 fully loaded) No 31 Mar 2023 30 Sep 2022 31 Mar 2022
CET1 capital (IFRS 9 fully loaded) (a) £3,537m £3,519m £3,481m
RWA (IFRS 9 fully loaded) (b) £24,632m £24,056m £24,111m
CET1 ratio (IFRS 9 fully loaded) (a)/(b) 14.4% 14.6% 14.4%
Tier 1 ratio No 31 Mar 2023 30 Sep 2022 31 Mar 2022
Tier 1 capital (a) £4,221m £4,299m £4,262m
RWA (b) £24,703m £24,148m £24,184m
Tier 1 ratio (a)/(b) 17.1% 17.8% 17.6%
Total capital ratio No 31 Mar 2023 30 Sep 2022 31 Mar 2022
Total capital (a) £5,242m £5,319m £5,282m
RWA (b) £24,703m £24,148m £24,184m
Total capital ratio (a)/(b) 21.2% 22.0% 21.8%
Tangible net asset value (TNAV) per share No 31 Mar 2023 30 Sep 2022 31 Mar 2022
Tangible equity (a) £4,795m £5,407m £4,528m
Number of ordinary shares in issue (b) 1,366m 1,409m 1,443m
Deferred shares (c) 2m 3m 3m
Own shares held (d) 0.2m 0.3m 0.3m
Tangible net asset value per share (a)/((b)+(c)-(d)) 350.5p 383.0p 313.2p
Common Equity Tier 1 (CET1) ratio (IFRS 9 transitional)
No
31 Mar 2023 30 Sep 2022 31 Mar 2022
CET1 capital (IFRS 9 transitional) (a) £3,627m £3,633m £3,565m
RWA (IFRS 9 transitional) (b) £24,703m £24,148m £24,184m
CET1 ratio (IFRS 9 transitional) (a)/(b) 14.7% 15.0% 14.7%
CET1 ratio (IFRS 9 fully loaded)
No
31 Mar 2023 30 Sep 2022 31 Mar 2022
CET1 capital (IFRS 9 fully loaded) (a) £3,537m £3,519m £3,481m
RWA (IFRS 9 fully loaded) (b) £24,632m £24,056m £24,111m
CET1 ratio (IFRS 9 fully loaded) (a)/(b) 14.4% 14.6% 14.4%
Tier 1 ratio
No
31 Mar 2023 30 Sep 2022 31 Mar 2022
Tier 1 capital (a) £4,221m £4,299m £4,262m
RWA (b) £24,703m £24,148m £24,184m
Tier 1 ratio (a)/(b) 17.1% 17.8% 17.6%
Total capital ratio
No
31 Mar 2023 30 Sep 2022 31 Mar 2022
Total capital (a) £5,242m £5,319m £5,282m
RWA (b) £24,703m £24,148m £24,184m
Total capital ratio (a)/(b) 21.2% 22.0% 21.8%
Tangible net asset value (TNAV) per share
No
31 Mar 2023 30 Sep 2022 31 Mar 2022
Tangible equity (a) £4,795m £5,407m £4,528m
Number of ordinary shares in issue (b) 1,366m 1,409m 1,443m
Deferred shares (c) 2m 3m 3m
Own shares held (d) 0.2m 0.3m 0.3m
Tangible net asset value per share (a)/((b)+(c)-(d)) 350.5p 383.0p 313.2p
Additional information
Measuring financial performance - glossary
Underlying adjustments to the statutory view of performance
Management exclude certain items from the Group's statutory position to arrive
at an underlying performance basis. Management's approach to underlying
adjustments is aligned to the European Securities and Markets Authority (ESMA)
guidelines on APMs and recommendations are subject to review and agreement by
the Board Audit Committee. Additional detail on these items is provided below
to help understand their exclusion from underlying performance.
Item 6 months to Restated Restated
31 Mar 2023 6 months to 6 months to
£m 31 Mar 2022 30 Sep 2022 Reason for exclusion from the Group's current underlying performance
£m £m
Restructuring charges (53) (46) (36) These costs relate to the Group's Digital-First strategy. The Group expects to
incur c.£275m of restructuring charges across FY22-24.
Acquisition accounting unwinds (3) (14) (21) This consists of the unwind of the IFRS 3 fair value adjustments created on
the acquisition of Virgin Money Holdings (UK) PLC in October 2018. These
represent either one-off adjustments or are the scheduled reversals of the
accounting adjustments that arose following the fair value exercise required
by IFRS 3. These will continue to be underlying adjustments until the
remaining £27m has been fully reversed.
Legacy conduct (4) (5) (3) These costs are historical in nature and are not indicative of the Group's
current practices.
Hedge ineffectiveness((1)) (16) 17 (4) The result of hedge accounting and fair value movements on derivatives in
economic hedges to the extent they either do not meet the criteria for hedge
accounting or give rise to hedge ineffectiveness. These items are often
volatile, driven by accounting requirements and not generally considered as a
component of the core financial result.
Other:
UTM transition costs (1) (8) (1) These costs relate to UTM's transformation costs principally for the build of
a new platform for administration and servicing.
VISA shares 1 - 2 A one-off gain on conversion of Visa B Preference shares to Series A
preference shares.
Internally developed software adjustments - - (62) These costs relate to the write-off of WIP and intangible asset balances held
on the balance sheet as a result of a reassessment of the Group's practices on
capitalisation against the backdrop of the move to an Agile project delivery.
Total other - (8) (61)
(1) Hedge ineffectiveness is now presented as an adjustment to underlying earnings
due to the increase in volatility caused by the recent significant changes in
interest rates. The comparative periods have been adjusted accordingly.
Additional information
Glossary
For a glossary of terms and abbreviations used within this report refer to
pages 354 to 359 of the Group's 2022 Annual Report and Accounts.
For terms not previously included within the Glossary, or where terms have
been redefined, refer below:
COO Chief Operating Officer
FSCS Financial Services Compensation Scheme
MA Management adjustment
O-SII Other Systemically Important Institution
Additional information
Officers and professional advisers
Non-Executive Directors
Board Chair David Bennett((1))
Senior Independent Non-Executive Director Tim Wade((2))
Independent Non-Executive Directors Geeta Gopalan((2))
Elena Novokreshchenova((2))
Darren Pope((2)(4))
Non-Executive Director Sara Weller((3)(4))
Executive Directors David Duffy
Clifford Abrahams
Group Company Secretary Lorna McMillan
Group General Counsel and Purpose Officer James Peirson
Independent auditors Ernst & Young LLP
25 Churchill Place
Canary Wharf
London
E14 5EY
(1) Member of the Remuneration Committee and Governance and Nomination
Committee.
(2) All Independent Non-Executive Directors are members of the Remuneration
Committee, Audit Committee, Risk Committee and Governance and Nomination
Committee.
(3) Member of the Governance and Nomination Committee.
(4) Sara Weller joined the Board on 3 October 2022 and on 16 December 2022 it
was announced that Darren Pope will step down as an independent Non-Executive
Director on 26 May 2023.
( )
VIRGIN MONEY UK PLC
Registered number 09595911 (England and Wales)
ARBN 609 948 281 (Australia)
Head Office: London Office: Registered Office:
30 St. Vincent Place Floor 15, The Leadenhall Building Jubilee House
Glasgow 122 Leadenhall Street Gosforth
G1 2HL London Newcastle Upon Tyne
EC3V 4AB NE3 4PL
virginmoneyukplc.com
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