Interim Financial Report
13/06/2024 07:00
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RNS Number : 2259S Virgin Money UK PLC 13 June 2024
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
2024.
Statutory basis: Statutory information is set out on page 4 and within the
interim condensed consolidated financial statements.
Excluding notable items basis: Management exclude certain items from the
Group's statutory position to arrive at an 'excluding notable items' basis.
The exclusion of notable items aims to remove the impact of one-offs and other
volatile items which may distort period-on-period comparisons. Rationale for
the notable items is shown on page 88. This basis is classed as an alternative
performance measure, see below. Previously, items adjusted from the Group's
statutory position resulted in an 'underlying basis' of performance. The Group
no longer presents results on an underlying basis, moving instead to a
statutory presentation of its income statement, whilst still providing details
of notable items of income and expenditure. Comparative periods have not been
restated as the 'excluding notable items basis' is directly comparable to the
previously disclosed 'underlying basis'. Further information on this change is
shown on page 88.
Alternative performance measures (APMs): 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 372 to 380 of the Group's 2023 Annual Report and Accounts. 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 pandemic), changes to
its Board and/or employee composition, exposures to terrorist activity, IT
system failures, cyber-crime, fraud and pension scheme liabilities, risks
relating to environmental matters such as climate change including the Group's
ability along with the government and other stakeholders to measure, manage
and mitigate the impacts of climate change effectively, 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 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, the repercussions
of Russia's invasion of Ukraine, the conflict in the Middle East, 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.
No statement in the Information is intended as a profit forecast, profit
estimate or quantified benefit statement for any period and no statement in
the Information should be interpreted to mean that earnings per share for the
Company for the current or future financial years would necessarily match or
exceed the historical published earnings or earnings per share (EPS) for the
Company or the Group.
Interim financial report
For the six months ended 31 March 2024
Contents
Virgin Money UK PLC Interim Results 2024 1
Business and financial review 3
Risk management 19
Risk overview 20
Credit risk 22
Financial risk 46
Statement of Directors' responsibilities 58
Independent review report to Virgin Money UK PLC 59
Financial statements 60
Interim condensed consolidated income statement 60
Interim condensed consolidated statement of comprehensive income 61
Interim condensed consolidated balance sheet 62
Interim condensed consolidated statement of changes in equity 63
Interim condensed consolidated statement of cash flows 64
Notes to the interim condensed consolidated financial statements 65
Additional information 84
Virgin Money UK PLC Interim Results 2024
David Duffy, Chief Executive Officer:
"Over the first six months, we have continued to deliver on our strategic
ambitions in line with expectations. While we expect there to be headwinds
through the second half of the year, we remain well placed to deliver growth
in our target segments."
Summary financials
6 months to 6 months to 6 months to
31 Mar 2024 31 Mar 2023 Change 30 Sep 2023 Change
£m £m % £m %
Net interest income (excluding notable items) 868 855 2 861 1
Non-interest income (OOI) (excluding notable items) 72 78 (8) 79 (9)
Total operating income (excluding notable items) 940 933 1 940 -
Notable items in income((1)) (17) (19) (11) (27) (37)
Statutory total operating income 923 914 1 913 1
Operating and administrative expenses (excluding notable items) (502) (477) 5 (494) 2
Notable items in expenses((1)) (49) (57) (14) (145) (66)
Statutory operating and administrative expenses (551) (534) 3 (639) (14)
Statutory operating profit before impairment losses 372 380 (2) 274 36
Impairment losses on credit exposures (93) (144) (35) (165) (44)
Statutory profit on ordinary activities before tax 279 236 18 109 156
Performance metrics((2))
Total customer lending £72,675m £72,435m 0.3% £72,754m (0.1)%
Net interest margin (NIM) 1.94% 1.91% 3bps 1.91% 3bps
Return on tangible equity (RoTE) 9.1% 6.1% 3.0%pts 1.6% 7.5%pts
Cost: income ratio 59.7% 58.5% 1.2%pts 70.0% (10.3)%pts
Adjusted cost: income ratio((3)) 52.3% 51.1% 1.2%pts 52.6% (0.3)%pts
Cost of risk (CoR) 0.26% 0.40% (14)bps 0.42% (16)bps
Common Equity Tier 1 (CET1) ratio (IFRS 9 transitional) 14.6% 14.7% (0.1)%pts 14.7% (0.1)%pts
(1) Full details of notable items are included on page 88.
(2) For definitions of the performance metrics, refer to 'Measuring the
Group's performance' on pages 372 to 380 of the Group's 2023 Annual Report and
Accounts.
(3) Adjusted to exclude all notable items and the new BoE Levy
recognised in 2024 of £10m. Refer to page 89 for further details.
Delivered strong financial performance in H1 2024
· NIM expanded further to 1.94% in H1 (Q224: 1.99%), supported by
EIR adjustments in the credit card portfolio, reflecting strong customer
activity and updated assumptions
· OOI (excluding notable items) down 8% YoY, reflecting
reclassification of insurance costs incurred on packaged current accounts
· Operating expenses (excluding notable items) 5% higher YoY,
driven by inflation and the new BoE Levy (£10m in Q2) partially offset by
ongoing delivery of the cost savings programme; adjusted C:I ratio modestly
higher YoY at 52.3%
· Notable expenditure included £33m from restructuring activities
and £15m related to new financial crime prevention programme
· Impairment charge of £93m (CoR: 26bps), incorporating benefit
from the ongoing SICR review of the Group's credit card portfolio and a
modestly improving macroeconomic outlook; credit quality remains solid; stable
provision coverage of 84bps (FY23: 84bps)
· Statutory profit before tax increased 18% YoY to £279m (9.1%
statutory RoTE), primarily reflecting the lower impairment charge
· CET1 ratio remains strong at 14.6% (FY23: 14.7%); movement
includes 2p foreseeable FY 2024 dividend and c.£63m returned to shareholders
as part of the £150m buyback programme announced alongside FY23, prior to the
cancellation of the programme
Further growth in target lending segments and relationship deposits, in line
with strategy
· 2% growth in active relationship customer accounts during H1 to
3.8m accounts
· Relationship deposits 2% higher in H1 at £36.3bn, remaining 53%
of total deposits; total deposits increased 2% to £68.2bn
· Continued growth in target segments; Unsecured +3%, driven by
growth in cards; Business lending +7% as growth in BAU balances offset a
reduction in Government scheme lending; Mortgages reduced 2% given subdued
market; overall lending stable
Continued strategic execution
· Completed purchase of abrdn's c.50% stake in Virgin Money
Investments((4)) in April for £20m, following successful roll-out of new
investment and pension services
· Fully rolled-out premium broker service to 225 mortgage
intermediaries, covering c.40% of VMUK applications, contributing to a
stronger pipeline of recommended cases from those brokers
· New virtual assistant Redi has now supported over 1 million
conversations, attracting strong Smile scores and solving more than 50% of
queries without the need for further escalation
· Reduced office property footprint by c.35% in H1, supporting
gross savings
· Progressing second phase of Consumer Duty review ahead of July
implementation
FY24 revised outlook
· Anticipate 5-10% growth across target lending segments of
business and unsecured lending in FY24, as guided at FY23
· Continue to expect NIM to be in 190-195bps range for FY24, with
NIM lower in H2 vs. H1, reflecting lower expected contribution from cards EIR
adjustments, ongoing competition and lower interest rates, partially mitigated
by the reinvestment rate of the structural hedge
· In light of the proposed acquisition by Nationwide Building
Society ('Nationwide'), the Group has deferred certain restructuring
activities
· Adjusted cost: income ratio anticipated to be higher in H2 vs.
H1, reflecting the latest outlook for income, inflation, ongoing investment
and cost savings
· Continue to expect CoR of 30-35bps for FY24, incorporating SICR
review on card portfolio & modestly improving economic outlook
· Given the proposed acquisition by Nationwide, the Group does not
intend to announce any further share buybacks or dividends
(4) Legal entity name 'Virgin Money Unit Trust Managers Limited'
· As a result of these factors, statutory RoTE expected to be lower
in H2 vs H1
Contact details
For further information, please contact:
Investors and Analysts
Richard Smith +44 7483 399 303
Head of Investor Relations & Sustainability richard.smith@virginmoney.com
Amil Nathwani +44 7702 100 398
Senior Manager, Investor Relations amil.nathwani@virginmoney.com
Martin Pollard +44 7894 814 195
Senior Manager, Investor Relations martin.pollard1@virginmoney.com
Media
Andrew Scott +44 7483 911 591
Head of Media Relations andrew.s.scott@virginmoney.com
Simon Hall +44 7855 257 081
Senior Media Relations Manager simon.hall@virginmoney.com
Press Office +44 800 066 5998
press.office@virginmoney.com
Teneo
Doug Campbell (UK) +44 7753 136628
Julia Henkel (Australia) +61 406 918080
There will be no management presentation or conference call today.
Announcement authorised for release by Lorna McMillan, Group Company
Secretary.
Business and financial review
KPIs
Measuring strategic delivery
All figures as at H1 2024
Total active relationship customer accounts Digital primacy((4)) Target lending segment asset growth
3.8m 68% 6% in H1
FY23: 3.8m FY23: 61% FY23: 9%
FY22: 3.6m FY22: 56% FY22: 7%
2021((1)): 3.3m H1 22((2)): 51% FY21: (3)%
Gross annualised cost savings (cumulative) Customer complaints per 1k accounts Colleague engagement
c.£150m 3.9 83%
FY23: £130m FY23: 4.0 FY23: 80%
FY22: £69m FY22: 4.2 FY22: 79%
Target: £200m FY21: 3.7 FY21: 68%
Group Smile score((4)) Group diversity indicators
57% Senior gender((3)) Senior ethnicity((3)) Group ethnicity
FY23: 49% 50% 9% 8%
FY22: 46% FY23: 55% FY23: 4% FY23: 6%
FY21: 51% FY22: 52% FY22: 8% FY22: 7%
Target: 45-55% Target: 10% Target: 10%
(1) As at October 2021 due to availability of source data.
(2) As at March 2022 due to availability of source data.
(3) Senior defined as top three levels.
(4) H1 2024 outcomes reflect improved source data, not directly comparable to
historic data
Business and financial review
Financial performance - summary
Summary income statement
6 months to 6 months to 6 months to
31 Mar 2024 31 Mar 2023 Change 30 Sep 2023 Change
£m £m % £m %
Net interest income (excluding notable items) 868 855 2 861 1
Non-interest income (excluding notable items) 72 78 (8) 79 (9)
Total operating income (excluding notable items) 940 933 1 940 -
Notable items in income (17) (19) (11) (27) (37)
Statutory total operating income 923 914 1 913 1
Operating and administrative expenses (excluding notable items) (502) (477) 5 (494) 2
Notable items in expenses (49) (57) (14) (145) (66)
Statutory operating and administrative expenses (551) (534) 3 (639) (14)
Statutory operating profit before impairment losses 372 380 (2) 274 36
Impairment losses on credit exposures (93) (144) (35) (165) (44)
Statutory profit on ordinary activities before tax 279 236 18 109 156
Tax expense (43) (56) (23) (43) -
Statutory profit after tax 236 180 31 66 258
Notable items
6 months to 6 months to 6 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
£m £m £m
Operating income:
Acquisition accounting unwinds (net interest income) (9) (3) (26)
Hedge ineffectiveness (non-interest income) (8) (16) -
Other (non-interest income) - - (1)
Total notable items in statutory operating income (17) (19) (27)
Operating expenses:
Restructuring charges (33) (53) (78)
Financial crime prevention programme (15) - -
Legacy conduct 4 (4) (8)
Other (5) - (59)
Total notable items in statutory operating expenses (49) (57) (145)
Operating profit before impairment losses (excluding notable items) 438 456 446
Performance metrics((1))
6 months to 6 months to 6 months to
31 Mar 2024 31 Mar 2023 Change 30 Sep 2023 Change
Profitability:
Net interest margin (NIM) 1.94% 1.91% 3bps 1.91% 3bps
Statutory return on tangible equity (RoTE) 9.1% 6.1% 3.0%pts 1.6% 7.5%pts
Statutory cost: income ratio 59.7% 58.5% 1.2%pts 70.0% (10.3)%pts
Earnings per share (EPS) 16.0p 11.0p 5.0p 3.0p 13.0p
Adjusted cost: income ratio((2)) 52.3% 51.1% 1.2%pts 52.6% (0.3)%pts
(1) For definitions of the performance metrics, refer to 'Measuring the Group's
performance' on pages 372 to 380 of the Group's 2023 Annual Report and
Accounts
(2) Adjusted to exclude all notable items shown above and the new BoE Levy
recognised in 2024 of £10m.
Business and financial review
Financial performance - summary
Performance metrics (continued)
As at: 31 Mar 2024 31 Mar 2023 Change 30 Sep 2023 Change
Asset quality
Cost of risk (CoR)((1)) 0.26% 0.40% (14)bps 0.42% (16)bps
Total provision to customer loans 0.84% 0.72% 12bps 0.84% -bps
Indexed loan to value ratio (LTV) of mortgage portfolio((2)) 53.6% 53.6% -%pts 52.9% 0.7%pts
Regulatory Capital:
CET1 ratio (IFRS 9 transitional) 14.6% 14.7% (0.1)%pts 14.7% (0.1)%pts
CET1 ratio (IFRS 9 fully loaded) 14.5% 14.4% 0.1%pts 14.3% 0.2%pts
Total capital ratio 20.9% 21.2% (0.3)%pts 21.2% (0.3)%pts
Minimum requirement for own funds and eligible liabilities (MREL) ratio 33.9% 31.0% 2.9%pts 31.9% 2.0%pts
UK leverage ratio 5.3% 5.0% 0.3%pts 5.0% 0.3%pts
Tangible net asset value (TNAV) per share 361.2p 350.5p 10.7p 359.8p 1.4p
Funding and Liquidity:
Loan to deposit ratio (LDR) 107% 108% (1)%pt 109% (2)%pts
Liquidity coverage ratio (LCR) 151% 153% (2)%pts 146% 5%pts
(1) CoR 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 2024 30 Sep 2023 Change
£m £m %
Customer loans 72,675 72,754 -
of which Mortgages 56,627 57,497 (2)
of which Unsecured 6,727 6,519 3
of which Business 9,321 8,738 7
Other financial assets 19,058 17,766 7
Other non-financial assets 1,300 1,266 3
Total assets 93,033 91,786 1
Customer deposits 68,184 66,609 2
of which relationship deposits((1)) 36,267 35,394 2
of which non-linked savings 10,759 9,741 10
of which term deposits 21,158 21,474 (1)
Wholesale funding 16,223 16,658 (3)
Other liabilities 2,967 2,912 2
Total liabilities 87,374 86,179 1
Ordinary shareholders' equity 4,824 5,013 (4)
Additional Tier 1 (AT1) equity 835 594 41
Equity 5,659 5,607 1
Total liabilities and equity 93,033 91,786 1
Risk Weighted Assets (RWAs) 25,581 25,176 2
(1) Current account and linked savings balances
Business and financial review
Chief Executive Officer's statement
Delivering against our strategy
"Over the first six months, we have continued to deliver on our strategic
ambitions in line with expectations. While we expect there to be headwinds
through the second half of the year, we remain well placed to deliver growth
in our target segments."
David Duffy, CEO
Dear Stakeholder,
I am pleased to report that in the first half of the final year of our current
strategic cycle, we have delivered continued operational, financial and
strategic progress in line with our Purpose-led digital strategy.
In May, our shareholders voted to approve the Scheme of Arrangement ("Scheme")
and associated resolutions in connection with the proposed acquisition of
Virgin Money by Nationwide Building Society ("Nationwide"). Together, Virgin
Money and Nationwide will become the second largest mortgage and savings
provider in the UK. The proposed combination presents an exciting opportunity
to build on Virgin Money's strategic and operational progress in recent years,
including the consistent growth we have delivered in retail and business
lending, and deposits, and the combined group will be able to offer more great
products and services to a larger customer base. The proposed acquisition
remains subject to the satisfaction or waiver of all remaining conditions of
the Scheme, including regulatory approval, and final approval by the Court.
During the first half, we have delivered further growth across all our target
segments, despite the competitive backdrop in UK banking. We've continued to
invest in our capabilities throughout the period and our planned cost savings
have helped partially mitigate ongoing inflationary pressure. The higher rate
environment and ongoing Effective Interest Rate (EIR) adjustments in our
credit cards portfolio, reflecting strong customer activity and updated
assumptions, supported our net interest margin, which, combined with focused
management of costs saw a stable adjusted cost: income ratio for H1, in line
with our guidance.
So far this financial year, the macroeconomic backdrop has modestly improved,
with inflation continuing to fall, though remaining above the Bank of
England's target range. As a result, market interest rate expectations have
been volatile through the period, but with continued low unemployment and wage
inflation supporting customer affordability. Overall, whilst GDP growth
remains low, the level of activity in key lending categories has shown some
signs of improvement.
Against this backdrop, we've continued to execute our strategy, with growth in
Business lending, up 7% in H1 24, and Unsecured, 3% higher in H1 24,
offsetting a 2% reduction in mortgages. Overall deposits also grew 2% during
the half supported by growth in our relationship deposit base where our
digital propositions, including Personal and Business current accounts (PCAs
and BCAs) continued to attract new customers. Following the relaunch of Virgin
Money Investments (VMI) during FY23, we were pleased to complete the
acquisition of VMI from abrdn in April, which will support further growth.
During H1, we've also continued to deliver our restructuring programme, with
further gross costs savings realised during the period helping to partially
offset inflationary impacts and investment. Given the proposed acquisition, we
will now defer some activity that was due to take place later in the year,
which will limit the level of cost savings realised in H2. As announced
alongside FY23 results, we launched the financial crime prevention programme
(FCPP) across H1 as we focus on upgrading our financial crime prevention and
cyber capabilities. We are also reaching the final stages of our preparations
for the implementation of the next phase of Consumer Duty, covering off-sale
products and services, on 31 July 2024.
As we look forward over the remainder of the year, following a good first half
we do expect some headwinds, with downward pressure on NIM relative to H1
driven by ongoing competition, lower interest rates and a lower expected
contribution from Effective Interest Rate (EIR) adjustments in our credit
cards portfolio. On costs, inflation and continuing investment will only be
partially mitigated by the ongoing cost savings programme, where certain
restructuring activities have now been deferred in light of the proposed
acquisition by Nationwide, representing further headwinds relative to H1.
Following the successful shareholder vote in May, during the second half of
the year we will also focus on concluding the transaction with Nationwide,
which remains subject to the satisfaction or waiver of all remaining
conditions of the Scheme, including regulatory approval and final approval by
the Court. The terms of the cash acquisition comprise a 220p per share total
cash price to compensate shareholders for the fundamental value of the Virgin
Money Group. This includes an FY 2024 dividend of 2 pence per share, which the
Board is pleased to announce today, and which will be paid on 30 July 2024. We
continue to expect the transaction to conclude in calendar Q4 2024.
Good financial performance in H1 2024
The higher rate environment, combined with our strategic execution, saw the
Group deliver good financial performance during H1. Statutory RoTE of 9.1%
improved relative to last year (H1 2023: 6.1%), reflecting higher profit
before tax and also a lower cash flow hedge reserve level, given the rate
environment. Statutory profit before tax in H1 2024 was £279m, 18% up on H1
2023 (£236m), as higher income and lower impairments offset higher operating
and administrative expenses.
Total income on a statutory basis increased 1% to £923m (H1 2023: £914m)
compared to the same period a year ago. This was primarily driven by a
continued improvement in net interest margin, to a 1.94% NIM for H1 (H1 2023:
1.91%), as the benefits from the reinvestment rate of the structural hedge and
ongoing credit card EIR adjustments reflecting strong customer activity and
updated assumptions, offset spread pressure in mortgages and deposit
competition and migration. Non-interest income of £64m was 3% higher
year-on-year, primarily reflecting lower hedge ineffectiveness.
Business and financial review
Chief Executive Officer's statement
Operating and administrative costs of £551m were 3% higher when compared to
H1 2023 as gross cost savings from the restructuring programme were more than
offset by persistent inflation, including higher wages and a £10m impact from
the new Bank of England levy in Q2. The adjusted cost: income ratio, excluding
the levy and notable items, of 52.3% was broadly stable half-on-half (H2 23:
52.6%).
Operating and administrative costs included £49m of notable expenditure
during H1 (H1 2023: £57m), primarily relating to ongoing restructuring
activity (£33m) and the financial crime prevention programme (£15m). Credit
impairments of £93m were significantly lower year-on-year (H1 2023: £144m),
with the cost of risk of 26bps (H1 2023: 40bps) reflecting updated, more
benign macroeconomic assumptions and our ongoing review of the application of
significant increases in credit risk criteria (SICR) on the credit card
portfolio, which reduced the expected credit loss provision by £31m in H1.
Lending balances finished the period at £72.7bn, broadly stable compared to
the 2023 level, reflecting the continued growth in our target segments of
Business and Unsecured lending offset by lower mortgages balances. Overall
deposit balances increased 2% to £68.2bn supported by growth in relationship
deposits which remained at 53% of the total deposit base. With lending broadly
stable, this enabled a reduction in the loan to deposit ratio to 107% (FY23:
109%).
The Group maintained a conservative balance sheet position, with resilient
asset quality supported by the modestly improving economic outlook, while
capital, funding and liquidity all remained robust, with provision coverage
stable on FY23 at 84bps. The CET1 ratio remains strong at 14.6% (FY23: 14.7%),
as underlying capital generation offset RWA growth in the period. The CET1
movement in H1 incorporated the c.£63m returned to shareholders as part of
the £150m buyback programme announced alongside FY23 results, prior to the
cancellation of the remainder of the programme given the proposed acquisition
of the Company by Nationwide.
Continuing our strategic execution during the first half of 2024
We set out a three year plan at FY21 to digitise the bank and improve our
financial performance. In the first 6 months of the final year of this plan,
the Group delivered growth in key target lending segments, launched improved
propositions, delivered savings, and invested in resilience and sustainability
while providing further capital distributions to shareholders. Whilst we see
some headwinds over the remainder of the year to the NIM and cost outlook, we
continue to see an opportunity for further growth in our target segments.
Pioneering Growth
In Business lending, our established franchise continued to deliver strong
growth, increasing balances by 7% in H1 to £9.3bn, supported by healthy
demand at good margins in our resilient sector specialisms, and benefiting
from our relationship manager-led approach. In Unsecured, lending increased 3%
in H1 to £6.7bn, driven mainly by measured, 5% growth in credit cards,
reflecting strong demand from existing customers, and further new account
acquisition in a growing market. During the first half we also saw resilient
credit card spending, broadly stable on a per account basis to a year ago.
In Mortgages, balances reduced by 2% in H1 to £56.6bn, reflecting a subdued
market for completions in which we continued to trade nimbly to optimise
performance, including the roll-out of our premium broker service to 225
mortgage intermediaries, covering c.40% of VMUK applications. Q2 saw higher
application volumes than in Q1, against a backdrop of improving momentum
across the market.
Relationship deposits also increased by 2% to £36.3bn, reflecting the
strength of our current accounts and related exclusive propositions for
customers. Current account balances were down 3% over the half, reflecting
general market trends as customers migrated to higher yielding savings
products. Despite lower balances, we continued to attract new customers during
the period, selling c.62k new personal current accounts (H2 23: c.44k) and
c.19k new business current accounts during the half (H2 23: c.19k). Overall
relationship customer numbers continued to increase in the half, as we added
c.60k, taking the total to 3.8m.
Delighted Customers and Colleagues
In February, Virgin Money announced we had reached agreement to buy out our
joint venture (JV) partners abrdn and take full ownership of Virgin Money
Investments (VMI), with the transaction subsequently completing in early
April. This follows the launch of our new digital platform and pensions
proposition last year, offering customers a range of award-winning investment
products. The transaction will help support growth in AUM and enable Virgin
Money and abrdn to focus on their respective strengths.
We continued to focus on digitising customer journeys and improving service
levels in the first half, including continued automation of key processes. The
Group's Smile Score is now 57% (FY23: 49%), which reflects enhancements to the
customer survey on which this metric is based, which now gathers feedback from
a wider range of customers, together with our ongoing focus on improving the
customer experience.
Colleague Engagement levels were also strong, at 83% in our most recent
survey, up 3% on the position at FY23. During H1, we've also continued to
focus on the DE&I agenda and were pleased to be named in the Women in
Finance Charter for our work on our BRAVER initiative.
Super-straightforward Efficiency
At H1, we delivered further cost savings as part of our cost savings
programme, with c.£150m of annualised gross cost savings now realised (FY23:
£130m), including benefits from sourcing, digitisation and organisational
design. We have continued to make good progress post the period-end and the
programme remains important to help offset headwinds from investment and
inflation, including from annual wage rises, as well as maintaining resilience
and service levels. Given the proposed acquisition, we will now defer some
activity that was due to take place later in the year, which will limit the
level of cost savings realised in H2.
Business and financial review
Chief Executive Officer's statement
In digital and service developments, our new virtual assistant Redi has now
supported over 1 million conversations, attracting strong Smile scores and
solving more than 50% of queries without the need for further escalation.
Digital primacy, which measures the proportion of active PCA and Card
customers who are digital-only in their engagement with Virgin Money, is now
up to 68% (FY23: 61%), reflecting improved processes and data capture. We were
also pleased to have delivered a significant year-on-year improvement in our
online and mobile banking security as rated by Which?, demonstrating our focus
on improving our digital defences.
Discipline and Sustainability
We have made a good start on our new financial crime prevention programme
(FCPP), with the programme tracking in line with expectations. Over the next
few months, we will be implementing the upgrade of our strategic financial
crime platform to replace a number of current systems. Ahead of that we have
increased our real time screening capabilities, upgraded our customer risk
assessments, and added a new suite of financial crime detection triggers. In
parallel, we have progressed several fraud prevention projects, including
investing in a market leading anti-fraud system, which is now into its
implementation phase. We are also making progress on the use of enhanced
behavioural modelling and biometric validation, with further implementation
expected in H2. c.£15m has been invested in the programme during the first
half.
Credit quality remained solid during the half with the portfolio continuing to
perform well, and with overall arrears trends remaining consistent with prior
reporting, including a gradual increase in credit card arrears, as expected,
mainly reflecting the ongoing portfolio maturation and diversification of our
cards book.
From a sustainability perspective, we have continued to focus on developing
customer propositions to support the transition to a low-carbon economy over
time. Through our partnership with Good Things Foundation, all our stores are
now Databanks offering free data to customers as we continue to focus on
fighting the Poverty Premium.
Outlook
Overall the business has had a positive first half of the year with good
delivery across key areas. As we look out in to the second half, the Group
does expect downward pressure on NIM relative to H1. We also anticipate cost
pressures from inflation and investment in H2, which will only be partially
mitigated by the ongoing cost savings programme, where certain restructuring
activities have now been deferred in light of the proposed acquisition by
Nationwide.
On volumes, we continue to anticipate 5-10% growth across our target lending
segments of business and unsecured in FY24, in line with our previous
guidance. From an income perspective, we continue to expect FY24 NIM to be in
the range of 190-195bps, but with H2 NIM expected to be lower than H1, given
the impact of a lower expected contribution from cards EIR adjustments, along
with ongoing competition and lower interest rates, partially offset by the
reinvestment rate of the structural hedge.
The adjusted cost: income ratio is expected to be higher in H2 as ongoing
inflation and investment will only be partially mitigated by the cost savings
programme, where given the proposed acquisition, we will now defer some
activity that was due to take place later in the year, limiting the level of
cost savings realised in H2. The Group also expects that transaction costs
associated with the proposed acquisition will be significantly higher in the
second half.
We continue to expect the cost of risk to be in the range of 30-35bps for
FY24, as guided at FY23, incorporating the ongoing SICR review on the credit
card portfolio and a modestly improving economic backdrop. Given the proposed
acquisition by Nationwide, the Group does not intend to announce any further
share buybacks or dividends, representing a headwind to returns, assuming the
transaction proceeds to completion in line with the anticipated timetable set
out in the Scheme document.
Given these anticipated headwinds over the remainder of the year, we expect
the return on tangible equity to be lower in the second half of the year,
relative to the first half.
Following Virgin Money shareholders' approval of the Scheme and related
matters for the proposed acquisition of Virgin Money by Nationwide in May, the
transaction continues to track in line with previously highlighted timescales,
with completion currently expected in calendar Q4 2024. Completion remains
subject to the satisfaction or waiver of all remaining conditions of the
Scheme, including regulatory approvals and final approval by the Court, but
looking forward, the proposed combination with Nationwide represents an
exciting longer-term opportunity, creating the second largest mortgage and
savings provider in the UK.
We have an attractive business that is well positioned to continue to deliver
on its growth ambitions. Over the remainder of the year, we'll continue to
invest in improving the customer experience and launching innovative and
rewarding products, whilst maintaining a resilient balance sheet and investing
further in our capabilities.
Finally, I would like to take this opportunity to thank all of the
stakeholders who have supported us on our journey. Thank you to our customers
for their loyalty, to our colleagues for their hard work, and to our investors
for their continued support.
David Duffy, Chief Executive Officer - 12 June 2024
Business and financial review
Chief Financial Officer's review
Delivering strategic and financial momentum
"The Group delivered continued business momentum during H1, supported by
ongoing strategic execution, with trading broadly as anticipated. The Group
believes the acquisition of Virgin Money by Nationwide presents an exciting
opportunity to build on our significant strategic progress by combining two
complementary businesses that together can offer more great products and
services to a larger customer base, while delivering value for our
shareholders."
Clifford Abrahams, Group CFO
Financial Highlights
Statutory profit before tax Profit before tax (excluding notable items) Statutory RoTE
£279m £345m 9.1%
H1 2023: £236m H1 2023: £312m H1 2023: 6.1%
NIM Adjusted cost: income ratio CoR
1.94% 52.3%((1)) 26bps
H1 2023: 1.91% H1 2023: 51.1% H1 2023: 40bps
CET1 ratio Capital distributions announced Relationship deposit growth
14.6% £26m 2.5%
FY23: 14.7% H1 2023: £45m H1 2023: 2.9%
LCR NSFR Dividend per share
151% 136% 2.0p
FY23: 146% FY23: 136% FY23: 5.3p
(1) Adjusted to exclude all notable items as shown in the tables on page 88 and
the new BoE Levy recognised in 2024 of £10m.
Business and financial review
Chief Financial Officer's review
Momentum in delivering our strategy
The Group has delivered a good first half of the year, with ongoing strategic
delivery and financial momentum. In line with our strategy, the Group has
continued to grow active relationship accounts and delivered further growth in
its target lending segments of business and unsecured, while broadly
maintaining its deposit mix. This, alongside ongoing credit card EIR
adjustments, reflecting strong customer activity and updated assumptions,
supported 1% growth in total operating income relative to H1 2023. Operating
and administrative expenses (excluding notable items) were higher
year-on-year, reflecting inflation, including annual wage rises, and the new
BoE Levy, which together more than offset savings in the period. Overall, this
resulted in an adjusted cost: income ratio of 52% (H1 2023: 51%). Credit
quality remained resilient in H1, with provision coverage stable when compared
with FY 2023. The Group's balance sheet remains strong with a robust funding
and liquidity position. CET1 finished the half at 14.6% (FY23: 14.7%), well in
excess of regulatory requirements and the Group's target range of 13-13.5%.
Growing in target segments
The Group delivered further lending growth in its target areas during the
first half of the year, while overall customer lending was stable at £72.7bn.
Mortgage balances reduced 1.5% during the period to £56.6bn, as the rate
environment and wider cost of living pressures tempered purchase activity,
albeit with signs of improved market activity levels since January. Business
lending increased 6.7% overall, as growth in BAU balances offset ongoing
reductions in government-backed lending. Unsecured balances increased 3.2%
during H1 to £6.7bn, driven by 5.3% growth in the credit card portfolio. We
continued to attract new deposits during the first half of the year,
supporting overall deposit growth of 2.4%, while the mix of deposits remained
broadly stable.
Resilient financial performance
Statutory profit before tax in H1 2024 was £279m, which was 18% higher
compared to last year (H1 2023: £236m), reflecting higher operating income
and lower impairments, offsetting growth in operating and administrative
expenses. Statutory RoTE of 9.1% in H1 was improved relative to last year (H1
2023: 6.1%), reflecting improved profitability, a lower tax charge, and a
reduction in the cash flow hedge reserve. NIM of 1.94% (H1 2023: 1.91%) was
higher year-on-year, as benefits from the reinvestment rate of the structural
hedge and ongoing credit card EIR adjustments offset spread pressure in
mortgages and ongoing deposit competition and migration. Non-interest income
of £64m was 3% higher year-on-year, primarily reflecting lower hedge
ineffectiveness. Overall, this resulted in total operating income that was 1%
better compared to a year ago. Operating and administrative costs of £551m
were 3% higher when compared to H1 2023 as gross cost savings from the
restructuring programme were more than offset by inflation and the new BoE
Levy. Operating and administrative costs included £49m of notable expenditure
during H1, primarily relating to the financial crime prevention programme and
ongoing restructuring activity. Credit impairments of £93m were significantly
lower year-on-year, reflecting updated macroeconomic assumptions and the
ongoing review of the application of SICR on the credit card portfolio, which
reduced the ECL provision by £31m during the period.
As a result of the Group's performance and as previously highlighted as part
of the terms of the proposed acquisition of Virgin Money by Nationwide, the
Board has announced an FY 2024 dividend of 2.0p.
Robust balance sheet with strong capital, liquidity and funding position
The Group maintained a conservative balance sheet position, including robust
funding and liquidity, a strong capital position and stable provision
coverage. The Group's total credit provision as at H1 2024 was £617m (FY23:
£617m) equivalent to a coverage ratio of 0.84% (FY23: 0.84%). Funding and
liquidity remain strong, with the 12-month average LCR ratio increasing to
151% (FY23 12-month average: 146%) and 12-month average net stable funding
ratio (NSFR) stable at 136% (FY23: 136%). The LDR reduced to 107% (FY23: 109%)
as deposit balances increased 2.4% to £68.2bn, while lending volumes were
broadly stable at £72.7bn. The CET1 ratio remains strong at 14.6% (FY23:
14.7%), as capital generation more than offset RWA growth in the period. The
CET1 movement in H1 incorporated c.£63m returned to shareholders as part of
the £150m buyback programme announced alongside FY23 results, prior to the
cancellation of the programme, given the proposed acquisition of the Company
by Nationwide.
Outlook
Following a strong H1, during the second half of the year, the Group expects
downward pressure on NIM relative to H1, primarily reflecting a lower expected
contribution from cards EIR adjustments, and ongoing competition. The Group
also anticipates cost pressures from inflation and investment in the second
half, which will only be partially mitigated by the ongoing cost savings
programme, where certain restructuring activities have now been deferred in
light of the proposed acquisition by Nationwide. In the medium term, the Group
remains focussed on delivering growth in return accretive segments, continued
cost-efficiency and ongoing balance sheet resilience and believes the proposed
acquisition by Nationwide will support its strategic ambitions, leveraging
Nationwide's scale and pace of investment, as well as Virgin Money's
capabilities and strengths.
Business and financial review
Chief Financial Officer's review
Income
6 months to 6 months to 6 months to
31 Mar 2024 31 Mar 2023 Change 30 Sep 2023 Change
£m £m % £m %
Net interest income (excluding notable items) 868 855 2 861 1
Acquisition accounting unwinds (9) (3) 200 (26) (65)
Statutory net interest income 859 852 1 835 3
Non-interest income (excluding notable items) 72 78 (8) 79 (9)
Hedge ineffectiveness (8) (16) (50) - n/a
Other - - - (1) (100)
Statutory non-interest income 64 62 3 78 (18)
Total operating income (excluding notable items((1))) 940 933 1 940 -
Statutory total operating income 923 914 1 913 1
(1) Notable items are presented separately above, with full details included on
page 88.
Overview
Statutory total operating income of £923m was 1% higher compared with H1 2023
and H2 2023, driven by growth in NII. NII (excluding notable items) improved
2% year-on-year as NIM increased 3bps to 1.94%, including a Q2 NIM of 1.99%.
There were also £(9)m of acquisition accounting unwinds within NII during H1
(H1 2023: £(26)m), reflecting fair value accounting adjustments at the time
of the CYBG and Virgin Money acquisition. Statutory non-interest income was 3%
higher year-on-year.
NII and NIM
Asset yields increased 151bps compared to H1 2023 at an aggregate level.
Within this, mortgage yields increased 83bps, given the higher rate
environment, while average mortgage balances were 2% lower in H1 2024
year-on-year. Together, this resulted in mortgage interest income that was 31%
higher year-on-year.
Unsecured average balances increased 6% relative to H1 2023, in line with the
Group's strategy to target growth in higher-yielding lending. Average yields
increased 293bps year-on-year and incorporated £72m of positive EIR
adjustments in the credit cards portfolio in H1, equivalent to 16bps of NIM on
an annualised basis, reflecting behavioural outperformance relative to more
prudent assumptions, and the removal of the temporary macro-economic
adjustments that were previously applied at 30 September 2023, partly offset
by the Group reducing the expectation of future balances. Altogether, this
drove a 53% year-on-year increase in interest income from unsecured lending.
In Business, a 179bps 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 40% higher interest income year-on-year.
Elsewhere, the average yield on the Group's liquid assets increased 189bps
reflecting the higher rate environment.
In March, £262m of Cash Ratio Deposits that were with the BoE and classed as
non-interest earning assets were returned to the Bank as part of the
introduction of the new BoE Levy and are now classed as interest earning
assets.
Liability rates on interest bearing liabilities increased 167bps relative to
H1 2023, with increased average rates across all products, mainly due to the
higher rate environment.
Current account average balances reduced during the period, reflecting deposit
migration into higher rate products. Term deposit average balances increased
year-on-year as the Group actively participated in this market for new
funding. Savings account balances reduced in H1 2024 relative to H1 2023 due
to the attrition or churn of existing balances. Wholesale funding average
balances reduced during the period, primarily reflecting the repayment of
TFSME.
Business and financial review
Chief Financial Officer's review
Net interest income
6 months ended 31 March 2024 6 months ended 31 March 2023
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 57,193 942 3.30 58,315 719 2.47
Unsecured 6,885 333 9.66 6,492 218 6.73
Business((2)) 8,997 356 7.91 8,359 255 6.12
Liquid assets 15,835 417 5.27 15,651 264 3.38
Due from other banks 698 16 4.47 748 5 1.25
Swap income/other - 331 n/a - 252 n/a
Other interest earning assets 3 - n/a 3 - n/a
Total average interest earning assets 89,611 2,395 5.34 89,568 1,713 3.83
Total average non-interest earning assets 2,296 2,556
Total average assets 91,907 92,124
Interest bearing liabilities:
Current accounts 14,876 (127) (1.71) 16,123 (84) (1.04)
Savings accounts 23,738 (329) (2.77) 27,560 (179) (1.30)
Term deposits 23,493 (530) (4.51) 17,129 (206) (2.41)
Wholesale funding 17,186 (539) (6.28) 18,395 (387) (4.22)
Other interest earning liabilities 190 (2) n/a 152 (2) n/a
Total average interest bearing liabilities 79,483 (1,527) (3.84) 79,359 (858) (2.17)
Total average non-interest bearing liabilities 6,848 6,890
Total average liabilities 86,331 86,249
Total average equity 5,576 5,875
Total average liabilities and average equity 91,907 92,124
Net interest income 868 1.94 855 1.91
(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).
Non-interest income
Non-interest income (excluding notable items) was £6m lower relative to H1
2023 at £72m. The key driver for this movement was the reclassification of
insurance costs incurred on packaged current accounts from April 2023 as
non-interest income; these were previously recognised within operating and
administrative expenses. Excluding this impact, performance was broadly stable
year-on-year, reflecting resilient credit card activity and business fee
income. There were a further £(8)m of notable items within non-interest
income (H1 2023: £(16)m) arising from hedge volatility and rate volatility in
the period.
Business and financial review
Chief Financial Officer's review
Costs
6 months to 6 months to 6 months to
31 Mar 2024 31 Mar 2023 Change 30 Sep 2023 Change
£m £m % £m %
Staff costs 213 177 20 190 12
Property and infrastructure 20 19 5 21 (5)
Technology and communications 64 61 5 65 (2)
Corporate and professional services 75 87 (14) 86 (13)
Depreciation, amortisation and impairment 43 49 (12) 46 (7)
Other expenses 87 84 4 86 1
Operating and administrative expenses (excluding notable items) 502 477 5 494 2
Notable items:
Restructuring charges 33 53 (38) 78 (58)
Financial crime prevention programme 15 - n/a - n/a
Legacy conduct (4) 4 n/a 8 n/a
Other 5 - n/a 59 (92)
Statutory operating and administrative expenses 551 534 3 639 (14)
Cost: income ratio 59.7% 58.5% 1.2%pts 70.0% (10.3)%pts
Adjusted cost: income ratio ((1)(2)) 52.3% 51.1% 1.2%pts 52.6% (0.3)%pts
(1) Notable items are presented separately above. Full details of all notable
items is included on page 88.
(2) Adjusted to exclude all notable items shown above and the new BoE Levy
recognised in 2024 of £10m.
Operating expenses (excluding notable items) increased 5% year-on-year to
£502m, while the adjusted cost: income ratio increased 1.2%pts to 52.3%. The
Group has continued to deliver its restructuring programme, which has driven
further cost efficiencies, with annualised savings of c.£150m to date. Staff
costs were £36m (20%) higher relative to H1 2023 due to wage inflation and a
£11m lower defined benefit pension credit year-on-year, partly mitigated by
restructuring benefits. The reduction in corporate and professional services
costs year-on-year included the non-recurrence of complaints handling costs
with service now improved. The Group also benefited from a lower depreciation
charge in H1 2024, primarily due to the run-off of assets and the impact of
store closures. Other expenses of £87m in H1 2024 were £3m higher
year-on-year and included a £10m initial estimate of the costs related to the
new BoE Levy (that replaced the BoE's Cash Ratio Deposit Scheme, with effect
from 1 March 2024), partly offset by higher VAT recoveries. The BoE Levy is
the means of funding the costs of the BoE's policy functions in pursuit of its
Financial Stability and Monetary Policy objectives that is paid for by
eligible institutions.
The Group incurred c.£49m of notable expenditure during the period, £8m
lower than in H1 2023. Restructuring charges of £33m included spend related
to ongoing digitisation, property changes and severance. During the period,
the Group also incurred £15m related to the new financial crime prevention
programme to support the upgrade of our financial crime prevention and cyber
defence capabilities. There was a net £4m legacy conduct release during the
period, reflecting the latest risk assessment of potential cases. Other
notable expenditure of £5m included costs associated with the proposed
acquisition of Virgin Money by Nationwide.
Impairments
As at 31 March 2024 Credit Gross Coverage Net CoR((1)) % of loans in % of loans in
provisions lending ratio bps Stage 2 Stage 3
£m £bn bps
Mortgages 55 56.9 10 - 4.5 1.0
Unsecured: 425 7.1 635 242 18.5 2.0
of which credit cards 391 6.5 648 269 15.9 2.1
of which personal loans and overdrafts 34 0.6 520 1 44.9 0.9
Business 137 9.3 155((2)) 30 16.9 4.9
Total 617 73.3 84 26 7.4 1.6
of which Stage 2 353 5.4 651
of which Stage 3 161 1.2 1,645
(1) CoR 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 2023 Credit Gross lending Coverage Net CoR % of loans in % of loans in
provisions £bn ratio bps Stage 2 Stage 3
£m bps
Mortgages 57 57.8 10 - 4.7 1.0
Unsecured: 429 6.8 665 430 24.1 1.7
of which credit cards 392 6.1 688 483 21.7 1.8
of which personal loans and overdrafts 37 0.7 488 86 44.3 0.9
Business 131 8.7 160((1)) 44 22.8 4.7
Total 617 73.3 84 42 8.6 1.5
of which Stage 2 400 6.3 633
of which Stage 3 128 1.1 1,393
(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 of £617m as at H1 2024 were stable relative to FY23 (£617m).
Alongside stable customer lending, this resulted in coverage of 84bps, which
was unchanged from FY23. The components of the total ECL provision includes
£536m of modelled and individually assessed ECL (FY23: £540m) and £81m of
management adjustments (MAs) (FY23: £76m). These factors resulted in a £93m
impairment charge during the period, equivalent to an annualised CoR of 26bps.
The key macroeconomic assumptions used in the Group's IFRS 9 modelling were
updated based on scenarios provided by our third-party provider Oxford
Economics. The weightings applied to the scenarios were 10% to the Upside
scenario, 55% to the Base scenario and 35% to the Downside scenario. The
weighted macroeconomic scenario includes a 0.3% decline in GDP in 2024 before
a modest recovery thereafter, peak unemployment of 4.8% in 2027 and a 3.4%
contraction in the House Price Index (HPI) in 2024, followed by a steady
recovery thereafter.
During the period, the Group finalised changes to the credit card SICR model
that removed the requirement for a two-month probation before accounts could
return to Stage 1 from Stage 2 for non-forborne exposures. Overall, this
reduced the ECL by £31m during H1 2024. Excluding the impact of SICR changes,
the increase in ECL primarily reflected growth in Unsecured and Business
lending.
During the first half of the year, loans classified as Stage 2 reduced from 9%
of the portfolio at FY23 to 7%, including the impact from SICR model changes
in the credit cards portfolio. 96% of the Stage 2 lending balances remain
<30 days past due (DPD). Stage 3 assets as a % of Group lending increased
modestly to 1.6% (FY23: 1.5%).
Aggregate provision coverage of 84bps at H1 remained consistent during the
period. In Mortgages, the coverage ratio of 10bps is considered appropriate
for the conservative loan book that is weighted to low LTVs. The portfolio
continues to evidence good underlying credit performance, despite a gradual
increase in late-stage arrears over the period.
Our Unsecured book coverage ratio of 635bps includes 648bps of coverage for
our credit card portfolio and 520bps of coverage for our smaller personal
loans and overdrafts book. Credit card portfolio coverage was lower relative
to FY23, incorporating the impact of SICR model changes and revised
macroeconomic forecasts. Credit card arrears continued to increase gradually
during the first half of the year, mainly reflecting the ongoing maturation
and diversification of the portfolio. Despite this, 97% of balances in Stage 1
or Stage 2 remain not past due (FY23: 97%).
In Business, the coverage ratio of 155bps reflects a 5bps decrease in the
period, driven mainly by the modestly improving economic conditions and
customers migrating from Stage 2 into Stage 1. There continues to be no
significant deterioration in asset quality metrics and no significant increase
in specific provision recognition. The proportion of loans in Stage1 or 2 and
not past due remains high at 95% (FY23: 95%).
Profitability
6 months to
31 Mar 2024
31 Mar 2023 30 Sep 2023
£m £m £m
Statutory profit on ordinary activities before tax 279 236 109
Tax expense (43) (56) (43)
Statutory profit for the period 236 180 66
RoTE 9.1% 6.1% 1.6%
TNAV per share 361.2p 350.5p 359.8p
Basic earnings per share (EPS) 16.0p 11.0p 3.0p
Overview
The Group made a statutory profit before tax of £279m in H1 2024 (H1 2023:
£236m), resulting in a statutory RoTE of 9.1% (H1 2023: 6.1%). TNAV per share
increased 1.4p in H1 2024 relative to FY23 to 361.2p. The key drivers of the
increase were 15.3p of retained earnings net of dividends and 8.7p from share
buybacks, offset by (18.3)p from a reduction in the cash flow hedge reserve,
(3.6)p from a lower overall actuarial pension surplus and (0.7)p of fair value
through other comprehensive income (FVOCI) and other movements.
Taxation
There was a £43m tax charge in respect of £279m of statutory profit before
tax, reflecting an effective tax rate of 15%. The lower effective tax rate
during the period incorporates a reduction in the deferred tax liability in
respect of the defined benefit pension surplus, following the enactment of
changes to the authorised surplus payments charge from 35% to 25%.
During the full year to September 2023, the most recent period for which
annual tax data is available, the Group paid cash tax totalling £170m to HMRC
(principally corporation tax including banking surcharge and irrecoverable
VAT), with a further £87m (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 2024 30 Sep 2023
£m £m Change
Mortgages 56,627 57,497 (2)%
Unsecured 6,727 6,519 3%
Business((1)) 9,321 8,738 7%
Total customer lending 72,675 72,754 -%
Relationship deposits((2)) 36,267 35,394 2%
Non-linked savings 10,759 9,741 10%
Term deposits 21,158 21,474 (1)%
Total customer deposits 68,184 66,609 2%
Wholesale funding 16,223 16,658 (3)%
of which TFSME 5,050 6,200 (19)%
LDR 107% 109% (2)%pts
LCR 151% 146% 5%pts
(1) Of which, £499m government lending (30 September 2023: £625m)
(2) Current account and linked savings balances.
Overview
At an aggregate level, total customer lending remained stable at £72.7bn in
H1 as growth in Unsecured and Business lending, in line with the Group's
strategy, was offset by a reduction in Mortgages. Total customer deposits
increased 2% to £68.2bn, resulting in a reduction in the LDR to 107% (FY23:
109%).
Mortgage balances reduced 2% in H1 2024 to £56.6bn, reflecting lower housing
activity with mortgage rates positioned at higher levels and wider cost of
living pressures.
Unsecured balances increased 3% in H1 2024 to £6.7bn, as 5% growth in credit
card balances was offset by a reduction in personal loans. In cards, the Group
has benefitted from resilient activity levels and further new account
acquisition, supported by its digitally-led proposition. During the period,
the Group has continued to observe customer behavioural activity outperforming
its prudent assumptions across spend, repayment and retention, resulting in
card EIR performance remaining persistently better than expected.
Business lending increased by 7% in H1 2024 to £9.3bn as a reduction in
Government-scheme balances was more than offset by 9% 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 reduced 20% to £0.5bn, as borrowers made
contractual repayments.
Customer deposits increased by 2% in the first half of the financial year to
£68.2bn. The Group continued to execute against its strategy during the
period, increasing relationship deposits by £0.9bn, supported by strong
customer propositions and competitive rates. Non-linked savings increased by
£1.0bn during H1 2024 as the Group prioritised this market for new funding.
Term deposit balances reduced by £0.3bn during the period, given ongoing
maturities and as the Group prioritised non-linked savings for new funding,
given the better value opportunities available.
Wholesale funding and liquidity
The Group has a stable funding base with customer deposits representing c.81%
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. Of the total customer deposit book, the
significant majority is insured via the Financial Services Compensation Scheme
and of the balances that are uninsured, a proportion are fixed term and/or
would incur a charge if customers wanted to withdraw their money.
Business and financial review
Chief Financial Officer's review
The Group has a number of well-established wholesale funding programmes with
proven markets access. During the period, the Group successfully issued
€750m of MREL senior notes and £500m of RMBS publicly to investors, while
at the same time repaying £1.15bn of its TFSME drawings (£5.05bn outstanding
as at 31 March 2024), resulting in the Group having now repaid all of its
TFSME maturities due in 2024. On an overall basis, wholesale funding reduced
to £16.2bn as at H1 2024 (FY23: £16.7bn). Of our total debt securities in
issue, only c.10% (£1.0bn) has less than 1-year to effective maturity,
reflecting term issuance roll-downs (the Group has negligible short-term
wholesale funding). The Group has £1.60bn of TFSME maturing in FY25 and
£2.55bn maturing in FY26, with the remaining £0.90bn subject to term
extension beyond FY26. Given the strong deposit performance in H1 and
wholesale issuances during the period, the Group does not expect to issue any
further secured issuance in FY24, subject to ongoing deposit flows and
acquisition process.
The stability of the Group's funding sources is highlighted in its NSFR, which
remains strong on a 12-month average basis at 136%. The Group's 12-month
average LCR increased to 151% (30 September 2023: 146%), continuing to
comfortably exceed both regulatory requirements and the Group's more prudent
internal risk appetite metrics. The Group's c.£15.7bn liquid asset portfolio
is primarily comprised of cash at the BoE (c.69%), UK Government securities
(Gilts) (c.8%) and AAA rated listed securities (e.g. bonds issued by
supra-nationals and corporate covered bonds) (c.23%). 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.£7.7bn 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.£19.4bn 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 2024 30 Sep 2023 Change
CET1 ratio (IFRS 9 transitional) 14.6% 14.7% (0.1)%pts
CET1 ratio (IFRS 9 fully loaded) 14.5% 14.3% 0.2%pts
Total capital ratio 20.9% 21.2% (0.3)%pts
MREL ratio 33.9% 31.9% 2.0%pts
UK leverage ratio 5.3% 5.0% 0.3%pts
RWAs (£m) 25,581 25,176 1.6%
of which Mortgages (£m) 8,446 9,072 (6.9)%
of which Unsecured (£m) 4,969 4,819 3.1%
of which Business (£m) 7,903 6,990 13.1%
(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 14.6% and a total capital ratio of 20.9%. The Group's
CET1 ratio on an IFRS 9 fully loaded basis was 14.5%. The Group's latest
Pillar 2A requirement has a CET1 element of 1.9%. Overall, the Group continues
to maintain a significant surplus above its CRD IV minimum CET1 capital
requirement (or MDA threshold) of 10.9%. The Group currently expects to
receive PRA approval on the mortgage IRB models (including hybrid PD) later
this year and will implement shortly thereafter. A model adjustment has been
applied to increase RWAs and expected losses in advance of formal approval of
models. The Group continues to expect some modest upside to our capital
position from Basel 3.1 implementation on day 1 (1 July 2025), subject to
regulatory approval.
CET1 capital
CET1 reduced by c.15bps in the period with the movements set out in the table
below. The (25)bps impact of the share buyback includes £63m that was
returned to shareholders, prior to the cancellation of the programme given the
proposed acquisition of the Company by Nationwide.
CET1 Capital movements 6 months to
31 Mar 2024
%/bps
Opening CET1 ratio 14.7%
Capital generated (bps) 82
RWA growth (bps) (23)
AT1 distributions (bps) (11)
Underlying capital generated (bps) 48
Restructuring charges (bps) (10)
Acquisition accounting unwind (bps) (4)
Financial crime prevention programme (bps) (4)
Conduct (bps) 2
Hedge ineffectiveness (bps) (2)
Foreseeable ordinary dividends (bps) (10)
Share buyback (bps) (25)
Other (bps) (10)
Net capital absorbed (bps) (15)
Closing CET1 ratio 14.6%
(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 at H1 2024 was at 33.9% (FY23: 31.9%) of
RWAs, or 10.1% when expressed as a percentage of Leverage exposures (FY23:
9.3%). This provides prudent headroom of £1.7bn or 6.6% above the binding
loss-absorbing capacity (LAC) requirement of 27.3% of RWAs, or 2.0% above the
binding LAC requirement of 8.2% when expressed as a percentage of Leverage
exposures. Given the surplus to LAC requirements and having refinanced its
redemptions in FY24, the Group is not planning any MREL or capital issuance
over the remainder of the year, subject to the acquisition process.
Business and financial review
Chief Financial Officer's review
Outlook and guidance
FY24 financial guidance
NIM
190-195bps range for FY24, with NIM lower in H2 vs. H1
Cost: income ratio
Adjusted cost: income ratio expected to be higher in H2 vs. H1
CoR
30-35bps range
Consistent with our strategy to diversify the balance sheet, we continue to
anticipate 5-10% growth across target lending segments of business and
unsecured lending in FY24.
During the second half of the year, we expect NIM to be impacted by a lower
expected contribution from cards EIR adjustments, ongoing competition and
lower interest rates, partially mitigated by the reinvestment rate of the
structural hedge. As a result of these factors, the Group continues to expect
NIM to be in the range of 190-195bps for FY24, with NIM lower in H2 vs. H1.
The adjusted cost: income ratio is anticipated to be higher in H2 vs. H1,
reflecting the latest outlook for income, inflation, ongoing investment and
cost savings, where certain restructuring activities have now been deferred in
light of the proposed acquisition by Nationwide. The Group also expects that
transaction costs associated with the proposed acquisition will be
significantly higher in the second half.
The Group continues to expect CoR to be in the range 30-35bps for FY24,
incorporating the SICR review on the credit card portfolio and a modestly
improving economic backdrop.
Given the proposed acquisition by Nationwide, the Group has cancelled its
share buyback programme and does not intend to announce any further share
buybacks or dividends, representing a headwind to returns, assuming the
transaction proceeds to completion in line with the anticipated timetable set
out in the Scheme Document.
As a result of these factors, statutory RoTE is expected to be lower in H2 vs.
H1.
Clifford Abrahams, Chief Financial Officer - 12 June 2024
Risk management
Risk overview
Risk overview 20
Credit risk 22
Financial risk 46
Risk management
Risk overview
The objective of risk management is to keep the bank safe, to ensure
resilience and to put the customer interests at the centre of our decision
making. Effective risk management supports the delivery of our strategic
objectives and fulfils our Purpose.
This report provides information on developments during the period relating to
the Group's risk exposures, including how those risks are managed or
mitigated. These risk disclosures support, and should be read in conjunction
with, the Risk report in the Annual Report and Accounts 2023.
During H1, Risk have continued work to enhance risk management practices and
reporting capabilities, with focus on determining risk and control libraries
aligned to our recently launched risk taxonomy, to support reporting from our
incoming Integrated Risk Management system. This investment will increase
monitoring of controls testing and drive improvements to our capability to
execute control effectiveness assessments, which will support more robust risk
management and better outcomes for our stakeholders.
We have also remained committed to proactively supporting our customers
through the higher-rate environment and cost of living pressures that continue
to prevail, and which have the potential to affect customer resilience and
debt affordability. Close portfolio monitoring and assessment of aggregate
risks is in place to highlight any signs of portfolio deterioration or
affordability stress.
Managing execution risk and delivering change sustainably has continued to be
a priority for the Group and we have supported the launch of the financial
crime prevention programme, to further improve risk controls and strengthen
technology, striving to meet evolving regulatory obligations and aligning to
our purpose. Fraud and scams continue to become more sophisticated and
incidence rates continue to rise across the sector, this investment will
bolster our fraud controls and cyber defences, providing customers with
improving protections against criminal actors. Risk teams have continued to
carry out detailed risk assessments, assurance and oversight activity to
support the business in management of fraud and cyber risks. Activity to
strengthen oversight of the technology and data risk profile has continued and
will remain a focus area, as we work towards adoption of the BCBS 239
data standard.
Building on progress in FY23, we have remained committed to ensuring good
customer outcomes, with focus on overseeing the effective implementation and
embedding of the FCA's Consumer Duty across the Group, including compliance
with the requirements for closed book review and reporting by 31 July 2024.
Good customer outcomes are at the heart of our purpose and central to our
culture, business objectives and strategy.
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 2023 Annual Report and Accounts.
Principal risks Definitions
Credit risk The risk that a retail or business customer or counterparty fails to pay the
interest or capital due on a loan or other financial instrument. Credit
risk needs to be managed through the life cycle of each loan from origination
to repayment, redemption, write-off or sale. It manifests in the 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 regulatory requirements and
changes in the regulatory environment, or failing to manage a constructive
relationship with our regulators, by not keeping them informed of relevant
issues, not responding effectively to information requests or not meeting
regulatory deadlines.
Conduct risk The risk of undertaking business in a way which fails to deliver good customer
outcomes in line with the FCA's Consumer Duty, and causes customer harm, and
may result in regulatory censure, redress costs and/or reputational damage.
Operational risk The risk of loss or customer harm resulting from inadequate or failed internal
processes, people and systems or from external events, incorporating the
inability to maintain critical services, recover quickly and learn from
unexpected/adverse events. Operational risk includes: change risk; third-party
risk; cyber and information security risk; physical and personal security
risk; IT resilience risk; data management risk; payment creation, execution
and settlement risk; and people risk.
Economic crime risk The risk that the Group fails to detect and prevent its products and services
from being used to facilitate economic crime, resulting in harm to customers,
the Group and its reputation, or third parties. This includes money
laundering, 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 fund or manage required change projects, or adapt
to external developments.
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
prevent delivery of good outcomes for our customers. Emerging and evolving
risks are continually assessed through a horizon scanning process, considering
all internal and external factors, with escalation and reporting to the Board.
The emerging and evolving risk classifications reported in the Group's 2023
Annual Report and Accounts have been reviewed and remain broadly unchanged,
noting the key developments outlined below. Areas of enhanced risk attention
include the risks associated with the proposed acquisition by Nationwide
Building Society and the continued development of Technology and Data Risks,
with a streamlined and refocused emerging risk now defined.
Risks Description
Deal risk associated to acquisition by Nationwide Building Society While the Board has recommended the proposal to shareholders, there are a
range of strategic & enterprise, financial and people risks should the
deal not succeed, which could include:
Strategic & enterprise risk - There could be: impacts from adjustments to
the pace of the Group's cost saving and change programmes; share price
volatility and reputational damage, as the market reacts to the Group's
revised positioning and strategic outlook; increased scrutiny on the Group's
capabilities to execute on its strategic ambitions; and, impacts to FY24
guidance and targets from short term costs related to the transaction.
Financial risk - There would be impacts to the Group's funding and financial
plans if the deal were not to proceed. Spreads for listed debt could widen due
to market uncertainty and the outlook for the Group's credit ratings could
change, with the potential for downside risk to reflect a lack of clarity on
the Group's strategy in the short to medium term.
People risk - During the transition period, there are people risks associated
to talent retention and attraction against the Group's shifting strategic
outlook. Significant people risk challenges could affect operations, growth,
costs and resilience.
Technology and Data Risks The pace of technological change, in areas such as Generative AI and cloud
solutions, continues to accelerate and risks and opportunities need to be
fully understood. These technologies have broad and potentially growing
applications, with supporting regulatory frameworks under continuous review.
The Group's operations and strategy are increasingly dependent on the use of
quality and timely data, within scalable and secure architecture, to support
decision making and to underpin our digital capabilities. Stakeholder
expectations in relation to the effective governance, management and
protection of data continue to evolve.
In turn, the landscape of security and cyber threats we face into continues to
change and is becoming more sophisticated in terms of frequency, impact, and
severity, with potential that AI-assisted tools such as voice and image
generation create further risks.
The Group is investing in capabilities to defend against cyber threats, with
key initiatives in place to upgrade propositions across areas such as
financial crime prevention and cyber defence.
Risk management
Credit risk
Section Page Tables Page
Credit risk overview 23
Group credit risk exposures 23 Maximum exposure to credit risk on financial assets, contingent liabilities 24
and credit-related commitments
Key credit metrics 24 Key credit metrics 24
Gross loans and advances ECL and coverage 25
Stage 2 balances 27
Credit risk exposure and ECL, by internal probability of default (PD) rating, 28
by IFRS 9 stage allocation
IFRS 9 staging 29
Mortgage credit performance 30 Breakdown of Mortgage portfolio 30
Collateral 30 Mortgage portfolio interest rate breakdown 30
Forbearance 31 Average LTV of Mortgage portfolio by staging 31
IFRS 9 staging 32 IFRS 9 staging 32
Unsecured credit performance 33 Breakdown of Unsecured credit portfolio 33
Forbearance 34
IFRS 9 staging 34 IFRS 9 staging 34
Business credit performance 36 Breakdown of Business credit portfolio 36
Forbearance 37
IFRS 9 staging 38 IFRS 9 staging 38
Macroeconomic assumptions, scenarios, and weightings 39
Macroeconomic assumptions 39 Scenarios 39
Key macroeconomic assumptions 40
Five-year simple averages on unemployment, GDP and HPI 41
The use of estimates, judgements and sensitivity analysis 41
The use of estimates 41 Economic scenarios 41
The use of judgement 42 Impact of changes to significant increase in credit risk (SICR) thresholds 42
on staging
Impact of management adjustments (MAs) on the Group's ECL allowance and 43
coverage ratio
Macroeconomic assumptions 45
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 Group's 2023 Annual Report and Accounts, and not all of
that information has been replicated in this Interim Financial Report.
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 24 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 remaining broadly stable overall with £73.3bn at
31 March 2024 (30 September 2023: £73.3bn). While the Mortgage portfolio
reduced slightly, the Unsecured portfolio has grown, driven primarily by
credit cards. The underlying growth has been maintained in the Business
portfolio, with the continuing reduction in the government backed loan schemes
outpaced by support for new and existing customers' lending needs.
Asset quality remains robust and most of the key asset quality ratios remained
resilient with no significant deterioration. Some weakening in the pre default
and early delinquency metrics continue to be monitored closely.
Within the total ECL provision, the modelled and IA provision has remained
stable at £617m as at 31 March 2024 (30 September 2023: £617m), resulting in
a stable coverage ratio of 84bps, although the composition has changed
slightly since September 2023.
Primarily driven by an improving economic outlook, the updated macroeconomic
inputs have resulted in a release of modelled provision across all portfolios.
During the period, the Group reviewed the existing staging approach for credit
cards in the Unsecured portfolio which focused on the triggers that move
exposures from Stage 1 (requiring a 12-month ECL calculation) to Stage 2
(requiring a lifetime ECL calculation) and removed the requirement for a
two-month probation period before accounts could return to Stage 1 from Stage
2 for non-forborne exposures. This enables the recognition of improving
economic forecasts immediately in the same way deterioration is currently
recognised immediately following a model economic scenario (MES) refresh, and
whilst this may increase the volatility of IFRS stage migration, the impact is
not expected to be material. The overall impact of these changes has been to
reduce the modelled ECL in the Unsecured portfolio by £31m.
MAs have increased in the period to £81m (30 September 2023: £76m) primarily
due to a review of the MAs held for debt sale. The IA impairment charge was
£107m in the period (12 months to 30 September 2023: £142m, 6 months to 31
March 2023: £63m), resulting in a total impairment charge to the income
statement of £93m (12 months to 30 September 2023: £309m, 6 months to 31
March 2023: £144m), and an associated CoR of 26bps (12 months to 30 September
2023: 42bps, 6 months to 31 March 2023: 40bps).
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 £12.9bn of cash and balances with
central banks and £0.6bn due from other banks at amortised cost (30 September
2023: £11.3bn and £0.7bn respectively), with a further £5.8bn (30 September
2023: £6.2bn) of financial assets at FVOCI. Cash and balances with central
banks includes £11.8bn of cash held with the BoE (30 September 2023:
£10.2bn). Balances with other banks and financial assets at FVOCI are
primarily held with senior 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 and credit-related
commitments
Gross loans and advances to customers Credit-related commitments Total
31 March 2024
£m £m £m
Mortgages 56,941 2,374 59,315
Unsecured 7,053 11,379 18,432
Business 9,267 4,059 13,326
Total 73,261 17,812 91,073
Impairment provisions on credit exposures ((1)) (612) (5) (617)
Fair value hedge adjustment (305) - (305)
Maximum credit risk exposure on lending assets 72,344 17,807 90,151
Cash and balances with central banks 12,930
Financial instruments at FVOCI 5,764
Due from other banks 592
Other financial assets at fair value 59
Derivative financial assets 44
Maximum credit risk exposure on all financial assets ((2)) 109,540
30 September 2023
Mortgage 57,797 2,685 60,482
Unsecured 6,814 11,242 18,056
Business 8,684 4,073 12,757
Total 73,295 18,000 91,295
Impairment provisions held on credit exposures ((1)) (612) (5) (617)
Fair value hedge adjustment (492) - (492)
Maximum credit risk exposure on lending assets 72,191 17,995 90,186
Cash and balances with central banks 11,282
Financial instruments at FVOCI 6,184
Due from other banks 667
Other financial assets at fair value 61
Derivative financial assets 135
Maximum credit risk exposure on all financial assets ((2)) 108,515
(1) The total ECL provision covers both on and off-balance sheet exposures
which are reflected in notes 3.1.1.1 and 3.3 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 2024 30 Sep 2023 31 Mar 2023
£m £m £m
Impairment charge on credit exposures
Mortgage lending (1) 2 3
Unsecured lending 81 269 126
Business lending 13 38 15
Total Group impairment charge 93 309 144
Impairment charge ((1)) to average customer loans (cost of risk (CoR)) 0.26% 0.42% 0.40%
6 months to 12 months to
31 Mar 2024 30 Sep 2023
Key asset quality ratios
Loans in Stage 2 7.39% 8.63%
Loans in Stage 3 1.59% 1.47%
Total book coverage ((2)) 0.84% 0.84%
Stage 2 coverage ((2)) 6.51% 6.33%
Stage 3 coverage ((2)) 16.45% 13.93%
(1) Inclusive of gains/losses on assets held at fair value and elements of fraud
loss.
(2)
Excludes the guaranteed element of government-backed loan schemes.
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 2024
Mortgages Cards Loans and Overdrafts Combined Business ((2)) To
ta
l(
(2
))
£m % £m % £m % £m % £m % £m %
Stage 1 53,828 94.5% 5,271 82.0% 339 54.2% 5,610 79.5% 7,247 78.2% 66,685 91.0%
Stage 2 - total 2,539 4.5% 1,024 15.9% 281 44.9% 1,305 18.5% 1,568 16.9% 5,412 7.4%
Stage 2: 0 DPD 2,233 4.0% 958 14.9% 277 44.2% 1,235 17.5% 1,544 16.7% 5,012 6.9%
Stage 2: < 30 DPD 135 0.2% 31 0.5% 2 0.3% 33 0.5% 11 0.1% 179 0.2%
Stage 2: > 30 DPD 171 0.3% 35 0.5% 2 0.4% 37 0.5% 13 0.1% 221 0.3%
Stage 3((3)) 574 1.0% 132 2.1% 6 0.9% 138 2.0% 452 4.9% 1,164 1.6%
56,941 100% 6,427 100% 626 100% 7,053 100% 9,267 100% 73,261 100%
ECLs((4))
Stage 1 9 17.3% 58 14.9% 4 11.2% 62 14.6% 31 22.6% 102 16.6%
Stage 2 - total 25 45.2% 262 67.0% 25 74.7% 287 67.6% 41 29.6% 353 57.1%
Stage 2: 0 DPD 22 40.0% 225 57.5% 23 68.5% 248 58.4% 41 29.4% 311 50.3%
Stage 2: < 30 DPD 1 1.6% 15 3.8% 1 1.8% 16 3.6% - 0.1% 17 2.6%
Stage 2: > 30 DPD 2 3.6% 22 5.7% 1 4.4% 23 5.6% - 0.1% 25 4.2%
Stage 3((3)) 21 37.5% 71 18.1% 5 14.1% 76 17.8% 65 47.8% 162 26.3%
55 100% 391 100% 34 100% 425 100% 137 100% 617 100%
Coverage
Stage 1 0.02% 1.18% 1.06% 1.17% 0.44% 0.15%
Stage 2 - total 0.96% 26.85% 8.75% 22.75% 2.63% 6.51%
Stage 2: 0 DPD 0.97% 24.65% 8.14% 20.77% 2.64% 6.19%
Stage 2: < 30 DPD 0.63% 50.40% 33.63% 49.44% 0.81% 9.04%
Stage 2: > 30 DPD 1.14% 66.02% 58.73% 65.51% 2.05% 12.06%
Stage 3((3)) 3.61% 55.85% 77.76% 56.85% 23.98% 16.45%
0.10% 6.48% 5.20% 6.35% 1.55% 0.84%
Undrawn exposures
Stage 1 2,261 95.2% 10,818 98.2% 276 75.2% 11,094 97.5% 3,552 87.5% 16,907 94.9%
Stage 2 102 4.3% 172 1.6% 90 24.5% 262 2.3% 483 11.9% 847 4.8%
Stage 3 11 0.5% 22 0.2% 1 0.3% 23 0.2% 24 0.6% 58 0.3%
2,374 100.0% 11,012 100.0% 367 100.0% 11,379 100.0% 4,059 100.0% 17,812 100.0%
Risk management
Credit risk
Gross loans and advances ((1)) ECL and coverage (continued)
Unsecured
30 September 2023
Mortgages Cards Loans and Overdrafts Combined Business ((2)) Total((2))
£m % £m % £m % £m % £m % £m %
Stage 1 54,540 94.3% 4,658 76.5% 398 54.8% 5,056 74.2% 6,293 72.5% 65,889 89.9%
Stage 2 - total 2,704 4.7% 1,321 21.7% 321 44.3% 1,642 24.1% 1,980 22.8% 6,326 8.6%
Stage 2: 0 DPD 2,405 4.2% 1,250 20.5% 316 43.6% 1,566 23.0% 1,951 22.4% 5,922 8.1%
Stage 2: < 30 DPD 98 0.2% 37 0.6% 2 0.3% 39 0.6% 14 0.2% 151 0.2%
Stage 2: > 30 DPD 201 0.3% 34 0.6% 3 0.4% 37 0.5% 15 0.2% 253 0.3%
Stage 3((3)) 553 1.0% 109 1.8% 7 0.9% 116 1.7% 411 4.7% 1,080 1.5%
57,797 100% 6,088 100% 726 100% 6,814 100% 8,684 100% 73,295 100%
ECLs ((4))
Stage 1 13 22.6% 42 10.8% 4 12.1% 46 10.9% 30 22.6% 89 14.5%
Stage 2 - total 27 47.9% 294 74.9% 28 73.5% 322 74.8% 51 39.4% 400 64.7%
Stage 2: 0 DPD 23 42.0% 256 65.3% 25 67.1% 281 65.5% 51 39.2% 355 57.6%
Stage 2: < 30 DPD 1 1.3% 17 4.3% 1 1.9% 18 4.1% - 0.2% 19 3.0%
Stage 2: > 30 DPD 3 4.6% 21 5.3% 2 4.5% 23 5.2% - - 26 4.1%
Stage 3((3)) 17 29.5% 56 14.3% 5 14.4% 61 14.3% 50 38.0% 128 20.8%
57 100% 392 100% 37 100% 429 100% 131 100% 617 100%
Coverage
Stage 1 0.02% 0.98% 1.07% 0.99% 0.49% 0.13%
Stage 2 - total 0.99% 23.16% 8.16% 20.07% 2.66% 6.33%
Stage 2: 0 DPD 0.98% 21.31% 7.56% 18.38% 2.67% 6.02%
Stage 2: < 30 DPD 0.74% 48.66% 35.30% 47.94% 1.56% 12.19%
Stage 2: > 30 DPD 1.28% 64.90% 56.02% 64.16% 0.95% 10.38%
Stage 3((3)) 3.03% 54.15% 77.16% 55.57% 19.76% 13.93%
0.10% 6.88% 4.88% 6.65% 1.60% 0.84%
Undrawn exposures
Stage 1 2,560 95.4% 10,493 96.2% 280 82.1% 10,773 95.8% 3,453 84.7% 16,786 93.3%
Stage 2 114 4.2% 387 3.6% 60 17.6% 447 4.0% 597 14.7% 1,158 6.4%
Stage 3((3)) 11 0.4% 21 0.2% 1 0.3% 22 0.2% 23 0.6% 56 0.3%
2,685 100% 10,901 100% 341 100% 11,242 100% 4,073 100% 18,000 100%
(1) Excludes loans designated at FVTPL, balances due from customers on
acceptances, accrued interest and deferred and unamortised fee income.
(2) Business and total coverage ratio excludes the guaranteed element of
government-backed loans.
(3) Stage 3 includes purchased or originated credit impaired (POCI) for gross
loans and advances of £45m for Mortgages and £1m for Unsecured (30 September
2023: £48m and £1m respectively); and ECL of (£1m) for Mortgages and (£1m)
for Unsecured (30 September 2023: (£1m) and (£1m) respectively).
(4) Includes £4m ECL held for the undrawn exposures shown (30 September 2023:
£5m), of which £1m (30 September 2023: £1m) is held under Stage 1 and £3m
(30 September 2023: £4m) under Stage 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 points leading
to a financial asset being classed as Stage 2:
31 March 2024 Unsecured
Mortgages Cards((3)) Loans and overdrafts Combined Business Total
£m % £m % £m % £m % £m % £m %
PD deterioration 1,553 61% 537 52% 278 99% 815 63% 895 57% 3,263 60%
Forbearance 86 3% 17 2% 1 - 18 1% 262 17% 366 7%
AFD or Watch List ((1)) 1 - - - - - - - 398 25% 399 8%
> 30 DPD 171 7% 35 4% 2 1% 37 3% 13 1% 221 4%
Other ((2)) 728 29% 435 42% - - 435 33% - - 1,163 21%
2,539 100% 1,024 100% 281 100% 1,305 100% 1,568 100% 5,412 100%
ECLs
PD deterioration 12 46% 121 46% 24 94% 145 50% 16 38% 173 49%
Forbearance 8 33% 5 2% - - 5 2% 12 29% 25 7%
AFD or Watch List ((1)) - - - - - - - - 13 33% 13 4%
> 30 DPD 2 8% 22 9% 1 6% 23 8% - - 25 7%
Other ((2)) 3 13% 114 43% - - 114 40% - - 117 33%
25 100% 262 100% 25 100% 287 100% 41 100% 353 100%
30 September 2023 Unsecured
Mortgages Cards Loans and overdrafts Combined Business Tot
al
£m % £m % £m % £m % £m % £m %
PD deterioration 1,739 65% 777 59% 317 99% 1,094 67% 1,229 62% 4,062 64%
Forbearance 81 3% 16 1% 1 - 17 1% 281 14% 379 6%
AFD or Watch List ((1)) 1 - - - - - - - 455 23% 456 7%
> 30 DPD 201 7% 34 3% 3 1% 37 2% 15 1% 253 4%
Other ((2)) 682 25% 494 37% - - 494 30% - - 1,176 19%
2,704 100% 1,321 100% 321 100% 1,642 100% 1,980 100% 6,326 100%
ECLs
PD deterioration 18 67% 143 49% 26 93% 169 52% 23 45% 210 52%
Forbearance 3 11% 5 2% - - 5 2% 14 28% 22 6%
AFD or Watch List ((1)) - - - - - - - - 14 27% 14 4%
> 30 DPD 3 11% 21 7% 2 7% 23 7% - - 26 7%
Other ((2)) 3 11% 125 42% - - 125 39% - - 128 31%
27 100% 294 100% 28 100% 322 100% 51 100% 400 100%
(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 refers primarily to rules using additional credit reference agency data
as well as a number of smaller value drivers.
(3) During the period, changes to the credit card SICR model, that removed the
requirement for a two-month probation before accounts could return to Stage 1
from Stage 2 for non-forborne exposures, resulted in a reduced modelled ECL in
the credit cards portfolio by £31m.
Risk management
Credit risk
Credit risk exposure and ECL, by internal PD rating, by IFRS 9 stage
allocation
The distribution of the Group's credit exposures and ECL by internal PD rating
is analysed below:
Stage 1 Stage 2 Stage 3((1)) Total
31 March 2024 Lending ECL Lending £m ECL Lending £m ECL Lending £m ECL
£m £m £m £m £m
Mortgages PD range
Strong 0 - 0.74 52,314 5 1,423 2 - - 53,737 7
Good 0.75 - 2.49 1,191 2 435 3 - - 1,626 5
Satisfactory 2.50 - 99.99 323 2 681 20 - - 1,004 22
Default 100 - - - - 574 21 574 21
Total 53,828 9 2,539 25 574 21 56,941 55
Unsecured
Strong 0 - 2.49 4,639 33 20 2 - - 4,659 35
Good 2.50 - 9.99 967 28 798 115 - - 1,765 143
Satisfactory 10.00 - 99.99 4 1 487 170 - - 491 171
Default 100 - - - - 138 76 138 76
Total 5,610 62 1,305 287 138 76 7,053 425
Business
Strong 0 - 0.74 2,317 2 101 - - - 2,418 2
Good 0.75 - 9.99 4,895 28 1,213 22 - - 6,108 50
Satisfactory 10.00 - 99.99 35 1 254 19 - - 289 20
Default 100 - - - - 452 65 452 65
Total 7,247 31 1,568 41 452 65 9,267 137
Stage 1 Stage 2 Stage 3((1)) Total
30 September 2023 Lending £m ECL Lending £m ECL Lending £m ECL Lending £m ECL
£m £m £m £m
Mortgages PD range
Strong 0 - 0.74 52,612 8 1,355 2 - - 53,967 10
Good 0.75 - 2.49 1,540 2 553 3 - - 2,093 5
Satisfactory 2.50 - 99.99 388 3 796 22 - - 1,184 25
Default 100 - - - - 553 17 553 17
Total 54,540 13 2,704 27 553 17 57,797 57
Unsecured
Strong 0 - 2.49 4,443 29 123 12 - - 4,566 41
Good 2.50 - 9.99 607 16 1,063 148 - - 1,670 164
Satisfactory 10.00 - 99.99 6 1 456 162 - - 462 163
Default 100 - - - - 116 61 116 61
Total 5,056 46 1,642 322 116 61 6,814 429
Business
Strong 0 - 0.74 1,860 2 158 - - - 2,018 2
Good 0.75 - 9.99 4,360 27 1,441 30 - - 5,801 57
Satisfactory 10.00 - 99.99 73 1 381 21 - - 454 22
Default 100 - - - - 411 50 411 50
Total 6,293 30 1,980 51 411 50 8,684 131
(1) Stage 3 includes POCI for gross lending of £45m for Mortgages and £1m for
Unsecured (30 September 2023: £48m and £1m respectively); and ECL of (£1m)
for Mortgages and (£1m) for Unsecured (30 September 2023: (£1m) and (£1m)
respectively).
In terms of the credit quality of the loan commitments and financial guarantee
contracts, at least 97% is classified as either 'Good' or 'Strong' under the
Group's internal PD rating scale with the overall portfolio at 96% (30
September 2023: 96%) and the level of default remaining low.
The improvements to the profile of the PD groupings has been predominantly
driven by the updates to MES received during the period, rather than
underlying customer rating changes.
Risk management
Credit risk
IFRS 9 staging
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 2024 Stage 1 Stage 2 Stage 3((1)) Total gross loans Total provisions
£m £m
Gross ecl Gross ecl Gross ecl Income statement £m
loans £m loans £m loans £m
£m £m £m
Opening balance at 1 October 2023 65,889 89 6,326 400 1,080 128 73,295 617
Transfers from Stage 1 to Stage 2 (3,295) (20) 3,294 177 - - (1) 157 157
Transfers from Stage 2 to Stage 1 3,086 24 (3,129) (142) - - (43) (118) (118)
Transfers to Stage 3 (43) - (348) (73) 394 88 3 15 15
Transfers from Stage 3 33 1 75 7 (114) (6) (6) 2 2
Net movement (219) 5 (108) (31) 280 82 (47) 56 56
New assets originated or purchased ((2)) 10,235 49 329 26 122 21 10,686 96 96
Repayments and other movements ((3)) (1,383) (2) (359) (3) 88 3 (1,654) (2) (2)
Repaid or derecognised ((3)) (7,837) (39) (776) (39) (288) (86) (8,901) (164) (164)
Write-offs - - - - (118) (118) (118) (118) -
Cash recoveries - - - - - 25 - 25 -
Individually assessed impairment charge - - - - - 107 - 107 107
Closing balance at 31 March 2024 66,685 102 5,412 353 1,164 162 73,261 617 93
12 months to 30 September 2023 Stage 1 Stage 2 Stage 3((1)) Total gross loans Total provisions
£m £m
Gross ecl Gross ecl Gross ecl Income statement £m
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 (8,561) (46) 8,535 414 - - (26) 368 368
Transfers from Stage 2 to Stage 1 6,077 16 (6,125) (129) - - (48) (113) (113)
Transfers to Stage 3 (96) - (586) (109) 686 138 4 29 29
Transfers from Stage 3 121 - 134 8 (266) (10) (11) (2) (2)
Net movement (2,459) (30) 1,958 184 420 128 (81) 282 282
New assets originated or purchased ((2)) 20,489 57 629 44 161 34 21,279 135 135
Repayments and other movements ((3)) (2,990) 12 (558) (22) 140 (4) (3,408) (14) (14)
Repaid or derecognised ((3)) (15,536) (35) (1,428) (74) (490) (127) (17,454) (236) (236)
Write-offs - - - - (187) (187) (187) (187) -
Cash recoveries - - - - - 38 - 38 -
Individually assessed impairment charge - - - - - 142 - 142 142
Closing balance at 30 September 2023 65,889 89 6,326 400 1,080 128 73,295 617 309
(1) Stage 3 includes POCI for gross loans and advances of £45m for Mortgages and
£1m for Unsecured (30 September 2023: £48m and £1m respectively), and ECL
of (£1m) for Mortgages and (£1m) for Unsecured (30 September 2023: (£1m)
and (£1m) respectively). Nil for Business in both periods.
(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.
The IFRS 9 staging movements are driven by a variety of factors at individual
product portfolio levels, with further detail provided in the following
portfolio performance pages. Overall, the portfolio movements across staging
are consistent with the prior period with gross flows in and out of Stage 2
the predominant movement. The level of write offs in the 6 month period is
trending higher than the full year outcome of the prior period and has been
primarily driven from the credit card portfolio, in addition to a small number
of individually significant business write offs. 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
£2.4m (30 September 2023: £5.1m). The Group has not purchased any lending
assets in the period (30 September 2023: 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 2024 £m £m £m £m £m % %
Residential - capital repayment 34,274 9 3 12 34,262 0.04% 56.2%
Residential - interest only 7,587 8 1 9 7,578 0.12% 49.2%
Buy-to-let (BTL) 15,080 8 26 34 15,046 0.22% 54.9%
Total Mortgage portfolio 56,941 25 30 55 56,886 0.10% 53.6%
30 September 2023
Residential - capital repayment 35,085 10 5 15 35,070 0.04% 54.2%
Residential - interest only 7,503 8 1 9 7,494 0.12% 47.0%
BTL 15,209 7 26 33 15,176 0.21% 52.8%
Total Mortgage portfolio 57,797 25 32 57 57,740 0.10% 52.9%
Mortgage lending reduced in the period on a net basis to £56.9bn (30
September 2023: £57.8bn) with lower demand for new lending owing to the
higher rate environment, stressed affordability pressure and wider cost of
living considerations, being outpaced by repayments and redemptions.
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 2023: 98%), and 95% of loans held in Stage 1 (30 September 2023:
94%). A significant proportion of the portfolio is rated Strong or Good at the
balance sheet date under the Group's internal PD rating scale (97%),
consistent with 30 September 2023: 97%.
Stage 3 balances have remained consistently low at 1.0% (30 September 2023:
1.0%) and 86% of the portfolio has an LTV of less than 75% (30 September 2023:
91%), with the weighted average LTV relatively stable in the period to 53.6%
(30 September 2023: 52.9%).
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 below.
Mortgage portfolio - interest rate profile
31 March 2024 30 September 2023
£m % £m %
Fixed rate 51,817 91.0% 52,841 91.5%
Variable rate 4,159 7.3% 3,081 5.3%
Standard variable rate (SVR) 965 1.7% 1,875 3.2%
Total 56,941 100.0% 57,797 100.0%
The Group is a signatory to the government mortgage charter announced by the
chancellor of the exchequer on 23 June 2023, to support regulated residential
mortgage borrowers impacted by higher mortgage interest rates, in particular
borrowers whose existing fixed rate deal is due to end in the immediate
future.
During the period there has been a shift and increase in the volume of
customers opening tracker mortgages as customers monitor the interest rate
movements. The increase in interest rates has also driven a reduction in the
volume of customers on the SVR.
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 2024 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% 20,218 38% 2 1,395 55% 3 264 46% 3 21,877 38% 8
50% to 75% 26,218 49% 4 980 39% 11 214 37% 5 27,412 48% 20
76% to 80% 3,297 6% 1 78 3% 1 33 6% 2 3,408 6% 4
81% to 85% 1,939 4% 1 38 1% 1 18 3% 2 1,995 4% 4
86% to 90% 1,362 2% - 26 1% - 15 3% 1 1,403 3% 1
91% to 95% 706 1% - 15 1% 1 4 1% 1 725 1% 2
96% to 100% 53 - - 3 - 1 6 1% 1 62 - 2
Greater than 100% 35 - 1 4 - 7 20 3% 6 59 - 14
53,828 100% 9 2,539 100% 25 574 100% 21 56,941 100% 55
30 September 2023 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% 22,680 42% 4 1,551 58% 5 282 50% 2 24,513 42% 11
50% to 75% 26,913 49% 6 1,009 37% 14 203 37% 4 28,125 49% 24
76% to 80% 2,270 4% 1 81 3% 2 22 4% 1 2,373 4% 4
81% to 85% 1,408 3% 1 33 1% 1 13 2% 1 1,454 3% 3
86% to 90% 992 2% - 23 1% - 9 2% 1 1,024 2% 1
91% to 95% 236 - - 3 - - 11 2% 1 250 - 1
96% to 100% 8 - - 2 - 1 3 1% - 13 - 1
Greater than 100% 33 - 1 2 - 4 10 2% 7 45 - 12
54,540 100% 13 2,704 100% 27 553 100% 17 57,797 100% 57
(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 £45m (30 September 2023: £48m) of POCI gross loans and
advances and (£1m) ECL (30 September 2023: (£1m)).
The Mortgage portfolio remains highly secured with 86% of mortgages, by loan
value, having an indexed LTV of less than 75% (30 September 2023: 91.1%), and
an average portfolio LTV of 53.6% (30 September 2023: 52.9%). A new 2 year
fixed 95% product and increased lending to first time buyers in the period has
driven the higher value of lending in the 91% to 95% range. The total
portfolio has reduced by 1.5% with the highest reduction by proportion in
Stage 2 and value in Stage 1.
Forbearance
The volume and value of loans in forbearance has changed in the period to
3,743/£513m from 3,801/£498m at 30 September 2023, indicating that this is
still a primary measure of early intervention and support that customers use
to find breathing space and make good choices towards the most favourable
outcome.
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 2024, there were 35
repossessions (12 months to 30 September 2023: 55). The Group remains
committed to supporting the customer and places good customer outcomes at the
centre of this strategy.
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.
Stage 1 Stage 2 Stage 3((1))
6 months to 31 March 2024 Gross ecl Gross ecl Gross ecl Total Total provisions Income statement £m
loans £m loans £m loans £m gross £m
£m £m £m loans
£m
Opening balance at 1 October 2023 54,540 13 2,704 27 553 17 57,797 57
Transfers from Stage 1 to Stage 2 (1,937) (1) 1,927 17 - - (10) 16 16
Transfers from Stage 2 to Stage 1 1,738 2 (1,749) (20) - - (11) (18) (18)
Transfers to Stage 3 (21) - (155) (3) 175 4 (1) 1 1
Transfers from Stage 3 31 1 50 7 (84) (2) (3) 6 6
Net movement (189) 2 73 1 91 2 (25) 5 5
New assets originated or purchased ((2)) 2,838 1 - - 1 - 2,839 1 1
Repayments and other movements ((3)) (1,127) (6) (49) - (6) 10 (1,182) 4 4
Repaid or derecognised ((3)) (2,234) (1) (189) (3) (64) (3) (2,487) (7) (7)
Write-offs - - - - (1) (1) (1) (1) -
Individually assessed impairment charge - - - - - (4) - (4) (4)
Closing balance at 31 March 2024 53,828 9 2,539 25 574 21 56,941 55 (1)
of which:
Residential - capital repayment 32,658 2 1,343 3 273 7 34,274 12
Residential - interest only 6,773 1 616 1 198 7 7,587 9
BTL 14,397 6 580 21 103 7 15,080 34
Stage 1 Stage 2 Stage 3((1))
12 months to 30 September 2023 Gross ecl Gross ecl Gross ecl Total Total provisions Income statement
loans £m loans £m loans £m gross £m £m
£m £m £m loans
£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 (5,237) (3) 5,203 63 - - (34) 60 60
Transfers from Stage 2 to Stage 1 4,827 1 (4,852) (49) - - (25) (48) (48)
Transfers to Stage 3 (58) - (273) (5) 328 7 (3) 2 2
Transfers from Stage 3 112 - 104 7 (222) (3) (6) 4 4
Net movement (356) (2) 182 16 106 4 (68) 18 18
New assets originated or purchased ((2)) 8,372 2 - - - - 8,372 2 2
Repayments and other movements ((3)) (2,366) 4 (99) (15) (9) 3 (2,474) (8) (8)
Repaid or derecognised ((3)) (5,901) (1) (469) (6) (126) (3) (6,496) (10) (10)
Write-offs - - - - (1) (1) (1) (1) -
Individually assessed impairment charge - - - - - - - - -
Closing balance at 30 September 2023 54,540 13 2,704 27 553 17 57,797 57 2
of which:
Residential - capital repayment 33,328 3 1,489 6 268 6 35,085 15
Residential - interest only 6,651 1 657 2 195 6 7,503 9
BTL 14,561 9 558 19 90 5 15,209 33
(1) Stage 3 includes POCI for gross loans and advances of £45m and ECL of (£1m)
(30 September 2023: £48m 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.
Risk management
Credit risk
Mortgage credit performance (continued)
The Mortgage portfolio continues to evidence strong performance with levels of
delinquency and impairment remaining relatively low.
The level of mortgage lending classed as Stage 1 increased to 94.5% (30
September 2023: 94.3%), with a decrease in assets in Stage 2 from 4.7% to
4.5%. Within the Stage 2 category, 88% is not yet past due at the balance
sheet date (30 September 2023: 89%). The proportion of mortgages classified as
Stage 3 remains modest at 1.0% (30 September 2023: 1.0%). The net movements
across the stages show reductions, primarily in the Stage 2 and 3 portfolios,
driven by a wide variety of factors, but broadly they are all successful
outcomes in either restoring customers to fully performing or resuming
satisfactory repayment schedules, as the Group is committed to the delivery of
good customer outcomes.
The sustained quality in the internal PD ratings and high quality of
collateral underpinning the book are key factors in an impairment release of
£1m in the period (12 months to 30 September 2023: charge of £2m, 6 months
to 31 March 2023: charge of £3m) and associated CoR of nil bps (12 months to
30 September 2023: nil bps, 6 months to 31 March 2023: 1bps). Provision
coverage has remained stable in the period at 10bps (30 September 2023:
10bps).
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 ECL MA Total ECL Net lending Coverage
31 March 2024 £m £m £m £m £m %
Credit cards 6,427 354 37 391 6,036 6.48%
Personal loans 601 29 1 30 571 4.91%
Overdrafts 25 4 - 4 21 11.34%
Total Unsecured lending portfolio 7,053 387 38 425 6,628 6.35%
30 September 2023
Credit cards 6,088 364 28 392 5,696 6.88%
Personal loans 699 32 1 33 666 4.59%
Overdrafts 27 4 - 4 23 11.62%
Total Unsecured lending portfolio 6,814 400 29 429 6,385 6.65%
Unsecured gross lending balances increased to £7.1bn (30 September 2023:
£6.8bn) 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 97.1% of the portfolio in Stage 1 or Stage 2 not past due (30
September 2023: 97.2%).
During the period, the Group reviewed the existing staging approach for credit
cards in the Unsecured portfolio which focused on the triggers that move
exposures from Stage 1 (requiring a 12-month ECL calculation) to Stage 2
(requiring a lifetime ECL calculation) and removed the requirement for a
two-month probation period before accounts could return to Stage 1 from Stage
2 for non-forborne exposures. This enables the recognition of improving
economic forecasts immediately in the same way deterioration is currently
recognised immediately following a MES refresh, and whilst this may increase
the volatility of IFRS stage migration, the impact is not expected to be
material. The overall impact of these changes has been to reduce the modelled
ECL in the Unsecured portfolio by £31m. This has been partially offset by the
ECL attributable to the credit card portfolio growth. In addition, the updated
macroeconomic scenarios drove a further reduction in modelled ECL of £8m.
A refreshed debt sale MA has been introduced to account for the deferral
period for the receipt of Cards debt sale proceeds. The total MA held for debt
sale increased by £8.7m to £37.6m.
Overall, coverage reduced slightly to 635bps (30 September 2023: 665bps),
driven by the reduction in modelled ECL.
The value of credit cards written off in the period, net of recoveries, was
£76m (12 months to 30 September 2023: £116m).
Risk management
Credit risk
Unsecured credit performance (continued)
Forbearance
The level of forbearance concessions agreed in the Unsecured portfolio,
particularly in credit cards, has increased in line with portfolio arrears,
driven by continued portfolio maturation, the Group's diversification strategy
and the wider economic environment, although remains relatively low at 1.76%
of total portfolio lending at 31 March 2024 (30 September 2023: 1.42%). The
level of impairment coverage on forborne lending has remained stable at 46%
(30 September 2023: 46%).
Credit cards forbearance totalled £112m (27,392 accounts), an increase from
the 30 September 2023 position of £90m (22,206 accounts) reflective of the
current environment. This represents 1.84% of total credit cards balances (30
September 2023: 1.56%).
Limited forbearance is exercised in relation to Personal loans and overdrafts,
and it remains relatively stable at £2m which equates to 0.46% of the
portfolio (30 September 2023: £2m, 0.51%).
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 provisions Income statement
£m £m
6 months to 31 March 2024 Gross ecl Gross ecl Gross ecl Total
loans £m loans £m loans £m gross
£m £m £m loans
£m
Opening balance at 1 October 2023 5,056 46 1,642 322 116 61 6,814 429
Transfers from Stage 1 to Stage 2 (767) (17) 781 148 - - 14 131 131
Transfers from Stage 2 to Stage 1 754 19 (785) (109) - - (31) (90) (90)
Transfers to Stage 3 (10) - (118) (67) 132 80 4 13 13
Transfers from Stage 3 - - - - (3) (3) (3) (3) (3)
Net movement (23) 2 (122) (28) 129 77 (16) 51 51
New assets originated or purchased ((2)) 646 6 - - 2 2 648 8 8
Repayments and other movements ((3)) 33 10 (189) - 103 (2) (53) 8 8
Repaid or derecognised ((3)) (102) (2) (26) (7) (103) (63) (231) (72) (72)
Write-offs - - - - (109) (109) (109) (109) -
Cash recoveries - - - - - 24 - 24 -
Individually assessed impairment charge - - - - - 86 - 86 86
Closing balance at 31 March 2024 5,610 62 1,305 287 138 76 7,053 425 81
12 months to 30 September 2023 Stage 1 Stage 2 Stage 3((1)) Total provisions
£m
Gross ecl Gross ecl Gross ecl Total Income statement
loans £m loans £m loans £m gross £m
£m £m £m loans
£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 (1,621) (39) 1,642 320 - - 21 281 281
Transfers from Stage 2 to Stage 1 590 13 (608) (69) - - (18) (56) (56)
Transfers to Stage 3 (15) - (179) (100) 200 121 6 21 21
Transfers from Stage 3 - - 1 - (5) (5) (4) (5) (5)
Net movement (1,046) (26) 856 151 195 116 5 241 241
New assets originated or purchased ((2)) 1,101 12 1 - 2 2 1,104 14 14
Repayments and other movements ((3)) (97) - (282) 2 152 (6) (227) (4) (4)
Repaid or derecognised ((3)) (226) (3) (42) (12) (152) (91) (420) (106) (106)
Write-offs - - - - (161) (161) (161) (161) -
Cash recoveries - - - - - 37 - 37 -
Individually assessed impairment charge - - - - - 124 - 124 124
Closing balance at 30 September 2023 5,056 46 1,642 322 116 61 6,814 429 269
(1) Stage 3 includes POCI for gross loans and advances of £1m and ECL of (£1m)
(30 September 2023: £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.
Risk management
Credit risk
Unsecured credit performance (continued)
The level of write offs in the Unsecured portfolio has increased slightly,
commensurate with a growing portfolio, with an increase in the volume of
credit card balances reaching 180 DPD the primary driver, although the level
of post write off recoveries remains good. The total ECL held on balance sheet
has decreased from £429m at 30 September 2023 to £425m at 31 March 2024 with
the improved economic outlook and the removal of the staging probation period
being the primary drivers. Modelled provision coverage alone is now 549bps (30
September 2023: 589bps).
The changes to the credit card SICR model that removed the requirement for a
two-month probation before accounts could return to Stage 1 from Stage 2 for
non-forborne exposures, is the primary driver of the increase in the balance
of Unsecured lending classed as Stage 1 to 79.5% (30 September 2023: 74.2%),
with a corresponding decrease in assets in Stage 2 from 24.1% to 18.5%. This
change was approved on the basis that it will enable the recognition of
improving economic forecasts immediately following a refresh, and whilst
account volatility may increase, the impact is not expected to be material.
Within the Stage 2 category, 94.6% is not yet past due (30 September 2023:
95.4%). The proportion classified as Stage 3 increased slightly to 2.0% (30
September 2023: 1.7%).
The total ECL provision held for the unsecured portfolio as at 31 March 2024
is £425m (30 September 2023: £429m), which in addition to a net write off
impairment charge of £86m, gives rise to a total impairment charge in the
period of £81m (12 months to 30 September 2023: £269m, 6 months to 31 March
2023: £126m) and associated CoR of 242bps (12 months to 30 September 2023:
430bps, 6 months to 31 March 2023: 410bps).
The total provision coverage has reduced to 635bps (30 September 2023:
665bps).
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 Total ECL Net lending Cover-age ((2))
31 March 2024 £m £m £m £m £m £m £m %
Agriculture 1,316 40 1,356 4 1 5 1,351 0.37%
Business services 1,172 185 1,357 42 3 45 1,312 3.66%
Commercial Real Estate 818 3 821 4 - 4 817 0.50%
Government, health & education 1,395 33 1,428 7 1 8 1,420 0.60%
Hospitality 849 53 902 3 1 4 898 0.44%
Manufacturing 699 65 764 15 2 17 747 2.39%
Resources 168 4 172 1 - 1 171 1.00%
Retail and wholesale trade 764 125 889 23 2 25 864 3.21%
Transport and storage 337 28 365 4 - 4 361 1.12%
Utilities, post and telecoms 513 9 522 6 1 7 515 1.29%
Other 569 122 691 15 2 17 674 2.74%
Total Business portfolio 8,600 667 9,267 124 13 137 9,130 1.55%
30 September 2023
Agriculture 1,315 46 1,361 4 1 5 1,356 0.35%
Business services 1,153 212 1,365 38 3 41 1,324 3.45%
Commercial Real Estate 715 4 719 5 1 6 713 0.72%
Government, health & education 1,200 38 1,238 9 2 11 1,227 0.85%
Hospitality 779 60 839 3 1 4 835 0.50%
Manufacturing 669 77 746 17 3 20 726 2.87%
Resources 160 5 165 2 - 2 163 1.65%
Retail and wholesale trade 758 145 903 19 2 21 882 2.72%
Transport and storage 290 32 322 4 - 4 318 1.47%
Utilities, post & telecoms 376 11 387 4 1 5 382 1.22%
Other 501 138 639 11 1 12 627 2.36%
Total Business portfolio 7,916 768 8,684 116 15 131 8,553 1.60%
(1) Government includes all lending provided to business customers under UK
Government schemes including Bounce back loan scheme (BBLS), Coronavirus
business interruption loan scheme (CBILS), Coronavirus large business
interruption loan scheme (CLBILS) and Recovery loan scheme (RLS). This
excludes £168m (30 September 2023: £143m) of guarantee claim funds received
from British Business Bank.
(2) Coverage ratio excludes the guaranteed element of government-backed loan
schemes.
Risk management
Credit risk
Business credit performance (continued)
Gross Business lending increased to £9.3bn (30 September 2023: £8.7bn). 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 stable with lending to the
agriculture, business services and government, health and education sectors
continuing to account for almost half of the total book, at 45% (30 September
2023: 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 however, a small number of individually
significant specific provisions have been recognised increasing the value of
IA held by £18m. 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, as
well as wider geopolitical risks. However, the updated economic outlook is
more favourable and the updated macroeconomic inputs have resulted in a £10m
release of modelled provision.
The proportion of loans in Stage 1 has increased from 72.5% at 30 September
2023 to 78.2% at 31 March 2024, with a corresponding decrease in the
proportion of loans in Stage 2 to 16.9% (30 September 2023: 22.8%). Within the
Stage 2 category, 98.5% is not past due (30 September 2023: 98.5%) and 92%
remain rated as 'Strong' or 'Good' (30 September 2023: 90%) under the Group's
internal PD rating scale. Stage 3 loans remain modest at 4.9% (30 September
2023: 4.7%).
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, based on 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
is treated as forborne.
All balances subject to forbearance are classed as either Stage 2 or Stage 3
for ECL purposes.
Business portfolio forbearance has remained relatively stable from £493m (291
customers) at 30 September 2023 to £521m (286 customers) at 31 March 2024.
As a percentage of the Business portfolio, forborne balances are 5.33% (30
September 2023: 5.35%) with impairment coverage increasing to 11.59% (30
September 2023: 9.14%), primarily due to specific provisions raised.
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((3)) Total Income statement
gross £m
loans
£m
6 months to 31 March 2024 Gross ecl Gross ecl Gross ecl Total provisions((3))
loans £m loans £m loans £m £m
£m £m £m
Opening balance at 1 October 2023 6,293 30 1,980 51 411 50 8,684 131
Transfers from Stage 1 to Stage 2 (591) (2) 587 11 - - (4) 9 9
Transfers from Stage 2 to Stage 1 594 3 (595) (13) - - (1) (10) (10)
Transfers to Stage 3 (12) - (75) (4) 87 4 - - -
Transfers from Stage 3 1 - 24 - (28) (1) (3) (1) (1)
Net movement (8) 1 (59) (6) 59 3 (8) (2) (2)
New assets originated or purchased ((1)) 6,752 43 329 26 120 19 7,201 88 88
Repayments and other movements ((2)) (289) (7) (121) - (9) (6) (419) (13) (13)
Repaid or derecognised ((2)) (5,501) (36) (561) (30) (121) (20) (6,183) (86) (86)
Write-offs - - - - (8) (8) (8) (8) -
Cash recoveries - - - - - 1 - 1 -
Individually assessed impairment charge - - - - - 26 - 26 26
Closing balance at 31 March 2024 7,247 31 1,568 41 452 65 9,267 137 13
12 months to 30 September 2023 Stage 1 Stage 2 Stage 3((3)) Total provisions((3)) Income statement
£m £m
Gross ecl Gross ecl Gross ecl Total
loans £m loans £m loans £m gross
£m £m £m loans
£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 (1,703) (4) 1,689 31 - - (14) 27 27
Transfers from Stage 2 to Stage 1 659 1 (666) (11) - - (7) (10) (10)
Transfers to Stage 3 (23) - (134) (4) 158 10 1 6 6
Transfers from Stage 3 8 - 30 - (40) (2) (2) (2) (2)
Net movement (1,059) (3) 919 16 118 8 (22) 21 21
New assets originated or purchased ((1)) 11,017 43 627 44 159 32 11,803 119 119
Repayments and other movements ((2)) (526) 8 (174) (8) (1) (1) (701) (1) (1)
Repaid or derecognised ((2)) (9,409) (30) (918) (56) (213) (33) (10,540) (119) (119)
Write-offs - - - - (25) (25) (25) (25) -
Cash recoveries - - - - - 1 - 1 -
Individually assessed impairment charge - - - - - 18 - 18 18
Closing balance at 30 September 2023 6,293 30 1,980 51 411 50 8,684 131 38
(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) This excludes £168m (30 September 2023: £143m) of guarantee claim funds
received from British Business Bank.
The updated MES is the primary driver of the £412m drop in the value of loans
in stage 2, with the majority migrating to stage 1 as a result of the improved
economic forecasts. The proportion of loans in stage 2 and not past due
remains high at 98.5% (30 September 2023: 98.5%). The level of write offs in
the portfolio remains low, with a small number of connections driving the
majority of the £8m of balances written off in the period. The level of
provision recognition in the period has also remained subdued on a volume
basis, with a small number of individually significant provisions driving the
majority of the IA charge in the period. The level of Business lending classed
as Stage 1 increased to 78.2% (30 September 2023: 72.5%), with a corresponding
decrease in Stage 2 from 22.8% at 30 September 2023 to 16.9% at 31 March 2024.
The majority of the balances in Stage 2 (98.5%) are not past due and are
primarily in Stage 2 due to PD deterioration since origination, however, there
have been some PD improvements in the period, in addition to proactive
management measures such as early intervention, heightened monitoring and
forbearance concessions. Stage 3 loans have remained relatively stable at 4.9%
(30 September 2023: 4.7%) and are predominantly comprised of Bounce Back
Loans.
Risk management
Credit risk
Business credit performance (continued)
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
drivers or the emergence of arrears or defaults. The proportion of assets
classed as 'Strong' has increased to 26% (30 September 2023: 23%), with assets
classed as 'Strong' or 'Good' also improving to 92% (30 September 2023: 90%).
The specific provisions held on balance sheet have increased to £43m (30
September 2023: £25m) primarily due to a small number of individually
significant provisions recognised in the period. This results in an overall
provision of £137m (30 September 2023: £131m) and an impairment charge of
£13m in the period (12 months to 30 September 2023: £38m, 6 months to 31
March 2023: £15m) and associated CoR of 30bps (12 months to 30 September
2023: 44bps, 6 months to 31 March 2023: 34bps).
Overall, portfolio coverage remains prudent at 155ps (30 September 2023:
160bps).
Macroeconomic assumptions, scenarios and weightings
The Group's ECL allowance at 31 March 2024 was £617m (30 September 2023:
£617m).
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 2024 and changes in macroeconomic assumptions between
then and 31 March 2024 have been considered in concluding on the quantum of
the MAs. The Group has identified the following key macroeconomic drivers as
the most significant inputs for IFRS 9 modelling purposes: 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.
Weak economic data in December saw the UK economy fall into a mild recession,
however a strong start to the year has recovered any ground lost as a
result. Inflation has continued to fall back towards the BoE's long term
target rate of 2%, which supports the expectation that the Bank's Monetary
Policy Committee will begin cutting the bank base rate, from the current 16
year high of 5.25%, in Q2 2024. The unemployment outlook has also improved
following the release of revised LFS data by the Office of National Statistics
in February.
Against this backdrop the Group has assessed the available IFRS 9 scenarios
for inclusion in the macroeconomic models. The selection of scenarios and
the appropriate weightings applied to each of those scenarios are considered,
debated and decided by the Asset and Liability Committee (ALCO) and the Audit
Committee. The three scenarios selected and the weights applied have been
maintained as follows:
Scenario 31 Mar 2024 30 Sept 2023
(%) (%)
Upside 10 10
Base 55 55
Downside 35 35
The Group continue to select three scenarios, with the largest weighting
applied to the base scenario. The decision to maintain the choice of
scenarios, and the weightings applied to each of those scenarios, is a
reflection of the relatively stable progression across recent forecasts since
the September 2023 update.
Risk management
Credit risk
Macroeconomic assumptions (continued)
The key macroeconomic assumptions used in the scenarios in the period
are((1)):
( )
Base (55%) Upside (10%) Downside (35%)
GDP · Negative growth in Q1 2024 is followed by accelerated growth from · Despite a contraction of 0.2% in Q1 2024, year on year growth · The mild recession from Q4 2023 to Q1 2024 becomes a deep
H2 2024, exceeding 2% towards the end of 2025 reaches 2.1% in 2024 recession, with GDP contracting by 2.1% in 2024
· Overall year on year growth is forecast at 0.4% in 2024, followed · Year on year growth accelerates in 2025 to 3.8% before slowing in · The recession ends in Q3 2025 with growth of 0.8% in the quarter,
by 1.8% in 2025 the outer years but the average for the year remains negative at 0.5%
· Growth peaks at 2.2% in Q1 2026 before falling back to a long run · Growth of 2.8% in 2026 is followed by 2.2% in 2027 before · Productivity stabilises from that point on sees growth of 1.5% in
average on 1.5% by the end of 2029 levelling out at 1.6% in 2028 2026, 1.6% in 2027 and 1.8% in 2028
Inflation · Inflation continues to fall quickly, dropping below the BoE's 2% · Inflation continues to fall rapidly to a low of 1.9% in Q2 2024 · Inflation falls rapidly, dropping to just above 0% in Q1 2025
target in Q2 2024 before rising again, leading to an average of 2.6% for the year before increasing steadily back to the BoE's target rate of 2% by Q2 2027
· Having hit a low of 1.6% the rate slowly increases to a high of · The rate continues to rise until Q3 2025, peaking at 3.4%, with · This is reflected in the average annual rates, with inflation of
2.3% by the end of 2025 before falling back to 2% by the end of 2028 an average of 3.3% for the year 1.4% in 2024, 0.6% in 2025 and 1.6% in 2026 before stabilising at 2.0% in 2027
· Inflation then falls back, with averages of 2.7% in 2026, 2.2% in
2027 and 2.1% in 2028
Base rate · The BoE base rate begins to fall from the current high of 5.25% · Two 25bp rate increases sees the BoE base rate peak at 5.75% in · As with the base case, the BoE base rate begins to fall from the
in Q2 2024 Q3 2024, where it remains through Q1 2025 current high of 5.25% in Q2 2024
· The rate falls steadily at around 25bps per quarter to a low of · The rate falls consistently from Q2 2025 through to Q3 2028 when · The rate is cut at an accelerated rate, through to Q1 2027 where
2.0% in 2027 the rate levels out at 2.5% it stabilises at 1.5%
· Overall the average rate drops from 4.7% in 2024 to 3.0% in 2025
and 2.0% in 2026
HPI · HPI falls throughout 2024, albeit at a lower rate than previously · Following a quarter on quarter fall in the HPI in Q1 2024 the · Starting from a fall of 0.8% in Q1 2024, v Q1 2023, HPI falls
forecast index value increases throughout the remainder of the forecast rapidly to -7.7% in Q4 2024 v Q4 2023
· Q4 v Q4 in 2024 sees a contraction of 1.3% · Overall Q4 v Q4 growth in 2024 is broadly flat at 0.2% · The index continues to fall until Q1 2027 at which point it
begins to increase, but at the end of the 5 year horizon it remains well below
· Growth returns from Q1 2025, with Q4 v Q4 growth 2.6% followed by · Growth accelerates to 4.9% in 2025 and 6.7% in 2026 before the levels seen at the start of the forecast
4.4% in both 2026 and 2027, before easing to 3.4% in 2028 falling back to 5.1% in 2027 and 3.3% in 2028
· Overall Q4 v Q4 comparison sees negative growth of 2.9% in 2025
and 0.7% in 2026, before positive growth of 3.5% in 2027 and 3.8% in 2028
(1) The time periods referenced in this section relate to calendar years
unless otherwise stated.
(
)
Risk management
Credit risk
Macroeconomic assumptions (continued)
Base (55%) Upside (10%) Downside (35%)
Unemployment · Following the revision to LFS data, unemployment peaks at 4.1% in · Unemployment peaks below 4% in Q1 2024 before falling to a low of · Unemployment increases steadily from a low of 3.9% in Q1 2024 to
Q3 2024 3.6% in Q3 2025 a peak of 6.9% in Q1 2027
· The rate remains at that level until Q2 2025 when in gradually · Although the rate rises slightly in the outer years the annual · Having peaked the rate slowly falls back to 6.6% by the end of
begins to fall to a new long run average of 3.8% average for 2026 through to 2028 remains at 3.6% 2028
Five-year simple averages on unemployment, GDP and HPI
31 March 2024 Unemployment GDP HPI
% % %
Upside 3.7 2.5 4.0
Base 3.8 1.5 2.7
Downside 6.1 0.4 (0.8)
30 September 2023
Upside 3.9 2.2 1.3
Base 4.2 1.2 (0.2)
Downside 6.1 0.2 (3.3)
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 2024 Probability
Weighted((1)) Upside Base Downside
£m £m £m £m
Mortgages 24 22 23 28
Unsecured of which: 386 367 367 426
Cards 353 339((3)) 338 388
Personal loans and overdrafts((2)) 33 28 29 38
Business((2)) 81 74 77 92
Total 491 463 467 546
30 September 2023
Probability Upside Base Downside
Weighted((1)) £m £m £m
£m
Mortgages 20 17 18 24
Unsecured of which: 399 382 382 433
Cards 364 352((3)) 350 391
Personal loans and overdrafts((2)) 35 30 32 42
Business((2)) 91 81 86 107
Total 510 480 486 564
(1) In addition to the probability weighted modelled provision shown in the table,
the Group holds £81m relative to MAs and £44m of IA provision (30 September
2023: £76m and £30m 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.
Risk management
Credit risk
The use of estimates (continued)
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 below.
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 2023 Annual Report and Accounts.
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 2024 30 Sept 2023
£m £m
A 10% movement in the mortgage portfolio from Stage 1 to Stage 2 +9 +13
A 10% movement in the credit card portfolio from Stage 1 to Stage 2 +114((1)) +89
A 10% movement in the business portfolio from Stage 1 to Stage 2 +12 +10
A PD stress which increases PDs upwards by 20% for all portfolios +132 +131
(1) The review of the staging approach for credit cards has increased the
proportion of lending in Stage 1 and is the primary driver of the increased
impact shown.
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.
MAs
At 31 March 2024, £81m of MAs (30 September 2023: £76m) are included within
the total ECL provision of £617m (30 September 2023: £617m).
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 use of judgement (continued)
The impact of these adjustments and how they impact the Group's total reported
ECL allowance and coverage ratio for each portfolio is:
31 March 2024((1))
Mortgages Unsecured Business Total
£m £m £m £m
ECL before adjustments (A) 24.6 387.4 124.2 536.2
Adjustments:
To address economic resilience 2.5 - - 2.5
Additional BTL impact 25.1 - - 25.1
Other credit card adjustments - 36.7 - 36.7
Other adjustments 2.8 0.9 12.8 16.5
Total adjustments (B) 30.4 37.6 12.8 80.8
Total reported ECL (A + B) 55.0 425.0 137.0 617.0
% of total ECL (B / total reported ECL) 55% 9% 9% 13%
Coverage - total 0.10% 6.35% 1.55% 0.84%
Coverage - total ex MAs 0.04% 5.49% 1.40% 0.73%
30 September 2023((1))
Mortgages Unsecured Business Total
£m £m £m £m
ECL before adjustments (A) 25.2 400.2 115.5 540.9
Adjustments:
To address economic resilience 5.0 - 15.0 20.0
Additional BTL impact 25.1 - - 25.1
Other credit card adjustments - 27.5 - 27.5
Other adjustments 1.7 1.3 0.5 3.5
Total adjustments (B) 31.8 28.8 15.5 76.1
Total reported ECL (A + B) 57.0 429.0 131.0 617.0
% of total ECL (B / total reported ECL) 56% 7% 12% 12%
Coverage - total 0.10% 6.65% 1.60% 0.84%
Coverage - total ex MAs 0.04% 5.87% 1.33% 0.74%
(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.
Mortgages
The selection of appropriate MAs is a major component in determining the
Group's ECL. Asset quality metrics for the BTL mortgage book remain robust,
but the Group continues to review the level of provisioning held for this
customer cohort, and has retained the £25m MA (30 September 2023: £25m) to
ensure the coverage on this portfolio remains higher than the coverage on the
residential portfolio and in line with peers. The improvements in the economic
outlook have resulted in the MA for economic uncertainty being reduced from
£5m to £3m. The Group no longer raise individually assessed provisions on
the mortgage portfolio and have implemented an updated valuation and
calculated provision process. A new MA has been introduced to reflect this new
policy within ECL calculations while upstream processes are adapted. This
together with other small MAs total £3m (30 September 2023: £2m), taking
total MAs held to £30m, down from £32m at 30 September 2023.
Risk management
Credit risk
Unsecured
The unsecured portfolio comprises credit cards, personal loans and overdrafts,
with credit cards the largest consideration for MAs. The refresh of the debt
sale adjustments has introduced a new debt sale MA of £11m to account for the
deferral period for the receipt of Cards debt sale proceeds from 12 to 18
months. Due to the time value of money, this will have an adverse impact on
recovery rates as recoveries from debt sale activities must be discounted.
This is not currently captured in the model, and so the ECL impact of the
increased Loss Given Defaults (LGDs), due to reduced recovery rates post
discounting, is held as an MA. There are 3 other separate MAs held for debt
sale, reflecting the difference between the updated contracts and the current
models.
Business
The £15m economic uncertainty MA, implemented in September 2023, has been
released. The economic forecasts have improved sufficiently that the
requirement for a non-targeted uncertainty MA has been removed.
Two new MAs have been introduced in the period, one of which being a £8m MA
relating to the LGD model. The current LGD implementation assumes a constant
discounting approach across all LGD segments. The new ECL calculator enables a
more granular segmentation which improves the accuracy of the calculation.
This MA will be held as until the implementation of the new calculator later
this financial year.
In addition, a new £5m MA has been introduced to better reflect origination
risk for some lending facilities where our platform has not retained
sufficient information to automatically ensure that loans are correctly
attributed to their origination date and origination ratings. This can result
in loans appearing in Stage 1 that have deteriorated since their true
origination. The new ECL calculator can identify loans which have an incorrect
origination date and rating and calculate the correct ECL for these loans
meaning the MA will be released when it is implemented.
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.
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 2024
Scenario VMUK weighting Economic measure ((2)) 2024 2025 2026 2027 2028
% % % % %
Upside 10% Base rate 5.6 5.5 4.5 3.5 2.6
Unemployment 3.9 3.7 3.6 3.6 3.6
GDP 2.1 3.8 2.8 2.2 1.6
Inflation 2.6 3.3 2.7 2.2 2.1
HPI 0.2 4.9 6.7 5.1 3.3
Base 55% Base rate 5.0 4.0 3.0 2.1 2.0
Unemployment 4.0 3.9 3.8 3.8 3.8
GDP 0.4 1.8 2.0 1.7 1.7
Inflation 2.1 2.1 2.2 2.1 2.1
HPI (1.3) 2.6 4.4 4.4 3.4
Downside 35% Base rate 4.7 3.0 2.0 1.5 1.5
Unemployment 4.6 5.7 6.6 6.8 6.6
GDP (2.1) (0.5) 1.5 1.6 1.8
Inflation 1.4 0.6 1.6 2.0 2.0
HPI (7.7) (2.9) (0.7) 3.5 3.8
Weighted average Base rate 4.9 3.8 2.8 2.0 1.9
Unemployment 4.2 4.5 4.7 4.8 4.7
GDP (0.3) 1.2 1.9 1.7 1.7
Inflation 1.9 1.7 2.1 2.1 2.0
HPI (3.4) 0.9 2.9 4.1 3.6
30 September 2023
Scenario VMUK weighting Economic measure ((2)) 2023 2024 2025 2026 2027
% % % % %
Upside 10% Base rate 4.8 6.5 6.0 5.0 4.0
Unemployment 4.2 4.1 3.9 3.8 3.7
GDP 0.8 3.0 2.6 3.0 1.6
Inflation 7.6 4.2 2.5 1.1 1.7
HPI (1.3) (4.8) (0.9) 6.6 7.0
Base 55% Base rate 4.7 5.4 4.5 3.5 2.5
Unemployment 4.2 4.5 4.3 3.9 3.9
GDP 0.5 0.4 1.5 2.3 1.5
Inflation 7.6 3.2 1.5 1.0 1.7
HPI (2.7) (7.2) (2.9) 4.6 7.1
Downside 35% Base rate 4.6 4.5 3.5 2.5 1.5
Unemployment 4.3 5.7 6.7 7.0 6.8
GDP (0.1) (3.3) 0.7 1.9 1.6
Inflation 7.4 1.7 0.4 0.7 1.7
HPI (4.7) (12.7) (7.6) 1.0 7.5
Weighted average Base rate 4.7 5.2 4.3 3.3 2.3
Unemployment 4.2 4.9 5.1 5.0 4.9
GDP 0.3 (0.6) 1.3 2.2 1.6
Inflation 7.5 2.8 1.2 0.9 1.7
HPI (3.3) (8.9) (4.4) 3.6 7.3
(1) Macroeconomic assumptions provided by Oxford Economics on 28 February 2024 and
reported on a calendar year basis unless otherwise stated. Any changes in
macroeconomic assumptions between this date and 31 March 2024 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 47
Capital risk 47
Regulatory capital developments 47
Capital resources 48 Regulatory capital 48
Regulatory capital flow of funds 49
Risk Weighted Assets 50 Minimum capital requirements 50
RWA movements 50
IFRS 9 transitional arrangements 51 IFRS 9 transitional arrangements 51
Capital requirements 51 Minimum requirements 51
MREL 52 MREL position 52
Dividend 52
Share buyback 53
Leverage 53 Leverage ratio 53
Funding and liquidity risk 54
Sources of funding 54 Sources of funding 54
Liquid assets 55 LCR 55
Liquid asset portfolio 55
Analysis of debt securities in issue by residual maturity 55
External credit ratings 56 External credit ratings 56
Net interest income 56 Net interest income 56
LIBOR replacement 57
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.
Internal ratings-based (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 will apply the relevant models after PRA
approval.
Ahead of the Group's implementation of mortgage IRB models (including hybrid
PD), a model adjustment has been applied to increase RWAs and expected losses
in advance of formal approval of models.
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
transition period. There are also amendments to IRB approaches, Credit
Valuation Adjustments, Credit Risk Mitigation rules and associated reporting
and disclosure requirements. The Group continues to expect some modest upside
to our capital position from Basel 3.1 implementation on day 1 (1 July 2025),
subject to regulatory approval. Since the publication of CP16/22, the PRA has
issued PS17/23 covering the 'near final' rules and policy on Operational Risk,
Counterparty Credit Risk, Credit Valuation Adjustment Risk and Market Risk in
December 2023 with the remaining elements of Credit Risk, Output Floor and
Reporting and Disclosure requirements to be published in Q2 2024. The Group
will implement the final Basel 3.1 policies from 1 July 2025 in line with the
PRA's prescribed timelines.
Pillar 2A
As part of its Basel 3.1 proposals, the PRA announced its intention to review
Pillar 2A methodologies after the rules on Basel 3.1 are finalised, with a
view to consult on any proposed changes in 2025. This review could have an
impact on the Group which will be assessed when the proposals are published.
In addition, the first part of the PRA's 'near-final' policy statement on
Basel 3.1 included the announcement of an off-cycle review of Pillar 2 capital
requirements ahead of day 1 with specific focus on 'double counts' and
're-basing' Pillar 2A and PRA buffer requirements.
Solvency Stress Test and Annual Cyclical Scenarios (ACS)
The Group completed the 2022 ACS exercise in Q2 FY23. The scenario tested
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 BoE published results in July 2023, with the Group
remaining significantly in excess of its reference rates on both a
transitional and non-transitional basis. In October 2023 the BoE confirmed
their intention to run a desk-based stress test exercise, rather than an ACS,
in 2024 and the Group is participating in this exercise as required.
Resolvability Assessment Framework
The BoE has introduced a Resolvability Assessment Framework to ensure major UK
banks can be safely resolved. The Group is required to submit an assessment
of its resolvability to the BoE biennially; the first assessment was submitted
in October 2021 with disclosures published in June 2022. The BoE concluded
that, upon their first assessment as resolution authority of the eight major
banks, a major UK bank could enter resolution safely, remaining open and
continuing to provide vital banking services to the economy. The Group has
submitted an updated self assessment to support their next public disclosure
in June 2024.
.
Risk management
Financial risk
Regulatory capital developments (continued)
Model Risk Management (MRM)
The PRA's policy on Model Risk Management Principles for Banks (Supervisory
Statement 1/23) came into effect on 17 May 2024. Before the effective date,
firms have been expected to conduct an initial self-assessment of their
implemented MRM frameworks against the policy and, where relevant, to prepare
remediation plans to address any identified shortcomings. The Group has
undertaken a programme of work to update the policies and frameworks to make
them compliant to the new regulations as well as the implementation of
improved capability for model inventory and approaches to model tiering and
classifications. Gaps with regards to the live practice of MRM principles have
been identified and will be addressed in accordance with the policy's
approach to remediation plans.
Capital resources
The Group's capital resources position as at 31 March 2024 is summarised
below:
31 Mar 2024 30 Sep 2023
Regulatory capital((1)) £m £m
Statutory total equity 5,659 5,607
CET1 capital: regulatory adjustments((2))
Other equity instruments (835) (594)
Defined benefit pension fund assets (331) (333)
Prudent valuation adjustment (6) (5)
Intangible assets (139) (162)
Goodwill (11) (11)
Deferred tax asset relying on future profitability (245) (261)
Cash flow hedge reserve (250) (496)
AT1 coupon accrual (18) (12)
Foreseeable dividend on ordinary shares (26) (27)
Excess expected losses (101) (103)
IFRS 9 transitional adjustments 38 112
Unconsolidated losses arising from JV (4) (4)
Total regulatory adjustments to CET1 (1,928) (1,896)
Total CET1 capital 3,731 3,711
AT1 capital
AT1 capital instruments 835 594
Total AT1 capital 835 594
Total Tier 1 capital 4,566 4,305
Tier 2 capital
Subordinated debt 773 1,022
Total Tier 2 capital 773 1,022
Total regulatory capital 5,339 5,327
(1) Data in the table is reported under CRD IV on a fully loaded basis with IFRS 9
transitional arrangements applied.
(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 2024 30 Sep 2023
Regulatory capital flow of funds((1)) £m £m
CET1 capital((2))
CET1 capital at 1 October 3,711 3,633
Share issuance 2 2
Share buyback (63) (99)
Retained earnings and other reserves (including special purpose entities) 145 (242)
Intangible assets 23 94
Deferred tax asset relying on future profitability 16 41
Defined benefit pension fund assets 2 317
Movement in AT1 foreseeable distributions (6) 1
Foreseeable dividend on ordinary shares (26) (27)
Excess expected losses 2 (3)
IFRS 9 transitional adjustments (74) (2)
Prudent valuation adjustment (1) -
Unconsolidated losses arising from JV - (4)
Total CET1 capital at 31 March 3,731 3,711
AT1 capital
AT1 capital at 1 October 594 666
AT1 instrument issued net of costs 346 -
AT1 instrument redeemed (105) (72)
Total AT1 capital at 31 March 835 594
Total Tier 1 capital at 31 March 4,566 4,305
Tier 2 capital
Tier 2 capital at 1 October 1,022 1,020
Capital instrument redeemed (250) -
Amortisation of issue costs 1 2
Total Tier 2 capital at 31 March 773 1,022
Total capital at 31 March 5,339 5,327
(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.
The Group's CET1 capital showed an increase of £20m during the period. The
Group reported a profit after tax of £236m which drove an overall increase in
retained earnings. The capital benefits of this increase were utilised to fund
AT1 distributions of £26m, a foreseeable dividend of £26m and share buyback.
In November 2023, a £150m share buyback programme was announced with £63m
returned to shareholders before the programme was formally cancelled on 2
April due to the potential cash acquisition of the Group by Nationwide. The
reduction in standardised IFRS 9 provisions recognised in the period, together
with a tapering of relief, reduced the IFRS 9 transitional adjustments by
£74m. Other main movements included reductions in the intangible assets
balance of £23m and in the deferred tax recognised on tax losses carried
forward of £16m, offset by £12m market driven movements in the reserves
balance for assets held at fair value.
In December 2023, the Group redeemed £250m of 7.875% Fixed Rate Reset
Callable Notes due 2028, held as Tier 2 capital. The Group also issued a new
£350m AT1 instrument and simultaneously tendered 42% of its £250m 9.25% AT1
instrument, first callable in June 2024 (note 4.1.2). The Group redeemed the
residual £144m 9.25% AT1 securities on their call date in June 2024.
Risk management
Financial risk
Risk weighted assets
31 March 2024 30 September 2023
Minimum capital requirements Exposure RWA Minimum capital requirements Exposure RWA Minimum capital requirements
£m £m £m £m £m £m
Retail mortgages 59,191 8,446 676 60,354 9,072 726
Business lending 13,192 7,903 632 12,635 6,990 559
Other retail lending 17,926 4,969 397 17,586 4,819 385
Other lending 19,587 379 30 18,328 364 29
Other((1)) 609 694 55 592 674 54
Total credit risk 110,505 22,391 1,790 109,495 21,919 1,753
Credit valuation adjustment 198 16 278 22
Operational risk 2,833 227 2,833 227
Counterparty credit risk 159 13 146 12
Total 110,505 25,581 2,046 109,495 25,176 2,014
(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 2024 6 months to 30 September 2023
RWA movements IRB STD Non-credit risk Total Minimum capital requirement £m IRB STD Non-credit risk Total Minimum capital
RWA RWA RWA((2)) £m RWA RWA RWA((2)) £m requirement £m
£m £m £m £m £m £m
Opening RWA 15,476 6,443 3,257 25,176 2,014 15,528 6,171 3,004 24,703 1,976
Asset size 196 198 - 394 32 10 203 - 213 17
Asset quality 410 33 - 443 35 (1,153) 109 - (1,044) (83)
Model updates((1)) (383) - - (383) (31) 1,091 - - 1,091 87
Methodology and policy - - - - - - - - - -
Other - 18 (67) (49) (4) - (40) 253 213 17
Closing RWA 15,699 6,692 3,190 25,581 2,046 15,476 6,443 3,257 25,176 2,014
(1) Model updates include MAs.
(2) Non-credit risk RWA includes operational risk, credit valuation adjustment and
counterparty credit risk.
RWA increased c.£0.4bn to £25.6bn primarily due to increased lending in the
Retail unsecured and Business portfolios, and higher risk weights associated
with new business lending.
Updates to Hybrid model related MAs have reduced RWAs by £0.5bn in the
mortgage portfolio, while Business model MA updates have resulted in an RWA
increase of £0.1bn.
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 2024 (£m)
Available capital (amounts) IFRS 9 Transitional basis IFRS 9 Fully loaded basis
CET1 capital 3,731 3,693
Tier 1 capital 4,566 4,528
Total capital 5,339 5,301
RWA (amounts)
Total RWA 25,581 25,551
Capital ratios
CET1 (as a percentage of RWA) 14.6% 14.5%
Tier 1 (as a percentage of RWA) 17.8% 17.7%
Total capital (as a percentage of RWA) 20.9% 20.7%
Leverage ratio
Leverage ratio total exposure measure 85,720 85,682
UK leverage ratio 5.3% 5.3%
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. From 1 January 2025, the Group will no longer apply
transitional relief in respect of IFRS 9.
At 31 March 2024, £38m of IFRS 9 transitional adjustments (30 September 2023:
£112m) have been applied to the Group's capital position in accordance with
CRR, which is entirely comprised of dynamic relief (30 September 2023: £3m
static and £109m 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 2024
Minimum requirements CET1 Total capital
Pillar 1((1)) 4.5% 8.0%
Pillar 2A 1.9% 3.4%
Total capital requirement (TCR) 6.4% 11.4%
Capital conservation buffer 2.5% 2.5%
UK countercyclical capital buffer 2.0% 2.0%
Total (excluding PRA buffer)((2)) 10.9% 15.9%
(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 2024 the Group maintained CET1 capital in excess of
its maximum distributable amount requirements equal to 3.7% of RWAs
(equivalent to £939m).
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 TCR, which is the minimum requirement which must be met
at all times.
Risk management
Financial risk
Capital requirements (continued)
In November 2023 the PRA communicated an update to the Group's Pillar 2A
requirement setting it as 3.41% of RWAs, of which 1.92% must be met with
CET1 capital (30 September 2023: 2.97% of which 1.67% had to be met with CET1
capital). Applying this updated requirement in March 2024 resulted in a modest
increase in total capital requirements of £113m and CET1 requirements of
£63m. At 31 March 2024 this resulted in a TCR of 11.41% of RWAs (equivalent
to £2,919m) of which 6.4% must be met with CET1 capital (equivalent to
£1,642m).
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 the Group operates in. Currently this
reflects only the UK. As had been previously announced, the CCyB increased in
the prior year to 2% in July 2023 to align with its guidance for the CCyB rate
under standard risk conditions. The Financial Policy Committee 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.
The Group has been designated as an O-SII, but is not required to hold a
related capital buffer.
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:
31 Mar 2024 30 Sep 2023
£m £m
Total capital resources((1)(2)) 5,339 5,327
Eligible senior unsecured securities issued by Virgin Money UK PLC((2)) 3,333 2,707
Total MREL resources 8,672 8,034
RWA 25,581 25,176
Total MREL resources available as a percentage of RWA 33.9% 31.9%
UK leverage exposure measure 85,720 86,554
Total MREL resources available as a percentage of UK leverage exposure measure 10.1% 9.3%
(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 one year to
maturity.
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 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 LAC
requirement.
As at 31 March 2024, the Group's risk based LAC requirement of 27.3% of RWA
exposures (or 8.2% when expressed as a percentage of leverage) was greater
than the leverage based LAC requirement of 26.8% of RWAs, meaning the RWA
measure is the binding requirement.
MREL resources were £8.7bn (30 September 2023: £8.0bn) equivalent to 33.9%
of RWA exposures (30 September 2023: 31.9%) or 10.1% when expressed as a
percentage of leverage (30 September 2023: 9.3%). This provides prudent
headroom of £1.7bn or 6.6% above the LAC requirement of 27.3% of RWAs, or
2.0% above the LAC requirement of 8.2% when expressed as a percentage of
leverage exposures.
Dividend
Distributable reserves are determined as required by the Companies Act 2006 by
reference to a company's individual financial statements. At 31 March 2024,
the Company had accumulated distributable reserves of £1,130m (30 September
2023: £1,044m).
The Board has recommended an interim dividend for the financial year ending 30
September 2024 of 2p per share. The interim dividend is consistent with the
terms of the recommended cash acquisition of the Group by Nationwide and
should be considered alongside cash consideration of 218p per share which
together form the overall 220p per share value attributable to each
shareholder.
Risk management
Financial risk
Share buyback
On 2 August 2023 the Company announced a new share buyback to repurchase £50m
in aggregate of ordinary shares and CHESS Depositary Interests (CDIs) and
subsequently repurchased shares and CDIs in approximately equal proportions;
the buyback commenced on 2 August 2023 and ended on 22 November 2023.
On 23 November 2023 the Company announced a further share buyback with an
intent to repurchase another £150m in aggregate of shares and CDIs, ending no
later than 16 May 2024.
On 7 March 2024, the Company announced the suspension of the £150m buyback
programme due to the potential cash acquisition of the Group by Nationwide; at
the point of suspension, share repurchases of £63m had been completed. The
boards of directors of Nationwide and the Company have since agreed the terms
of the recommended cash acquisition and on 2 April 2024 the Company announced
the full cancellation of the remaining buyback programme.
Further details are disclosed in note 4.1.1.
Leverage
31 Mar 2024 30 Sep 2023
Leverage ratio £m £m
Total Tier 1 capital for the leverage ratio
Total CET1 capital 3,731 3,711
AT1 capital 835 594
Total Tier 1 capital 4,566 4,305
Exposures for the leverage ratio
Total assets 93,033 91,786
Adjustment for off-balance sheet items 2,962 2,999
Adjustment for derivative financial instruments 676 706
Adjustment for securities financing transactions 1,870 2,261
Adjustment for qualifying central bank claims (10,968) (9,052)
Regulatory deductions and other adjustments (1,853) (2,146)
UK leverage ratio exposure((1)) 85,720 86,554
UK leverage ratio((1)) 5.3% 5.0%
Average UK leverage ratio exposure((2)) 86,214 85,910
Average UK leverage ratio((2)) 5.1% 4.9%
(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 2024 to 31 March 2024).
The leverage ratio is monitored against a Board-approved Risk Appetite
Statement, with the responsibility for managing the ratio delegated to ALCO.
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 5.3% (30 September 2023: 5.0%) 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 2024:
31 Mar 2024 30 Sep 2023
£m £m
Total assets 93,033 91,786
Less: Other liabilities((1)) (2,488) (2,694)
Funding requirement 90,545 89,092
Funded by:
Customer deposits 68,663 66,827
Debt securities in issue 9,968 9,719
Due to other banks 6,255 6,939
of which:
Secured loans 5,116 6,291
Securities sold under agreements to repurchase 1,058 552
Transaction balances with other banks 23 19
Deposits with other banks 58 77
Equity 5,659 5,607
Total funding 90,545 89,092
(1) Other liabilities include derivatives, 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 2024, the Group had a funding requirement of
£90,545m (30 September 2023: £89,092m) 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 £68,663m (30 September 2023: £66,827m). Customer deposits comprise
interest-bearing deposits, term deposits and non‑interest-bearing demand
deposits from a range of sources including Personal and Business customers.
Debt securities in issue
Growth in customer deposits has been supported by an increase in debt
securities to £9,968m (30 September 2023: £9,719m). The wholesale funding
has been primarily driven by issuance from our medium-term note and
securitisation programmes.
Equity
Equity of £5,659m (30 September 2023: £5,607m) 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 condensed 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.
Average
LCR 31 Mar 2024 30 Sep 2023
£m £m
Eligible liquidity buffer 14,135 13,798
Net stress outflows 9,387 9,424
Surplus 4,748 4,374
LCR 151% 146%
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 liquid asset portfolio is primarily comprised of cash
at the BoE, UK Government securities (Gilts) and listed securities (e.g. bonds
issued by supra-nationals and AAA-rated covered bonds).
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 Interest rate risk in the banking book (IRRBB)
stress testing 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 the portfolio is controlled
and the exposure will not exceed internal appetite or the amount of capital
allocated.
31 Mar 2024 30 Sep 2023 Change Average at 31 Mar 2024 Average at
30 Sep 2023
Liquid asset portfolio((1)) £m £m % £m £m
Level 1
Cash and balances with central banks 10,857 8,940 21.4 9,553 9,604
UK Government treasury bills and gilts 1,228 1,655 (25.8) 1,378 1,182
Other debt securities 3,136 3,153 (0.5) 2,946 2,782
Total level 1 15,221 13,748 10.7 13,877 13,568
Level 2((2)) 512 471 8.7 448 327
Total LCR eligible assets 15,733 14,219 10.6 14,325 13,895
(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 12-month average NSFR as at 31 March 2024 is 136% (30 September
2023: 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 2024 30 Sep 2023
£m £m £m £m £m
Covered bonds 43 9 3,831 - 3,883 4,415
Securitisation 72 153 1,834 - 2,059 1,740
Medium-term notes 736 13 2,555 - 3,304 2,612
Subordinated debt 7 1 714 - 722 952
Total debt securities in issue 858 176 8,934 - 9,968 9,719
Of which issued by Virgin Money UK PLC 743 14 3,269 - 4,026 3,564
Risk management
Financial risk
External credit ratings
The Group's long-term credit ratings are summarised below:
Outlook as at As at
31 Mar 2024((1)) 31 Mar 2024 30 Sep 2023
Virgin Money UK PLC
Moody's Positive Baa1 Baa1
Fitch Positive BBB+ BBB+
Standard & Poor's CreditWatch Positive BBB- BBB-
Clydesdale Bank PLC
Moody's((2)) Positive A3 A3
Fitch Positive A- A-
Standard & Poor's CreditWatch Positive A- A-
(1) For detailed background on the latest credit opinion by Standard & Poor's,
Fitch and Moody's, please refer to the respective rating agency website.
(2) Long-term deposit rating.
On 21 March 2024, Standard & Poor's placed the long- and short-term issuer
credit ratings of the Group on CreditWatch with positive implications. The
CreditWatch positive placement reflects the potential for Standard &
Poor's to upgrade the Group by up to two notches on completion of
Nationwide's acquisition of the Group, given the greater potential for support
from the parent, and that they expect to resolve the CreditWatch placement
upon completion of the acquisition.
On 22 March 2024, Moody's placed on review for upgrade Clydesdale Bank PLC B's
A3 long-term deposit and senior unsecured and Virgin Money UK PLC's Baa1
long-term issuer ratings. The ratings review reflects Moody's expectation that
upon the completion of the acquisition by Nationwide, the adjusted base line
credit assessment of the bank could benefit from potential support from its
new parent. It also reflects the potential benefit to senior creditors of the
Group if its liability structure converges with that of Nationwide, resulting
in lower loss-given failure. Moody's also note the uplift that could be
incorporated from a potential moderate likelihood of government support, in
case of need, due to the systemic importance of Nationwide.
On 6 June 2024, Fitch Ratings maintained Virgin Money UK PLC's long- and
short-term Issuer Default Ratings (IDRs) and debt ratings on Rating Watch
Positive pending the acquisition by Nationwide. At the same time, Fitch
affirmed the long-term IDR of Clydesdale Bank PLC at 'A-' and revised its
Outlook to Stable from Positive. The stabilisation of the Outlook on
Clydesdale Bank PLC's long-term IDR primarily reflects Fitch's updated lower
view of the profitability outlook compared to a year ago. The Outlook revision
also reflects potential strategy execution risks from the takeover by
Nationwide, with Fitch expecting to assign an 'a-' Shareholder Support Rating
to Virgin Money UK PLC and Clydesdale Bank PLC once the acquisition is
finalised.
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 2024 30 Sep 2023
£m £m
+25 basis point parallel shift 9 11
+100 basis point parallel shift 39 42
-25 basis point parallel shift (19) (11)
-100 basis point parallel shift (68) (45)
Risk management
Financial risk
Net interest income (continued)
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 rate pass on in line with
internal scenario specific pass on assumptions. Any rate reduction in a rate
fall scenario is subject to product floors with the assumption customer rates
would not go negative.
− Additional commercial pricing responses and management actions are
not included.
− While in practice hedging strategy would be reviewed in light of
changing market conditions, the sensitivities assume no changes over the
12-month period.
LIBOR replacement
All regulatory milestones in relation to LIBOR cessation have been met and
there are no conduct issues to note.
As at 31 March 2024 loans with an aggregate value of £0.8m (30 September
2023: £0.9m) with 6 customers (30 September 2023: 8 customers) remained on
three-month GBP synthetic LIBOR. This temporary reference rate ceased at the
end of March 2024 and the remaining loans will be transitioned to
alternative reference rates.
Post 31 March 2024, the Group holds no LIBOR exposure, in any currency, on the
balance sheet.
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 2024 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 2024 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
12 June 2024
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 2024 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
5.5. 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 2024 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 for 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
Edinburgh
12 June 2024
Financial statements
Interim condensed consolidated income statement
6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
(unaudited) (unaudited) (audited)
Note £m £m £m
Interest income 2,384 1,708 3,830
Other similar interest 2 2 3
Interest expense and similar charges (1,527) (858) (2,146)
Net interest income 2.1 859 852 1,687
Gains less losses on financial instruments at fair value (6) (14) (12)
Other operating income 70 76 152
Non-interest income 2.2 64 62 140
Total operating income 923 914 1,827
Operating and administrative expenses before impairment losses 2.3 (551) (534) (1,173)
Operating profit before impairment losses 372 380 654
Impairment losses on credit exposures (93) (144) (309)
Profit on ordinary activities before tax 279 236 345
Tax expense 2.4 (43) (56) (99)
Profit for the period 236 180 246
Attributable to:
Ordinary shareholders 210 152 192
Other equity holders 26 28 54
Profit for the period 236 180 246
Basic earnings per share (pence) 2.5 16.0 11.0 14.0
Diluted earnings per share (pence) 2.5 15.9 10.9 13.9
All material items dealt with in arriving at the profit before tax for the
periods relate to continuing activities.
The notes on pages 65 to 83 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 2024 31 Mar 2023 30 Sep 2023
(unaudited) (unaudited) (audited)
Note £m £m £m
Profit for the period 236 180 246
Items that may be reclassified to the income statement
Change in cash flow hedge reserve
Losses during the period 4.1.5 (303) (430) (268)
Transfers to the income statement 4.1.5 (37) (9) (12)
Taxation thereon - deferred tax credit 4.1.5 94 121 77
(246) (318) (203)
Change in FVOCI reserve
Losses during the period (16) (48) (49)
Transfers to the income statement - (1) (1)
Taxation thereon - deferred tax credit 4 14 14
(12) (35) (36)
Total items that may be reclassified to the income statement (258) (353) (239)
Items that will not be reclassified to the income statement
Change in defined benefit pension plan (89) (421) (544)
Taxation thereon - deferred tax credit 40 144 188
Taxation thereon - current tax credit 2 2 1
Total items that will not be reclassified to the income statement (47) (275) (355)
Other comprehensive losses, net of tax (305) (628) (594)
Total comprehensive losses for the period, net of tax (69) (448) (348)
Attributable to:
Ordinary shareholders (95) (476) (402)
Other equity holders 26 28 54
Total comprehensive losses attributable to equity holders (69) (448) (348)
The notes on pages 65 to 83 form an integral part of these interim condensed
consolidated financial statements.
Financial statements
Interim condensed consolidated balance sheet
31 Mar 2024 30 Sep 2023
(unaudited) (audited)
Note £m £m
Assets
Financial instruments 3.1
At amortised cost 3.1.1
Loans and advances to customers 3.1.1.1 72,344 72,191
Cash and balances with central banks 12,930 11,282
Due from other banks 592 667
At FVOCI 5,764 6,184
At FVTPL 3.1.2
Loans and advances to customers 3.1.2.1 57 59
Derivatives 3.1.2.2 44 135
Other 2 2
Intangible assets and goodwill 150 173
Deferred tax 2.4 266 193
Defined benefit pension assets 3.2 442 512
Other assets 442 388
Total assets 93,033 91,786
Liabilities
Financial instruments 3.1
At amortised cost 3.1.1
Customer deposits 68,663 66,827
Debt securities in issue 3.1.1.2 9,968 9,719
Due to other banks 3.1.1.3 6,255 6,939
At FVTPL 3.1.2
Derivatives 3.1.2.2 210 290
Deferred tax 2.4 111 179
Provisions for liabilities and charges 3.3 61 69
Other liabilities 2,106 2,156
Total liabilities 87,374 86,179
Equity
Share capital and share premium 4.1.1 140 143
Other equity instruments 4.1.2 835 594
Capital reorganisation reserve 4.1.3 (839) (839)
Merger reserve 4.1.4 2,128 2,128
Other reserves 269 528
Retained earnings 3,126 3,053
Total equity 5,659 5,607
Total liabilities and equity 93,033 91,786
The notes on pages 65 to 83 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 12 June 2024 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 Other Capital reorg' reserve Merger reserve Own shares held Capital redemption reserve Deferred shares reserve Equity based comp' reserve FVOCI Cash flow hedge reserve Retained earnings Total equity
equity instruments reserve
Note 4.1.1 4.1.2 4.1.3 4.1.4 4.1.5
£m £m £m £m £m £m £m £m £m £m £m £m
As at 1 October 2022((1)) 148 666 (839) 2,128 - 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)) 146 594 (839) 2,128 - 8 6 11 8 381 3,187 5,630
Profit for the period - - - - - - - - - - 66 66
Other comprehensive (losses)/income net of tax - - - - - - - - (1) 115 (80) 34
Total comprehensive (losses)/income for the period - - - - - - - - (1) 115 (14) 100
AT1 distributions paid - - - - - - - - - - (26) (26)
Dividends paid to ordinary shareholders - - - - - - - - - - (45) (45)
Ordinary shares issued (1) - - - - - - - - - - (1)
Share buyback (2) - - - - 2 - - - - (49) (49)
Purchase of own shares - - - - (2) - - - - - - (2)
As at 30 September 2023((1)) 143 594 (839) 2,128 (2) 10 6 11 7 496 3,053 5,607
Profit for the period - - - - - - - - - - 236 236
Other comprehensive losses net of tax - - - - - - - - (12) (246) (47) (305)
Total comprehensive (losses)/income for the period - - - - - - - - (12) (246) 189 (69)
AT1 distributions paid - - - - - - - - - - (26) (26)
Dividends paid to ordinary shareholders - - - - - - - - - - (26) (26)
Ordinary shares issued 2 - - - - - - - - - - 2
Share buyback (5) - - - - 5 - - - - (63) (63)
Purchase of own shares - - - - (8) - - - - - - (8)
Transfer from equity based compensation reserve - - - - - - - (5) - - 5 -
Equity based compensation expensed - - - - - - - 4 - - - 4
Settlement of Virgin Money Holdings (UK) PLC share awards - - - - 5 - (2) - - - (5) (2)
AT1 issuance - 346 - - - - - - - - - 346
AT1 redemption - (105) - - - - - - - - (1) (106)
As at 31 March 2024((1)) 140 835 (839) 2,128 (5) 15 4 10 (5) 250 3,126 5,659
(1) The balances as at 1 October 2022 and 30 September 2023 have been audited; the
movements in the individual six month periods to 31 March 2023 and 31 March
2024 are unaudited.
The notes on pages 65 to 83 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 2024 31 Mar 2023 30 Sep 2023
(unaudited) (unaudited) (audited)
Note £m £m £m
Operating activities
Profit on ordinary activities before tax 279 236 345
Adjustments for:
Non-cash or non-operating items included in profit before tax (718) (662) (1,207)
Changes in operating assets (415) (582) (544)
Changes in operating liabilities 1,924 1,149 284
Payments for short-term and low value leases (1) - (3)
Interest received 2,262 1,457 3,300
Interest paid (761) (383) (1,173)
Tax paid (16) (21) (48)
Net cash provided by operating activities 2,554 1,194 954
Cash flows from investing activities
Interest received 169 105 232
Proceeds from sale and maturity of financial assets at FVOCI 1,168 971 1,868
Purchase of financial assets at FVOCI (599) (1,602) (2,950)
Proceeds from sale of property, plant and equipment - 1 1
Purchase of property, plant and equipment (3) (3) (9)
Purchase and development of intangible assets (3) (6) (11)
Net cash provided by/(used in) investing activities 732 (534) (869)
Cash flows from financing activities
Interest paid (492) (277) (742)
Repayment of principal portions of lease liabilities 5.3 (11) (14) (24)
Issuance of RMBS and covered bonds 5.3 500 400 1,826
Redemption and principal repayment on RMBS and covered bonds 5.3 (784) (705) (1,012)
Issuance of medium-term notes/subordinated debt 5.3 641 447 747
Redemption and principal repayment on medium-term notes/subordinated debt 5.3 (250) - (432)
Issuance of AT1 securities 347 - -
Redemption of AT1 securities (106) (72) (72)
Amounts repaid under the TFSME 5.3 (1,150) (200) (1,000)
Share buybacks and purchase of own shares 4.1 (80) (75) (112)
AT1 distributions 4.1 (26) (28) (54)
Ordinary dividends paid 4.1 (26) (103) (148)
Net cash used in financing activities (1,437) (627) (1,023)
Net increase/(decrease) in cash and cash equivalents 1,849 33 (938)
Cash and cash equivalents at the beginning of the period 11,673 12,611 12,611
Cash and cash equivalents at the end of the period ( ) 13,522 12,644 11,673
The notes on pages 65 to 83 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 2024 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 FCA. 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 2023 Annual Report and Accounts which was
prepared in accordance with UK adopted IASs. Copies of the 2023 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 2023 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 2023 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 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.
On 22 May 2024 the Company's shareholders voted to approve the acquisition of
the Company by Nationwide. The transaction remains subject to regulatory
approvals and the satisfaction or waiver of other conditions as set out in the
Scheme document.
The Directors' going concern assessment has focussed on the current Board
approved strategy, with consideration of acquisition related risks and the
mitigation activities around them. Should the acquisition proceed, the
Directors expect that the new parent company will manage any consequential
changes to Group capital, funding sources and strategy in a controlled manner
which ensures the Group continues to meet all regulatory capital and funding
requirements and can continue to operate as a going concern for at least the
next 12 months from the date the interim condensed consolidated financial
statements are authorised for issue.
Nationwide has publicly stated that in the medium term, the Group will
continue to operate as a separate legal entity within the combined Nationwide
group, with a separate board of directors and a banking licence held by
Clydesdale Bank PLC. Following a successful completion, Nationwide intends to
work with the Group's management to undertake a detailed review of the Group
which will include, among other considerations, an appraisal of the short and
long-term objectives, strategy, and potential of the Group. Nationwide expects
that this review will be completed within approximately 18 months from the
acquisition date.
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 2023 Annual Report and Accounts except for
those policies highlighted in note 1.4. Comparatives are presented on a basis
that conforms to the current presentation unless stated otherwise.
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 2023 Annual Report and Accounts.
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)
There have been no material changes to the main accounting estimates and
judgements for EIR from the detail disclosed in note 2.1 of the Group's Annual
Report and Accounts for the year ended 30 September 2023 however there have
been some methodology changes for credit card EIR as described below.
Mortgages
As at 31 March 2024, a total EIR adjustment of £218m (30 September 2023:
£209m) has been recognised for mortgages. This represented 0.4% (30 September
2023: 0.4%) 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 1.0% of gross customer
interest income for mortgages (year to 30 September 2023: 0.5%).
Credit cards
During the period, the credit card EIR methodology has been reviewed with a
view to simplifying the approach. This has allowed the Group to remove the
temporary macro-economic adjustments that were previously applied at 30
September 2023, which has been compensated by the Group reducing the
expectation of future balances.
Key assumptions continue to be yield and balance attrition. Yield is a
function of the Interest Bearing Balance (IBB) and the Annual Percentage Rate
charged to customers. Balance attrition is a function of customer activity and
repayment expectations. IBB and balance attrition is impacted by customer
behaviour and while there is evidence to support the expected IBB and balance
attrition assumptions, there is inherent risk that this data may differ in the
future. The Group has embedded a reduced expectation of future balances as
part of the methodology review and has applied an average IBB of 51.9% and a
long run average attrition rate of 3.8% per month.
As at 31 March 2024, a total EIR adjustment of £292m (30 September 2023:
£259m) has been recognised for credit cards. This represented 4.8% (30
September 2023: 4.5%) of the balance sheet carrying value of gross loans and
advances to customers for credit cards. The impact of the net credit card EIR
adjustments on the income statement was a credit in the period representing
10.8% of gross customer interest income for credit cards (30 September 2023:
charge in the year representing (6.2)% of gross customer interest income for
credit cards).
Sensitivity analysis (mortgages and credit cards)
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 mortgage EIR adjustment 31 Mar 2024 30 Sep 2023
£m £m
+/- 1 month change to the timing of customer repayments, redemptions and 16/(16) 21/(18)
product transfers
50bps increase to the BoE base rate not passed through to the Group's SVR (47) (42)
The new simplified approach for the credit card EIR methodology reduces the
exposure to customer behaviours at the end of the promotional period and
therefore the sensitivities for the current year have been updated
accordingly. These now consider IBB and balance attrition assumptions over the
full expected life rather than focussing on the post-promotional period.
Sensitivity impact on the credit card EIR adjustment 31 Mar 2024 30 Sep 2023
£m £m
+/- 5 ppts change to post-promotional IBB assumption((1)) (9.1% relative n/a 25/(26)
increase/decrease)
+/- 5 ppts change to IBB assumption (10.8% relative increase/decrease) 55/(55) n/a
+/- 0.5 ppts change to post-promotional monthly balance attrition rate((1)) n/a (7)/7
(33% relative increase/decrease)
+/- 0.5 ppts change to monthly balance attrition rate (16.4% relative (23)/26 n/a
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.
The simplified credit card EIR methodology incorporates a reduced expectation
of future balances in order to mitigate the inherent judgement and estimation
uncertainty that exists in determining the EIR adjustment. During the period,
the Group outperformed the expectation set through the new simplified EIR
methodology, and there is sufficient capacity in the underlying methodology to
materially absorb the above sensitivities.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 1: Basis of preparation and accounting policies (continued)
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 8 'Accounting Policies and Accounting
Estimates': This was issued in February 2021 (applicable for accounting
periods beginning on or after 1 January 2023) and received endorsement for use
in the UK in November 2022. The amendments clarify what changes in accounting
estimates are and how these differ from changes in accounting policies and
corrections of errors.
· Amendments to IAS 12 'Income Tax': Deferred Tax Related to Assets
and Liabilities Arising from a Single Transaction. This was issued in May 2021
(applicable for accounting periods beginning on or after 1 January 2023) and
received endorsement for use in the UK in November 2022. The amendments
provide a further exception from the initial recognition exemption. Under the
amendments, an entity does not apply the initial recognition exemption for
transactions that give rise to equal taxable and deductible temporary
differences.
· International Tax Reform - Pillar 2 Model Rules: Amendments to
IAS 12. This was issued in May 2023 (with additional disclosure requirements
applicable for accounting periods beginning on or after 1 January 2023,
although some paragraphs were for immediate application) and received
endorsement for use in the UK in July 2023. The amendments introduce a
mandatory temporary exception to the accounting for deferred taxes arising
from the implementation of the Organisation for Economic Co-operation and
Development Pillar 2 model rules, together with targeted disclosure
requirements for affected entities (further detail on how this has been
reflected in UK tax legislation can be found in note 2.4).
Amendments to IAS 1 'Presentation of financial statements' and IFRS Practice
Statement 2 'Making materiality judgements' which were issued in February 2021
(applicable for accounting periods beginning on or after 1 January 2023) and
endorsed for use in the UK by the UK Endorsement Board in November 2022 was
early adopted by the Group with effect from 1 October 2022.
During the period, there have been no further pronouncements issued by the
IASB that are considered relevant and material to the Group.
Changes in the period - Expected credit losses (ECL)
During the period, the Group reviewed the existing staging approach for credit
cards in the Unsecured portfolio which focused on the triggers that move
exposures from Stage 1 (requiring a 12-month ECL calculation) to Stage 2
(requiring a lifetime ECL calculation). The overall impact of these changes
has been to reduce the modelled ECL in the Unsecured portfolio by £31m.
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 Net interest income
6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
(unaudited) (unaudited) (audited)
£m £m £m
Interest income
Loans and advances to customers 1,951 1,436 3,150
Loans and advances to other banks 271 173 435
Financial assets at FVOCI 162 99 245
Total interest income 2,384 1,708 3,830
Other similar interest
Financial assets at FVTPL 2 2 3
Total other similar interest 2 2 3
Less: interest expense and similar charges
Customer deposits (986) (469) (1,233)
Debt securities in issue (351) (230) (537)
Due to other banks (188) (157) (372)
Other interest expense (2) (2) (4)
Total interest expense and similar charges (1,527) (858) (2,146)
Net interest income 859 852 1,687
2.2 Non-interest income
6 months to 6 months to 12 months to
31 Mar 2024 2024 31 Mar 2023 2023 30 Sep 2023 2023
(unaudited) (unaudited) (audited)
£m £m £m
Gains less losses on financial instruments at fair value
Held for trading derivatives - (3) 1
Financial assets at fair value((1)) 2 5 2
Ineffectiveness arising from fair value hedges (21) 14 33
Amounts recycled to profit and loss from cash flow hedges((2)) 30 (2) 2
Ineffectiveness arising from cash flow hedges (17) (28) (50)
(6) (14) (12)
Other operating income
Net fee and commission income 60 66 128
Margin on foreign exchange derivative brokerage 10 9 19
Gain on sale of financial assets at FVOCI - 1 1
Share of JV loss after tax (1) - -
Other income 1 - 4
70 76 152
Total non-interest income 64 62 140
(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 2023: £Nil, year
ended 30 September 2023: £Nil) and a fair value gain on equity investments of
£Nil (period ended 31 March 2023: £1m, year ended 30 September 2023: £2m
gain).
(2) In respect of de-designated cash flow hedges where the swap was subsequently
re-designated in a fair value hedge.
The Group's unrecognised share of profit of JVs for the period was £3m
(period ended 31 March 2023: £3m loss, year ended 30 September 2023: £6m
loss). For loss-making entities, subsequent profits earned are not recognised
until previously unrecognised losses are extinguished. On a cumulative basis,
the Group's unrecognised share of losses net of unrecognised profits of JVs is
£12m (period ended 31 March 2023: £12m, year ended 30 September 2023:
£15m).
Financial statements
Notes to the interim condensed consolidated financial statements
Section 2: Results for the period (continued)
2.2 Non-interest income (continued)
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 2024 31 Mar 2023 30 Sep 2023
(unaudited) (unaudited) (audited)
£m £m £m
Current account and debit card fees 48 52 100
Credit cards 29 28 63
Insurance, protection and investments 3 4 7
Other fees((1)) 7 8 16
Total fee and commission income 87 92 186
Total fee and commission expense (27) (26) (58)
Net fee and commission income 60 66 128
(1) Other fees include mortgages, invoice and asset finance and ATM fees.
2.3 Operating and administrative expenses before impairment
losses
6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
(unaudited) (unaudited) (audited)
£m £m £m
Staff costs 228 191 432
Property and infrastructure 30 34 74
Technology and communications 68 62 130
Corporate and professional services 98 109 240
Depreciation, amortisation and impairment 44 53 116
Other expenses 83 85 181
Total operating and administrative expenses 551 534 1,173
Staff costs comprise the following items:
6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
(unaudited) (unaudited) (audited)
£m £m £m
Salaries and wages 147 132 275
Social security costs 18 15 32
Defined contribution pension expense 31 27 56
Defined benefit pension credit (13) (24) (50)
Compensation costs 183 150 313
Equity based compensation((1)) 6 4 6
Bonus awards 12 8 22
Performance costs 18 12 28
Redundancy and restructuring 3 1 7
Temporary staff costs 9 12 24
Other 15 16 60
Other staff costs 27 29 91
Total staff costs 228 191 432
(1) Includes National Insurance on equity based compensation.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 2: Results for the period (continued)
2.4 Taxation
6 months to 6 months to 12 months to
31 Mar 2024 2024 31 Mar 2023 2023 30 Sep 2023 2023
(unaudited) (unaudited) (audited)
£m £m £m
Current tax
Current period 47 27 36
Adjustment in respect of prior periods (1) 2 2
46 29 38
Deferred tax
Current period (3) 30 65
Adjustment in respect of prior periods - (3) (4)
(3) 27 61
Tax expense for the period 43 56 99
The tax assessed for the period differs from that arising from applying the
standard rate of corporation tax in the UK of 25% (2023: 22%). 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 2024 2024 31 Mar 2023 2023 30 Sep 2023 2023
(unaudited) (unaudited) (audited)
£m £m £m
Profit on ordinary activities before tax 279 236 345
Tax expense based on the standard rate of corporation tax in the UK of 25% 70 52 76
(March and September 2023: 22%)
Effects of:
Disallowable expenses (1) 1 5
Conduct indemnity adjustment - - (1)
Deferred tax assets derecognised 8 - 19
Impact of rate changes (30) 5 9
AT1 distribution (7) (6) (12)
Banking surcharge 3 5 5
Adjustments in respect of prior periods - (1) (2)
Tax expense for the period 43 56 99
The Group's effective tax rate is 15.5% (period ended 31 March 2023: 23.6%,
year ended 30 September 2023: 28.7%). The impact of the banking surcharge on
profits in excess of the threshold is more than 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 reduction to the authorised surplus payments charge from 35% to 25% from 6
April 2024 was substantively enacted on 11 March 2024 and drives the current
period rate change credit.
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 Other Total deferred Defined benefit Total deferred
accounting hedge reserve instruments at carried allowances temporary tax assets pension scheme tax liabilities
adjustments £m FVOCI forward £m differences £m surplus £m
£m £m £m £m £m
At 1 October 2022 (8) (267) (16) 302 111 24 146 (350) (350)
Income statement credit/(charge) 2 1 - (35) (8) (4) (44) (17) (17)
Other comprehensive income charge - 77 14 - - - 91 188 188
At 30 September 2023 (6) (189) (2) 267 103 20 193 (179) (179)
Income statement credit/(charge) 1 - - (20) (5) (1) (25) 28 28
Other comprehensive income credit - 94 4 - - - 98 40 40
At 31 March 2024 (5) (95) 2 247 98 19 266 (111) (111)
Financial statements
Notes to the interim condensed consolidated financial statements
Section 2: Results for the period (continued)
2.4 Taxation (continued)
Other temporary differences include the IFRS 9 transitional adjustment of £8m
and equity-based compensation of £5m (30 September 2023: £9m and £5m
respectively).
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.
The Group has unrecognised deferred tax assets of £28m (30 September 2023:
£21m) (£113m gross loss (30 September 2023: £83m) valued at the mainstream
rate of 25%) representing tax losses whose use is not forecast within the
foreseeable future.
The Group has assessed the likelihood of recovery of the deferred tax assets
at 31 March 2024, 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
decrease to £221m or increase to £294m respectively, with the latter being
full recognition of all losses. If Group profit forecasts were 10% lower than
anticipated, the total deferred tax asset would be £243m. If Group taxable
profit forecasts were 10% higher than anticipated, the deferred tax asset
would be £288m. All tax assets arising will be used within the UK.
The UK Government passed the legislation required to enact the Pillar 2 Model
Rules, as highlighted in note 1.4, for UK based groups in July 2023. It is
effective for accounting periods beginning on or after 1 January 2024. The
legislation introduces a domestic UK top-up tax for the profits made by group
subsidiaries and any other relevant non-consolidated entities where they are
taxed at a Pillar 2 effective tax rate of less than 15%. The Group's trading
operations are wholly within the UK. No material impact of Pillar 2 is
expected for members of the Group, though as this will depend upon financial
results at the time of each periodic assessment, no forward-looking assurance
can be given.
2.5 Earnings per share
6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
(unaudited) (unaudited) (audited)
£m £m £m
Profit attributable to ordinary equity holders for the purposes of 210 152 192
basic and diluted EPS
31 Mar 2024 Number of 31 Mar 2023 Number of 30 Sep 2023
shares shares Number of shares
Weighted-average number of ordinary shares in issue (millions)
- Basic 1,317 1,384 1,375
Adjustment for share awards made under equity based 7 6 4
compensation schemes
- Diluted 1,324 1,390 1,379
Basic earnings per share (pence) 16.0 11.0 14.0
Diluted earnings per share (pence) 15.9 10.9 13.9
Basic earnings per share has been calculated after deducting 3m (31 March
2023: 0.3m, 30 September 2023: 0.2m) 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 Financial instruments
3.1.1 Financial instruments at amortised cost
3.1.1.1 Loans and advances to customers
31 Mar 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Gross loans and advances to customers 73,261 73,295
Impairment provisions on credit exposures((1)) (612) (612)
Fair value hedge adjustment (305) (492)
72,344 72,191
(1) ECLs on off-balance sheet exposures of £5m (30 September 2023: £5m) are
presented as part of the provisions for liabilities and charges balance (note
3.3).
The Group has a portfolio of fair valued business loans of £57m (30 September
2023: £59m) which are classified separately as financial assets at FVTPL
(note 3.1.2.1). Combined with the above this is equivalent to total loans and
advances of £72,401m (30 September 2023: £72,250m).
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.
3.1.1.2 Debt securities in issue
The breakdown of debt securities in issue is shown below:
31 March 2024 (unaudited) Medium-term notes Subordinated debt Securitisation Covered bonds Total
£m £m £m £m £m
Debt securities 3,273 714 2,044 3,831 9,862
Accrued interest 31 8 15 52 106
3,304 722 2,059 3,883 9,968
30 September 2023 (audited) Medium-term notes Subordinated Securitisation Covered bonds Total
debt
£m £m £m £m £m
Debt securities 2,584 938 1,729 4,392 9,643
Accrued interest 28 14 11 23 76
2,612 952 1,740 4,415 9,719
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 2024 Year to 30 September 2023
Issuances Redemptions Issuances Redemptions
Denomination £m Denomination £m Denomination £m Denomination £m
Medium term notes EUR 641 - - EUR, GBP 747 EUR 432
Subordinated debt - - GBP 250 - - - -
Securitisation GBP 500 GBP 184 GBP 900 USD, GBP 1,012
Covered bonds - - GBP 600 EUR, GBP 926 - -
1,141 1,034 2,573 1,444
(1) Other movements relate to foreign exchange, hedging adjustments and the
capitalisation and amortisation of issuance costs.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 3: Assets and liabilities (continued)
3.1 Financial instruments (continued)
3.1.1 Financial instruments at amortised cost (continued)
3.1.1.2 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 2024 30 Sep 2023
(unaudited) (audited)
£m £m
VM UK 3.125% fixed-to-floating rate callable senior notes due 2025 300 300
VM UK 4% fixed rate reset callable senior notes due 2026 476 463
VM UK 3.375% fixed rate reset callable senior notes due 2026 338 330
VM UK 4% fixed rate reset callable senior notes due 2027 364 350
VM UK 2.875% fixed rate reset callable senior notes due 2025 422 418
VM UK 4.625% fixed rate reset callable senior notes due 2028 427 421
VM UK 7.625% fixed rate reset callable senior notes due 2029 310 302
VM UK 4% fixed rate reset callable senior notes 2028 636 -
3,273 2,584
Subordinated debt
31 Mar 2024 30 Sep 2023
(unaudited) (audited)
£m £m
VM UK 7.875% fixed rate reset callable subordinated notes due 2028 - 250
VM UK 5.125% fixed rate reset callable subordinated notes due 2030 440 424
VM UK 2.625% fixed rate reset callable subordinated notes due 2031 274 264
714 938
3.1.1.3 Due to other banks
31 Mar 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Secured loans 5,116 6,291
Securities sold under agreements to repurchase((1)) 1,058 552
Transaction balances with other banks 23 19
Deposits from other banks 58 77
6,255 6,939
(1) The underlying securities sold under agreements to repurchase have a carrying
value of £1,816m (30 September 2023: £1,047m) and relate to mortgage assets
as well as internally held debt securities, backed by mortgage assets.
Secured loans comprise amounts drawn under the TFSME schemes (including
accrued interest).
3.1.2 Financial instruments at fair value through profit or loss
3.1.2.1 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 £57m (30
September 2023: £59m). The cumulative loss in the fair value of the loans
attributable to changes in credit risk amounts to £1m (30 September 2023:
£1m); the change for the current period is £Nil (period ended 31 March 2023:
£Nil, year ended 30 September 2023: £Nil) of which £Nil (period ended 31
March 2023: £Nil, year ended 30 September 2023:£Nil) has been recognised in
the income statement.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 3: Assets and liabilities (continued)
3.1 Financial instruments (continued)
3.1.2 Financial instruments at fair value through profit or loss
(continued)
3.1.2.2 Derivative financial instruments
The tables below analyse derivatives between those designated as hedging
instruments and those classified as held for trading:
31 Mar 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Fair value of derivative financial assets
Designated as hedging instruments 21 96
Designated as held for trading 23 39
44 135
Fair value of derivative financial liabilities
Designated as hedging instruments 156 204
Designated as held for trading 54 86
210 290
Cash collateral totalling £224m (30 September 2023: £267m) has been pledged
and £12m has been received (30 September 2023: £33m) 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 £8m (30 September 2023:
£116m) 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 2024 (unaudited) 30 September 2023 (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) 37,103 658 246 51,185 1,295 545
Less: net settled interest rate swaps((1)) (37,054) (658) (246) (49,888) (1,222) (531)
Interest rate swaps (net)((2)) 49 - - 1,297 73 14
Fair value hedges
Interest rate swaps (gross)((3)) 21,093 866 822 19,203 1,219 862
Less: net settled interest rate swaps((1)) (20,393) (866) (814) (18,113) (1,206) (820)
Interest rate swaps (net)((2)) 700 - 8 1,090 13 42
Cross currency swaps((2)) 2,951 21 148 2,350 10 148
3,651 21 156 3,440 23 190
Total derivatives designated as hedging instruments 3,700 21 156 4,737 96 204
Derivatives designated as held for trading
Foreign exchange rate related contracts
Spot and forward foreign exchange((2)) 667 5 5 654 7 9
Options((2)) - - - - - -
667 5 5 654 7 9
Interest rate related contracts
Interest rate swaps (gross) 1,828 30 39 1,910 47 50
Less: net settled interest rate swaps((1)) (862) (25) (4) (753) (43) (1)
Interest rate swaps (net)(()(2)) 966 5 35 1,157 4 49
Swaptions((2)) 10 - 1 10 - 1
Options((2)) 1,138 8 8 1,067 16 16
2,114 13 44 2,234 20 66
Commodity related contracts 163 5 5 167 12 11
Total derivatives designated as held for trading 2,944 23 54 3,055 39 86
(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
£1,480m and a fair value liability of £413m. These swaps are centrally
cleared and net settled.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 3: Assets and liabilities (continued)
3.1 Financial instruments (continued)
3.1.2 Financial instruments at fair value through profit or loss
(continued)
3.1.2.2 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.
3.1.3 Fair value of financial instruments
This section should be read in conjunction with note 3.1.4 of the Group's 2023
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 3.1.4 of the Group's 2023 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 2024 30 Sep 2023
(unaudited) (audited)
Carrying value Fair value Carrying value Fair value
£m £m £m £m
Financial assets
Loans and advances to customers((1)) 72,344 72,780 72,191 71,611
Financial liabilities
Customer deposits((2)) 68,663 68,507 66,827 66,625
Debt securities in issue((3)) 9,968 10,168 9,719 9,788
Due to other banks((2)) 6,255 6,301 6,939 6,959
(1) Categorised as Level 3 in the fair value hierarchy with the exception of
£1,094m (30 September 2023: £1,085m) 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
£4,137m of listed debt (30 September 2023: £3,597m) which is categorised as
Level 1.
( )
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Financial statements
Notes to the interim condensed consolidated financial statements
Section 3: Assets and liabilities (continued)
3.1 Financial instruments (continued)
3.1.3 Fair value of financial instruments (continued)
(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 2024 (unaudited) 30 Sep 2023 (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 5,764 - - 5,764 6,184 - - 6,184
Loans and advances to customers - 57 - 57 - 59 - 59
Derivatives - 44 - 44 - 135 - 135
Other - - 2 2 - - 2 2
Total financial assets at fair value 5,764 101 2 5,867 6,184 194 2 6,380
Financial liabilities
Derivatives - 210 - 210 - 290 - 290
Total financial liabilities at fair value - 210 - 210 - 290 - 290
There were no transfers between Level 1 and 2 in the current or prior period.
3.2 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 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Fair value of Scheme assets 2,919 2,796
Defined benefit obligation (2,477) (2,284)
Net defined benefit pension asset 442 512
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.£1.6bn 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. The fair value of the hedge instrument is £Nil (30 September 2023:
£Nil).
During 2023 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 2022. The valuation resulted in an improvement
in the Scheme's funding position, with a reported surplus of £256m
(previously a surplus of £144m based on Scheme data and market conditions as
at 30 September 2019) and a technical provisions funding level of 109%
(previously 103%). As the 2022 valuation outcome was a funding surplus, a
deficit recovery plan is not required and the Group is not required to make
any additional contributions to the Scheme other than the ongoing funding of
the Scheme's administrative expenses.
The next triennial valuation will be conducted in the year ending 30 September
2026 based on Scheme data and market conditions as at 30 September 2025.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 3: Assets and liabilities (continued)
3.3 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 2022 7 13 27 3 50
Charge to the income statement 7 - 24 2 33
Utilised (6) (3) (5) - (14)
As at 30 September 2023 8 10 46 5 69
Charge/(credit) to the income statement 4 (5) 4 - 3
Utilised (6) (1) (6) - (13)
Other - 2 - - 2
As at 31 March 2024 6 6 44 5 61
Employee related costs provision
This includes provision for staff redundancies and for NIC on equity based
compensation. During the period, provisions of £4m (30 September 2023: £7m)
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. During the period, a £2m
(30 September 2023: £Nil) legacy insurance claim was received to cover the
remaining provision offset by a release of £5m (30 September 2023: £Nil)
following a review of the final amounts required.
Property provision
This includes costs for stores and office closures. During the period,
provisions of £4m (30 September 2023: £24m) were raised.
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 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Share capital 130 134
Share premium 10 9
140 143
31 Mar 2024 30 Sep 2023
(unaudited) (audited) 31 Mar 2024 30 Sep 2023
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 1,344,640,968 1,408,530,988 134 141
Issued under employee share schemes 816,743 3,947,282 1 -
Share buyback programme (48,985,025) (67,837,302) (5) (7)
Closing ordinary share capital 1,296,472,686 1,344,640,968 130 134
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 2024 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 2022
of 7.5p per ordinary share in the Company, amounting to £103m, was paid in
March 2023.
· An interim dividend in respect of the year ending 30 September
2023 of 3.3p per ordinary share in the Company, amounting to £45m, was paid
in June 2023.
· A final dividend in respect of the year ending 30 September 2023
of 2.0p per ordinary share in the Company, amounting to £26m, was paid in
March 2024.
· The Board has recommended an interim dividend for the financial
year ending 30 September 2024 of 2.0p per share.
The following share buybacks have been announced in the current and prior
periods:
· On 30 June 2022, the Company announced an initial repurchase of
up to £75m which 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 to purchase a further £50m. The buyback extension
commenced on 21 November 2022 and ended on 7 March 2023.
· On 2 August 2023, the Company announced a new share buyback
programme to repurchase £50m. The buyback commenced on 2 August 2023 and
ended on 22 November 2023. Under this buyback programme, the Company returned
£13m to shareholders in the current period.
· On 23 November 2023, the Company announced a further share
buyback to repurchase another £150m, ending no later than 16 May 2024.
On 7 March 2024, the Company announced the suspension of the £150m buyback
programme due to the potential cash acquisition of the Group by Nationwide.
The boards of directors of Nationwide and the Company have since agreed the
terms of the recommended cash acquisition and on 2 April 2024, the Company
announced the full cancellation of the remaining buyback programme and no
further purchases were made after 5 March 2024. Under this buyback programme,
the Company returned £63m to shareholders.
49m ordinary shares (30 September 2023: 68m), with a nominal value of £5m (30
September 2023: £7m), were repurchased in the period for a total
consideration of £76m (30 September 2023: £112m).
Each buyback is completed in aggregate between the Company's 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. 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.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 4: Capital (continued)
4.1 Equity (continued)
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.
4.1.2 Other equity instruments
Other equity instruments comprises AT1 capital which consists of the following
Perpetual Contingent Convertible Notes:
31 March 2024 30 September 2023
Carrying value Nominal value Carrying value Nominal value
£m £m £m £m
Perpetual securities (fixed 9.25% up to the first reset date) issued on 13 142 144 247 250
March 2019 with an optional redemption on 8 June 2024.
Perpetual securities (fixed 8.25% up to the first reset date) issued on 17 347 350 347 350
June 2022 with an optional redemption on 17 June 2027.
Perpetual securities (fixed 11.00% up to the first reset date) issued on 8 346 350 - -
December 2023 with an optional redemption on 8 December 2028.
835 844 594 600
On 6 December 2023, perpetual securities (fixed 9.25% up to the first reset
date) issued on 13 March 2019 totalling £105m were redeemed. The remaining
£142m were redeemed on the optional redemption date of 8 June 2024.
The issuances are treated as equity instruments in accordance with IAS 32
'Financial instruments: presentation' with the proceeds included in equity,
net of transaction costs, which is the difference between the nominal and
carrying values. AT1 distributions of £26m were paid in the period (period
ended 31 March 2023: £28m; year ended 30 September 2023: £54m).
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 2024 30 Sep 2023
(unaudited) (audited)
£m £m
At 1 October 496 699
Amounts recognised in other comprehensive income:
Cash flow hedge - interest rate risk
Effective portion of changes in fair value of interest rate swaps (303) (268)
Amounts transferred to the income statement (37) (12)
Taxation 94 77
Closing cash flow hedge reserve 250 496
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 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Guarantees and assets pledged as collateral security:
Due in less than 3 months 16 12
Due between 3 months and 1 year 33 18
Due between 1 year and 3 years 12 8
Due between 3 years and 5 years 1 1
Due after 5 years 40 40
102 79
Other credit commitments
Undrawn formal standby facilities, credit lines and other commitments to lend 17,710 17,921
at call
Other contingent liabilities
Conduct risk related matters and legal claims
There continues to be uncertainty with judgement required in determining the
quantum of conduct risk related liabilities, with note 3.3 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.
The Group's subsidiary, Clydesdale Bank PLC, along with its former parent
company, National Australia Bank Limited, is a defendant in nine separate
claims (comprising 904 individual claimants) co-ordinated by the claims
management company, RGL Management Limited, in connection with (i) the
payment of break costs and (ii) the composition of fixed interest rates, both,
in respect of historic tailored business loans. On 19 March 2024 His
Majesty's High Court delivered its judgment in the first and fourth claims
dismissing all claims made against Clydesdale Bank PLC and National Australia
Bank Limited. Costs have been awarded in favour of Clydesdale Bank PLC and
National Australia Bank Limited. The Claimants intend to appeal parts of the
judgment. No provision has been made in these financial statements in
respect of the current claims, nor any other claims of a similar nature
which may be brought by other claimants.
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 Scheme')
The Group provides banking services to the Scheme, with customer deposits of
£11m (30 September 2023: £7m). Pension contributions of £6m were made to
the Scheme in the period (period ended 31 March 2023: £6m; year ended 30
September 2023: £7m).
The Group granted a £75m uncommitted liquidity facility to the Scheme as an
additional contingency against future short-term liquidity challenges
resulting from unexpected market turbulence. As at 31 March 2024, the amount
drawn under the facility was £Nil (30 September 2023: £Nil). There is also a
£7m BACS facility held for the Scheme in relation to payments to the Scheme's
members (30 September 2023: £7m). As at 31 March 2024, the amount drawn on
the facility was £Nil (30 September 2023: £Nil).
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 £9m (30 September 2023: £10m). The
total share of losses recognised in the period was £1m (period ended 31 March
2023: £Nil; year ended 30 September 2023: £Nil). 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 was £260m (30 September 2023: £290m) and the undrawn facility was
£90m (30 September 2023: £60m). The facility is held under Stage 2 for
credit risk purposes (30 September 2023: Stage 2), with an ECL allowance of
£21m (30 September 2023: £22m) held against the lending. An impairment
release of £1m was recognised in the period (period ended 31 March 2023: £1m
release; year ended 30 September 2023: £3m charge). 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, there has been no material change to the ECL allowance held from
that at September 2023. Additionally, the Group received £8m of interest
income from Salary Finance in the period (period ended 31 March 2023: £8m;
year ended 30 September 2023: £16m) and holds deposits of £10m (30 September
2023: £10m). Board approval is in place for this facility up until December
2025 with £350m being the approved limit; and
· Virgin Money Unit Trust Managers Limited (UTM) - the Group
provides banking services to UTM which has resulted in amounts due of £3m (30
September 2023: £3m). Additionally, the Group received £5m of recharge
income in the period (period ended 31 March 2023: £4m; year ended 30
September 2023: £9m) from UTM in accordance with a Service Level Agreement in
respect of resourcing, infrastructure and marketing. During the period, the
Group provided no additional funding to UTM (30 September 2023: £Nil). The
Group has also paid consortium relief to UTM of £Nil (30 September 2023:
£1m) for losses surrendered from UTM. The Group provides UTM with a 30 day
notice account with customer deposits of £10m (30 September 2023: £17m)
which resulted in interest of £0.3m being paid to UTM (30 September 2023:
£0.5m). On 2 April 2024 the Group acquired the remaining 50 per cent ordinary
share capital of UTM for £20m. Refer to note 5.5 for further information.
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 2023:
£5m), with expenses incurred in the period of £9m (period ended 31 March
2023: £9m; year ended 30 September 2023: £17m).
· 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 £2m (30 September 2023:
£2m) and expenses of £9m were incurred in the period (period ended 31 March
2023: £7m; year ended 30 September 2023: £17m).
· 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 £0.5m (31 March 2023:
£0.2m; 30 September 2023: £0.2m), amounts payable totalled £Nil (31 March
2023: £1m; 30 September 2023: £0.1m) and during the period this resulted in
expenses of £0.5m (period ended 31 March 2023: £0.5m, year ended 30
September 2023: £0.5m) along with income of £0.5m (period ended 31 March
2023: £0.2m, year ended 30 September 2023: £0.4m).
· 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 amounts payable of £Nil (30 September 2023: £0.1m)
and expenses payable of £0.2m (period ended 31 March 2023: £0.2m, year ended
30 September 2023: £0.4m).
· The Group paid £4m (period ended 31 March 2023: £14m, year
ended 30 September 2023: £20m) 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 2023: £1m). The Group
made donations of £1m in the period (period ended 31 March 2023: £1m; year
ended 30 September 2023: £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 £0.2m (period ended 31 March 2023: £0.3m; year ended
30 September 2023: £0.5m).
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 Total
Lease liabilities
Note £m £m £m £m
3.1.1.3 3.1.1.2
At 1 October 2022 7,230 8,509 132 15,871
Cash flows:
Issuances - 2,573 - 2,573
Drawdowns - (1,444) - (1,444)
Redemptions (1,000) - (24) (1,024)
Repayment - - (1) (1)
Non-cash flows
Fair value and other associated adjustments - 59 - 59
Additions to right-of-use asset in exchange for increased lease liabilities - - 76 76
Remeasurement - - (6) (6)
Movement in accrued interest 61 27 3 91
Unamortised costs - (5) - (5)
At 30 September 2023 6,291 9,719 180 16,190
Cash flows:
Issuances - 1,141 - 1,141
Redemptions - (1,034) - (1,034)
Repayment (1,150) - (11) (1,161)
Non-cash flows
Fair value and other associated adjustments - 114 - 114
Additions to right-of-use asset in exchange for increased lease liabilities - - 1 1
Remeasurement - - 1 1
Movement in accrued interest (25) 30 2 7
Unamortised costs - (2) - (2)
At 31 March 2024 5,116 9,968 173 15,257
(1) This includes amounts drawn under the TFS and TFSME.
5.4 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 Managing Director,
Business and Commercial. 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 2024 31 Mar 2023 30 Sep 2023
(unaudited) (unaudited) (audited)
£m £m £m
Net interest income 859 852 1,687
Non-interest income 64 62 140
Total operating income 923 914 1,827
Operating and administrative expenses (551) (534) (1,173)
Impairment losses on credit exposures (93) (144) (309)
Segment profit before tax 279 236 345
Average interest earning assets 89,611 89,568 89,810
The Group has no operations outside the UK and therefore no secondary
geographical area information is presented. The Group is not reliant on a
single customer. Liabilities are managed on a centralised basis.
Financial statements
Notes to the interim condensed consolidated financial statements
Section 5: Other notes (continued)
5.5 Post-balance sheet events
Virgin Money Unit Trust Managers Limited acquisition
At 31 March 2024 the Group held a 50 per cent plus one share equity interest
in the ordinary share capital of Virgin Money Unit Trust Managers Limited
(UTM), a JV with abrdn plc (abrdn). The Group's investment in the JV is
accounted for under the equity method and the carrying value of the investment
at 31 March 2024 is £9m, included within other assets on the Group balance
sheet. UTM provides investment management services to retail customers
including general investment accounts, stocks and shares ISAs and a pension
product.
On 2 April 2024 the Group acquired the remaining 50 per cent ordinary share
capital of UTM for £20m. The Group will consolidate UTM from 2 April 2024.
With UTM having successfully completed its technology platform migration and
launched the Virgin Money Investments digital platform, taking full ownership
will enable the Group to focus on our expertise in branding and distribution,
while abrdn will continue to provide investment advisory services.
Because of the limited time available between the acquisition and approval of
these financial statements, the Group is still in the process of establishing:
a) the fair value of the existing interest in UTM held by the Group
prior to the acquisition date and the resulting gain or loss recognised as a
result of the IFRS requirement for acquisitions completed in stages to
remeasure the previously held interest to fair value immediately before the
business combination; and
b) the fair value of the assets and liabilities acquired and the
associated identifiable intangible assets and goodwill.
At 31 December 2023, being the year end date of the most recently audited
financial statements, UTM had net assets of £21m. Total assets of £33m
comprise primarily cash at bank of £19m along with trade receivables and
other receivables of £10m. Total liabilities of £12m include trade and other
payables of £6m and amounts due to related parties of £6m. The values shown
include £11m of cash and term deposits held with Group companies and amounts
due to the Group of £5m. Refer to note 5.2 for further information.
Nationwide's acquisition of Virgin Money
On 21 March 2024, the boards of the Company and Nationwide announced that they
had agreed the terms of a recommended cash acquisition of the entire issued
and to be issued share capital of the Company by Nationwide. The acquisition
is being implemented by way of a scheme of arrangement. On 22 May 2024, it
was announced that the Company's shareholders voted in favour of the
recommended cash acquisition by Nationwide. The transaction remains subject to
regulatory approvals and the satisfaction or waiver of other conditions as set
out in the scheme document following which there will be a court hearing to
sanction the scheme. The scheme will become effective shortly after approval
by the court with the acquisition expected to complete in calendar Q4
2024. In addition, the Company's shareholders approved amendments to the
brand licence agreement between the Company and Virgin Enterprises Limited
(the 'TMLA'), which governs the use of the 'Virgin Money' brand, pursuant to
the TMLA Amendment Agreement((1)) and which are contingent on the scheme
becoming effective. The TMLA Amendment Agreement includes arrangements for the
payment of an exit fee of £250m, payable by the Company to Virgin Enterprises
Limited, following completion.
(1) The agreement entered into between Nationwide and Virgin Enterprises Limited
on 7 March 2024 (as amended by a side letter dated 21 March 2024) pursuant to
which the parties have agreed to procure that a deed of amendment in respect
of the TMLA is entered into shortly following completion of the proposed
acquisition.
Additional information
Measuring financial performance
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 'excluding notable items' basis. Previously, items adjusted
from the Group's statutory position resulted in an 'underlying basis' of
performance. The Group no longer presents results on an underlying basis,
moving instead to a statutory presentation of its income statement, whilst
still providing details of notable items of income and expenditure. Further
detail on each of the notable items, along with management's reasoning for
excluding the impact of these items from the Group's current 'excluding
notable items' basis, can be found on page 88, directly following this
section.
Refer to pages 372 to 380 of the Group's 2023 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
Adjusted cost: income ratio Yes Non-IFRS 6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Operating and administrative expenses (excluding notable items) (a) £502m £477m £971m
BoE Levy (b) £10m - -
Total operating income (excluding notable items) (c) £940m £933m £1,873m
Adjusted cost: income ((a)-(b))/(c) 52.3% 51.1% 51.9%
Adjusted EPS No Non-IFRS 6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Adjusted profit after tax attributable to ordinary equity shareholders (a) £264m £207m £376m
Weighted average number of ordinary shares in issue (b) 1,317m 1,384m 1,375m
Adjusted basic earnings per share (a)/(b) 20.0p 14.9p 27.4p
Adjusted profit after tax attributable to ordinary equity shareholders No Non-IFRS 6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Profit before tax (excluding notable items) (a) £345m £312m £593m
Adjusted tax charge (b) £62m £77m £163m
AT1 distributions (c) £26m £28m £54m
BoE Levy (net of tax) (d) £7m - -
Adjusted profit after tax attributable to ordinary equity shareholders £264m £207m £376m
(a) - (b) - (c) + (d)
Adjusted EPS
No
Non-IFRS
6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Adjusted profit after tax attributable to ordinary equity shareholders (a) £264m £207m £376m
Weighted average number of ordinary shares in issue (b) 1,317m 1,384m 1,375m
Adjusted basic earnings per share (a)/(b) 20.0p 14.9p 27.4p
Adjusted profit after tax attributable to ordinary equity shareholders
No
Non-IFRS
6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Profit before tax (excluding notable items) (a) £345m £312m £593m
Adjusted tax charge (b) £62m £77m £163m
AT1 distributions (c) £26m £28m £54m
BoE Levy (net of tax) (d) £7m - -
Adjusted profit after tax attributable to ordinary equity shareholders £264m £207m £376m
(a) - (b) - (c) + (d)
Additional information
Measuring financial performance
Financial performance metrics continued
Profitability continued:
Metric KPI Basis Formula
Profit before tax (excluding notable items) No Non-IFRS 6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Statutory profit before tax (a) £279m £236m £345m
Acquisition accounting unwinds (b) £9m £3m £29m
Hedge ineffectiveness (c) £8m £16m £16m
Restructuring charges (d) £33m £53m £131m
Financial crime prevention programme (e) £15m - -
Legacy conduct (f) £(4)m £4m £12m
Other (g) £5m - £60m
Profit before tax (excluding notable items) £345m £312m £593m
(a) + (b) + (c) + (d) + (e) + (f) + (g)
Net interest margin (NIM) No Non-IFRS 6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
NII (excluding notable items) (a) £868m £855m £1,716m
Annualised half year NII (b) (a)*(366/183) (2023: 365/182) £1,736m £1,715m £1,716m
Average interest earning assets (c) £89,611m £89,568m £89,810m
Short-term repos used for liquidity management (d) - £8m -
NIM (b)/((c)-(d)) 1.94% 1.91% 1.91%
Statutory basic earnings per share (EPS) No IFRS 6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Statutory profit after tax attributable to ordinary equity shareholders (a) £210m £152m £192m
Weighted average number of ordinary shares in issue (b) 1,317m 1,384m 1,375m
Statutory basic earnings per share (a)/(b) 16.0p 11.0p 14.0p
Statutory cost: income ratio No Non-IFRS 6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Operating and administrative expenses (a) £551m £534m £1,173m
Total operating income (b) £923m £914m £1,827m
Statutory cost: income ratio (a)/(b) 59.7% 58.5% 64.2%
Statutory return on tangible equity (RoTE) Yes Non-IFRS 6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Statutory profit after tax attributable to ordinary equity shareholders (a) £210m £152m £192m
Annualised half year profit after tax (b) (a)*(366/183) (2023: 365/182) £420m £304m £192m
Average tangible equity (c) £4,634m £4,997m £4,971m
Statutory RoTE (b)/(c) 9.1% 6.1% 3.9%
Net interest margin (NIM)
No
Non-IFRS
6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
NII (excluding notable items) (a) £868m £855m £1,716m
Annualised half year NII (b) (a)*(366/183) (2023: 365/182) £1,736m £1,715m £1,716m
Average interest earning assets (c) £89,611m £89,568m £89,810m
Short-term repos used for liquidity management (d) - £8m -
NIM (b)/((c)-(d)) 1.94% 1.91% 1.91%
Statutory basic earnings per share (EPS)
No
IFRS
6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Statutory profit after tax attributable to ordinary equity shareholders (a) £210m £152m £192m
Weighted average number of ordinary shares in issue (b) 1,317m 1,384m 1,375m
Statutory basic earnings per share (a)/(b) 16.0p 11.0p 14.0p
Statutory cost: income ratio
No
Non-IFRS
6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Operating and administrative expenses (a) £551m £534m £1,173m
Total operating income (b) £923m £914m £1,827m
Statutory cost: income ratio (a)/(b) 59.7% 58.5% 64.2%
Statutory return on tangible equity (RoTE)
Yes
Non-IFRS
6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Statutory profit after tax attributable to ordinary equity shareholders (a) £210m £152m £192m
Annualised half year profit after tax (b) (a)*(366/183) (2023: 365/182) £420m £304m £192m
Average tangible equity (c) £4,634m £4,997m £4,971m
Statutory RoTE (b)/(c) 9.1% 6.1% 3.9%
Lending (Basis - non-IFRS):
Metric KPI Formula
Target lending segment asset growth Yes 6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Target lending - current year (a) £15,549m £13,970m £14,632m
Target lending - prior year (b) £14,632m £13,448m £13,448m
Target lending growth ((a)-(b))/(b) 6.3% 3.9% 8.8%
Additional information
Measuring financial performance
Financial performance metrics continued
Lending (Basis - non-IFRS) continued:
Metric KPI Formula
Relationship deposits growth Yes 6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Total relationship deposits - current year (a) £36,267m £35,643m £35,394m
Total relationship deposits - prior year (b) £35,394m £34,649m £34,649m
Relationship deposit growth ((a)-(b))/(b) 2.5% 2.9% 2.2%
Asset quality (Basis - non-IFRS):
Metric KPI Formula
Impairment charge to average customer loans No 6 months to 6 months to 12 months to
(cost of risk)
31 Mar 2024 31 Mar 2023 30 Sep 2023
Impairment charge (a) £93m £144m £309m
Annualised half year impairment charge (b) (a)* (366/183) (2023: 365/182) £186m £289m £309m
Average customer loans (c) £72,833m £72,869m £72,770m
Cost of risk (b)/(c) 0.26% 0.40% 0.42%
% of loans in Stage 2 No 31 Mar 2024 31 Mar 2023 30 Sep 2023
Stage 2 loans (a) £5,412m £7,153m £6,326m
Gross loans and advances (b) £73,261m £73,889m £73,295m
%of loans in stage 2 (a)/(b) 7.4% 9.7% 8.6%
% of loans in Stage 3 No 31 Mar 2024 31 Mar 2023 30 Sep 2023
Stage 3 loans (a) £1,164m £1,075m £1,080m
Gross loans and advances (b) £73,261m £73,889m £73,295m
%of loans in stage 3 (a)/(b) 1.6% 1.5% 1.5%
Total book coverage No 31 Mar 2024 31 Mar 2023 30 Sep 2023
Impairment provisions on credit exposures (a) £617m £526m £617m
Gross loans and advances (b) £73,261m £73,035m £73,295m
Total book coverage (a)/(b) 0.84% 0.72% 0.84%
Stage 2 coverage((1)) No 31 Mar 2024 31 Mar 2023 30 Sep 2023
Stage 2 impairment provisions on credit exposures (a) £353m £349m £400m
Stage 2 gross loans and advances (b) £5,403m £7,073m £6,305m
Total stage 2 book coverage (a)/(b) 6.51% 4.94% 6.33%
Stage 3 coverage((1)) No 31 Mar 2024 31 Mar 2023 30 Sep 2023
Stage 3 impairment provisions on credit exposures (a) £162m £112m £128m
Stage 3 gross loans and advances (b) £984m £925m £920m
Total stage 3 book coverage (a)/(b) 16.45% 12.10% 13.93%
(1) The ratios exclude the government-backed loan portfolio, unearned income,
accrued interest and fair value adjustments.
% of loans in Stage 2
No
31 Mar 2024 31 Mar 2023 30 Sep 2023
Stage 2 loans (a) £5,412m £7,153m £6,326m
Gross loans and advances (b) £73,261m £73,889m £73,295m
% of loans in stage 2 (a)/(b) 7.4% 9.7% 8.6%
% of loans in Stage 3
No
31 Mar 2024 31 Mar 2023 30 Sep 2023
Stage 3 loans (a) £1,164m £1,075m £1,080m
Gross loans and advances (b) £73,261m £73,889m £73,295m
% of loans in stage 3 (a)/(b) 1.6% 1.5% 1.5%
Total book coverage
No
31 Mar 2024 31 Mar 2023 30 Sep 2023
Impairment provisions on credit exposures (a) £617m £526m £617m
Gross loans and advances (b) £73,261m £73,035m £73,295m
Total book coverage (a)/(b) 0.84% 0.72% 0.84%
Stage 2 coverage((1))
No
31 Mar 2024 31 Mar 2023 30 Sep 2023
Stage 2 impairment provisions on credit exposures (a) £353m £349m £400m
Stage 2 gross loans and advances (b) £5,403m £7,073m £6,305m
Total stage 2 book coverage (a)/(b) 6.51% 4.94% 6.33%
Stage 3 coverage((1))
No
31 Mar 2024 31 Mar 2023 30 Sep 2023
Stage 3 impairment provisions on credit exposures (a) £162m £112m £128m
Stage 3 gross loans and advances (b) £984m £925m £920m
Total stage 3 book coverage (a)/(b) 16.45% 12.10% 13.93%
(1)
The ratios exclude the government-backed loan portfolio, unearned income,
accrued interest and fair value adjustments.
Additional information
Measuring financial performance
Financial performance metrics continued
Capital (Basis - non-IFRS):
Metric KPI Formula
Announced shareholder distributions Yes 6 months to 6 months to 12 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
Interim dividend (a) £26m £45m £45m
Final dividend (b) n/a n/a £27m
Buybacks (c) n/a n/a £200m
Statutory profit after tax attributable to ordinary equity holders (d) £210m £152m £192m
Announced shareholder distributions ((a)+(b)+(c))/(d) 12% 30% 142%
Common Equity Tier 1 (CET1) ratio (IFRS 9 transitional) No 31 Mar 2024 31 Mar 2023 30 Sep 2023
CET1 capital (IFRS 9 transitional) (a) £3,731m £3,627m £3,711m
RWA (IFRS 9 transitional) (b) £25,581m £24,703m £25,176m
CET1 ratio (IFRS 9 transitional) (a)/(b) 14.6% 14.7% 14.7%
CET1 ratio (IFRS 9 fully loaded) No 31 Mar 2024 31 Mar 2023 30 Sep 2023
CET1 capital (IFRS 9 fully loaded) (a) £3,693m £3,537m £3,599m
RWA (IFRS 9 fully loaded) (b) £25,551m £24,632m £25,087m
CET1 ratio (IFRS 9 fully loaded) (a)/(b) 14.5% 14.4% 14.3%
Tier 1 ratio No 31 Mar 2024 31 Mar 2023 30 Sep 2023
Tier 1 capital (a) £4,566m £4,221m £4,305m
RWA (b) £25,581m £24,703m £25,176m
Tier 1 ratio (a)/(b) 17.8% 17.1% 17.1%
Total capital ratio No 31 Mar 2024 31 Mar 2023 30 Sep 2023
Total capital (a) £5,339m £5,242m £5,327m
RWA (b) £25,581m £24,703m £25,176m
Total capital ratio (a)/(b) 20.9% 21.2% 21.2%
Tangible net asset value (TNAV) per share No 31 Mar 2024 31 Mar 2023 30 Sep 2023
Tangible equity (a) £4,674m £4,795m £4,840m
Number of ordinary shares in issue (b) 1,296m 1,366m 1,345m
Deferred shares (c) 1m 2m 2m
Own shares held (d) 4m 0.2m 1.3m
Tangible net asset value per share (a)/((b)+(c)-(d)) 361.2p 350.5p 359.8p
Common Equity Tier 1 (CET1) ratio (IFRS 9 transitional)
No
31 Mar 2024 31 Mar 2023 30 Sep 2023
CET1 capital (IFRS 9 transitional) (a) £3,731m £3,627m £3,711m
RWA (IFRS 9 transitional) (b) £25,581m £24,703m £25,176m
CET1 ratio (IFRS 9 transitional) (a)/(b) 14.6% 14.7% 14.7%
CET1 ratio (IFRS 9 fully loaded)
No
31 Mar 2024 31 Mar 2023 30 Sep 2023
CET1 capital (IFRS 9 fully loaded) (a) £3,693m £3,537m £3,599m
RWA (IFRS 9 fully loaded) (b) £25,551m £24,632m £25,087m
CET1 ratio (IFRS 9 fully loaded) (a)/(b) 14.5% 14.4% 14.3%
Tier 1 ratio
No
31 Mar 2024 31 Mar 2023 30 Sep 2023
Tier 1 capital (a) £4,566m £4,221m £4,305m
RWA (b) £25,581m £24,703m £25,176m
Tier 1 ratio (a)/(b) 17.8% 17.1% 17.1%
Total capital ratio
No
31 Mar 2024 31 Mar 2023 30 Sep 2023
Total capital (a) £5,339m £5,242m £5,327m
RWA (b) £25,581m £24,703m £25,176m
Total capital ratio (a)/(b) 20.9% 21.2% 21.2%
Tangible net asset value (TNAV) per share
No
31 Mar 2024 31 Mar 2023 30 Sep 2023
Tangible equity (a) £4,674m £4,795m £4,840m
Number of ordinary shares in issue (b) 1,296m 1,366m 1,345m
Deferred shares (c) 1m 2m 2m
Own shares held (d) 4m 0.2m 1.3m
Tangible net asset value per share (a)/((b)+(c)-(d)) 361.2p 350.5p 359.8p
Additional information
Measuring financial performance
Management exclude certain items from the Group's statutory position to arrive
at an 'excluding notable items' basis. The exclusion of notable items aims to
remove the impact of one-offs and other volatile items which may distort
period-on-period comparisons. Previously, items adjusted from the Group's
statutory position resulted in an 'underlying basis' of performance. The Group
no longer presents results on an underlying basis, moving instead to a
statutory presentation of its income statement, whilst still providing details
of notable items of income and expenditure. Comparative periods have not been
restated as the 'excluding notable items basis' is directly comparable to the
previously disclosed 'underlying basis'. Management's approach to notable
items 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 inclusion as a notable item.
Notable items within operating income
Item 6 months to 6 months to 6 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
£m £m £m Reason for inclusion as a notable item
Acquisition accounting unwinds (9) (3) (26) 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 treated as notable items until the
remaining amounts have been fully reversed.
Hedge ineffectiveness (8) (16) - 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) (1) These costs relate to UTM's transformation costs principally for the build of
a new platform for administration and servicing.
VISA shares - 1 - A one-off gain on conversion of Visa B Preference shares to Series A
preference shares.
Total (17) (19) (27)
Notable items within operating expenses
Item 6 months to 6 months to 6 months to
31 Mar 2024 31 Mar 2023 30 Sep 2023
£m £m £m Reason for inclusion as a notable item
Restructuring charges (33) (53) (78) These costs relate to the Group's £275m restructuring programme as first
announced alongside the Group's FY21 results.
Financial crime prevention programme (15) - - The Group has initiated a 'Financial Crime Prevention Programme' which will
deliver significantly enhanced financial crime, fraud, and cyber security and
controls across the Group's estate and is estimated to cost c.£130m over 3
years. This is a one-off programme of activity driving a significant increase
in spend.
Legacy conduct 4 (4) (8) These credits/(costs) are historical in nature and are not indicative of the
Group's current practices.
Other:
Transaction costs (5) - - Costs incurred as a direct consequence of the Nationwide offer. This includes
professional advisory fees, including incremental audit fees following the
resignation of PwC and appointment of EY.
Internally developed software adjustments - - (47) In FY23 the write-off charge was in relation to the Group's mortgage
digitisation programme. Following an assessment of the progress of
the project to upgrade the mortgage platform and challenges identified
during testing, we anticipate a significant deferral and redesign as we
implement the upgraded capability.
Property, plant and equipment, and investment property adjustments - - (12) In FY23, £6m of these costs related to a data cleanse exercise conducted on
the Group's fixed asset registers ahead of a migration to a single fixed asset
register and a £6m reduction in the valuation of an investment property due
to changes in market conditions.
Total (49) (57) (145)
Additional information
Measuring financial performance
Bank of England (BoE) Levy
The adjusted cost: income ratio, adjusted profit after tax attributable to
ordinary equity shareholders, and adjusted EPS exclude both the notable items
and the new BoE Levy. Whilst not regarded as a notable item, we believe that
the cost of the new Levy should be excluded from these specific performance
metrics in the current period as its impact on the Group's FY24 results was
unclear at the time the FY23 results were published and this was not clarified
until the relevant legislation required to implement the new Levy was passed
in Q1 2024. Additionally, the £10m expense was fully recognised in Q2 as
required under the new Levy, creating a distorted view of the cost: income
ratio and EPS in both Q2 and H1 2024. The calculation of the £10m expense is
the Group's best estimate of the liability due under the Levy based on
available information from the BoE.
We anticipate that in H2 2024, the interest income generated from the return
of the Cash Ratio Deposit funds will also be adjusted for these performance
metrics (the impact for H1 2024 is immaterial), together with any true-up
required to the £10m expense under the Levy as a result of the full liability
becoming known in Q4 2024.
Additional information
Glossary
For a glossary of terms and abbreviations used within this report refer to
pages 382 to 387 of the Group's 2023 Annual Report and Accounts.
For terms and abbreviations not previously included within the Glossary, or
where terms have been redefined, refer below:
Term Definition
Nationwide Nationwide Building Society, a building society authorised by the PRA and
regulated by the FCA and the PRA under registration number 106078
Nationwide group Nationwide and its subsidiary undertakings
Abbreviations
IBB Interest bearing balance
MA Management adjustment
MDA Maximum distributable amount
MES Model economic scenarios
MRM Model risk management
TCR Total capital requirement
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 Lucinda Charles-Jones((2))
Geeta Gopalan((2)(3))
Elena Novokreshchenova((2))
Darren Pope((2))
Non-Executive Director Sara Weller((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) Geeta Gopalan will step down from the Board on 30 June 2024.
(4) Member of the Governance and Nomination Committee.
.
VIRGIN MONEY UK PLC
Registered number 09595911 (England and Wales)
ARBN 609 948 281 (Australia)
Head Office: London Office: Registered Office:
177 Bothwell Street Floor 15, The Leadenhall Building Jubilee House
Glasgow 122 Leadenhall Street Gosforth
G2 7ER London Newcastle Upon Tyne
EC3V 4AB NE3 4PL
virginmoneyukplc.com
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