REG - Clydesdale Bank PLC - Interim Financial Report to 30 September 2024
27/11/2024 08:15
For best results when printing this announcement, please click on link below:
https://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20241127:nRSa7641Na&default-theme=true
RNS Number : 7641N Clydesdale Bank PLC 27 November 2024
CLYDESDALE BANK PLC
INTERIM FINANCIAL REPORT
6 MONTHS TO 30 SEPTEMBER 2024
Clydesdale Bank PLC is registered in Scotland (company number: SC001111) and
has its registered office at 177 Bothwell Street, Glasgow, G2 7ER.
BASIS OF PRESENTATION
Clydesdale Bank PLC (the Bank), together with its subsidiary undertakings
(which together comprise the 'Group'), operate under the Clydesdale Bank,
Yorkshire Bank and Virgin Money brands. It is the main operating subsidiary of
its immediate parent, Virgin Money UK PLC (Virgin Money). Following the
acquisition of Virgin Money by Nationwide Building Society (Nationwide), the
financial year end of the Bank was changed from 30 September to 31 March in
order to align to Nationwide's financial year end. This release therefore
covers the interim results of the Group for the 6 months ended 30 September
2024 and the Group's next Annual Report and Accounts will cover the 18-month
period ending 31 March 2025. Unless otherwise stated, income statement
commentaries throughout this document compare the 12 months ended 30 September
2024 to the 12 months ended 30 September 2023 and the balance sheet analysis
compares the Group balance sheet as at 30 September 2024 to the Group balance
sheet as at 30 September 2023. The Interim Financial Report is unaudited and
the independent review report is included on page 45.
Statutory basis: Statutory information is set out 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 73. This basis is classed as an alternative
performance measure, see below. In the Group's 2023 Annual Report and
Accounts, items adjusted from the Group's statutory position resulted in an
'underlying basis' of performance. Since then, the Group has not presented
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 73.
Alternative performance measures (APMs): the financial performance measures
used in monitoring the Group's performance and reflected throughout this
report are determined on a combination of bases (including regulatory and
APMs), as detailed at 'Measuring financial performance - glossary' on page 181
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, 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 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 'Clydesdale Bank PLC 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 Clydesdale Bank PLC 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 for the Company
or the Group.
Interim financial report
For the six months ended 30 September 2024
Contents
Business and financial review 1
Risk management 4
Risk overview 5
Credit risk 7
Financial risk 32
Statement of Directors' responsibilities 44
Independent review report to Clydesdale Bank PLC 45
Financial statements 46
Interim condensed consolidated income statement 46
Interim condensed consolidated statement of comprehensive income 47
Interim condensed consolidated balance sheet 48
Interim condensed consolidated statement of changes in equity 49
Interim condensed consolidated statement of cash flows 50
Notes to the interim condensed consolidated financial statements 51
Additional information 73
Business and financial review
Principal activities
The Group operates a full service UK-focused retail and commercial banking
business under the brand names 'Clydesdale Bank', 'Yorkshire Bank', 'and
'Virgin Money'. The bank is a strong, low risk bank focused on providing
residential mortgages, personal and business current accounts, savings,
personal loans and credit cards, loans for small and medium businesses, and
payment and transaction services.
The acquisition of Virgin Money by Nationwide became effective on 1 October
2024, with Virgin Money shares delisted on the same date. Following the
acquisition, the Virgin Money group is wholly owned by Nationwide, forming the
second largest provider of mortgages and retail savings in the UK.
Business review
Summary balance sheet
As at
30 Sep 2024 30 Sep 2023
£m £m
Customer loans 71,296 72,754
Other financial assets 17,328 17,760
Other non-financial assets 1,278 1,370
Total assets 89,902 91,884
Customer deposits (69,423) (66,609)
Wholesale funding (12,261) (16,680)
Other liabilities (2,670) (2,906)
Total liabilities (84,354) (86,195)
Ordinary shareholders' equity (4,855) (5,095)
Additional Tier 1 (AT1) equity (693) (594)
Equity (5,548) (5,689)
Total liabilities and equity (89,902) (91,884)
Summary income statement
6 months to 30 Sep 2024 12 months to 6 months to 30 Sep 2023 12 months to
30 Sep 2024 30 Sep 2023
£m £m £m £m
Net interest income (excluding notable items) 906 1,775 860 1,715
Non-interest income (excluding notable items) 75 146 78 158
Total operating income (excluding notable items) 981 1,921 938 1,873
Notable items in income 12 (6) (27) (47)
Statutory total operating income 993 1,915 911 1,826
Operating and administrative expenses (excluding notable items) (526) (1,028) (494) (971)
Notable items in expenses (66) (115) (145) (202)
Statutory operating and administrative expenses (592) (1,143) (639) (1,173)
Statutory operating profit before impairment losses 401 772 272 653
Impairment losses on credit exposures (84) (177) (165) (309)
Statutory profit on ordinary activities before tax 317 595 107 344
Tax expense (133) (176) (43) (95)
Statutory profit attributable to equity holders 184 419 64 249
Business and financial review (continued)
Notable items
6 months to 30 Sep 2024 12 months to 6 months to 30 Sep 2023 12 months to
30 Sep 2024 30 Sep 2023
£m £m £m £m
Operating income:
Acquisition accounting unwinds (net interest income) (8) (18) (26) (29)
Hedge ineffectiveness (non-interest income) (3) (11) - (16)
Other (non-interest income) 23 23 (1) (2)
Total notable items in statutory operating income 12 (6) (27) (47)
Operating expenses:
Restructuring charges (23) (56) (78) (131)
Financial crime prevention programme (22) (37) - -
Legacy conduct 7 11 (8) (12)
Other (28) (33) (59) (59)
Total notable items in statutory operating expenses (66) (115) (145) (202)
Operating profit before impairment losses (excluding notable items) 455 893 444 902
Summary
The Group performed well during the 12-month period to 30 September 2024 with
a solid overall performance, demonstrated by an improvement in statutory
profit after tax of £419m relative to £249m in the previous year. This
performance coincided with the acquisition process of Virgin Money by
Nationwide, which completed on 1 October 2024. While overall financial
performance improved, the acquisition did have some impact during the
six-month period to 30 September 2024, most notably as the Group incurred
transaction-related costs and paused restructuring activity.
Balance sheet summary
The Group delivered further lending growth in its target segments during the
12-month period to 30 September 2024, while overall customer lending was 2%
lower at £71.3bn. Mortgage balances reduced 4% during the 12-month period to
£55.1bn, as the Group safeguarded overall returns in a subdued market.
Business lending increased 7% overall, as growth in BAU balances offset
ongoing reductions in government-backed lending. Unsecured balances increased
4% to £6.8bn, driven by 8% growth in the credit card portfolio. We continued
to attract new deposits during the 12-month period to 30 September 2024,
supporting overall deposit growth of 4%.
The Group maintained a conservative balance sheet position, including stable
provision coverage, robust funding and liquidity and a strong capital
position. Total credit provisions at 30 September 2024 were £606m (30
September 2023: £617m) equivalent to a coverage ratio of 0.84% (30 September
2023: 0.84%). Funding and liquidity remain strong, with the 12-month average
LCR ratio increasing to 157% (30 September 2023: 146%) and 12-month average
net stable funding ratio (NSFR) stable at 138% (30 September 2023: 136%).
Profit and loss summary
During the 12-month period to 30 September 2024, the Group delivered growth in
statutory total income of 5% year-on-year, to £1,915m, mainly driven by a
£71m increase in net interest income. Statutory non-interest income was 13%
higher year-on-year, though was lower when excluding the effects of notable
income, including income relating to the purchase of abrdn Holdings Limited's
(abrdn) c.50% stake in Virgin Money Investments (VMI) in April. Operating and
administrative costs of £1,028m (excluding notable items) were 6% higher
year-on-year, reflecting inflation, the new BoE Levy, and the impact on cost
savings of the pause to our restructuring programme. Notable expenditure was
lower year-on-year, despite the Group incurring additional transaction
related-costs, given the higher scale of restructuring charges and intangible
asset write-downs incurred in the 12-month period to 30 September 2023. Credit
impairment losses of £177m were significantly lower year-on-year, reflecting
updated macroeconomic assumptions, the review of the application of
significant increase in credit risk (SICR) on the credit card portfolio and
resilient credit quality. The combination of all of these factors drove
improved profit before tax of £595m, 73% higher year-on-year.
Business and financial review (continued)
Capital
At 30 September 2024, the Group maintained a robust capital position, with a
CET1 ratio of 13.6% (IFRS 9 transitional basis) and a total capital ratio of
19.1%. The Group's CET1 ratio on an IFRS 9 fully loaded basis was 13.5%. The
Group's CET1 position included a deduction for the £250m (plus VAT of £50m)
TMLA fee((1)) due to Virgin Enterprises, following amendments to the brand
licence agreement between Virgin Money and Virgin Enterprises as part of the
Nationwide acquisition. Although this fee was not recognised for accounting
purposes, it was deducted from the Bank's regulatory capital resources as it
represented a foreseeable charge.
As detailed in note 5.6 to the interim condensed consolidated financial
statements, the Group has made a number of material accounting policy changes
to align with those used by Nationwide. These changes took place following
completion of the acquisition on 1 October 2024 and have therefore not been
recognised in the 30 September 2024 interim condensed consolidated financial
statements or capital position.
The accounting policy changes include revisions to EIR methodology for
mortgages and credit cards and will require restatement to prior periods. The
impact of the restatement will include reductions of £185m and £370m to the
mortgage EIR asset and to the credit card EIR asset respectively compared to
the 30 September 2024 positions. There remains the potential for further
adjustments following other changes to accounting policy and practice. On 1
October 2024, the Bank issued ordinary shares to Virgin Money for cash
consideration of £650m. This ordinary share issue mitigates the impact of the
accounting policy changes noted above on the Group's CET1 ratio.
Key performance indicators
The Directors do not rely on KPIs at the individual subsidiary level. The
performance of the Group is included in the Interim Financial Report of Virgin
Money UK PLC. The business is managed within the Virgin Money UK PLC Group and
the results are consistent with the Group's status as a fully integrated and
wholly owned subsidiary of the Virgin Money UK PLC Group. For this reason, the
Bank's Directors believe that providing further indicators for the Group
itself would not enhance an understanding of the development, performance or
position of the Group.
(1) For accounting purposes, the TMLA fee of £250m and the irrecoverable
VAT on the first instalment of £25m has been recognised in October 2024. The
VAT payable on the second instalment will be recognised in October 2025.
Further detail can be found in note 5.6 to the interim condensed consolidated
financial statements.
Risk management
Risk overview
Risk overview 5
Credit risk 7
Financial risk 32
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 to support good customer outcomes. Effective risk management supports
the sustainable delivery of our strategic objectives.
This report provides information on developments during the period relating to
the Group's risk exposures, including how those risks are managed or
mitigated.
Key developments in 2024
During 2024, Risk has focussed on the launch and delivery of key initiatives,
supporting the vision to 'Drive Better Outcomes Through More Impactful Risk
Management.'
Work continues to enhance risk management practices and reporting
capabilities. During the period significant effort has been made to ensure
readiness for the launch of our new Integrated Risk Management (IRM) system.
The new system will provide enhanced risk management practices and reporting
capabilities, improving transparency and understanding of risks and related
controls across the bank, and building a more data driven approach to risk
management. Control effectiveness requires focus, with the introduction of the
new IRM system and ongoing training supporting heightened awareness and better
controls. Internal policies, standards and procedures are being strengthened
in line with improved system capabilities to drive further improvements and
uplift overall control quality and completeness in readiness for increased
expectations under Principle 29 of the Corporate Governance Code 2024.
Additionally, work continues to enhance our internal fraud control
environment, with robust plans established which are due to be implemented by
December 2024.
A new model inventory solution was launched, delivering core functionality to
support adherence to the new supervisory statement (SS)1/23 'Model risk
management principles for banks'. This is another step forward as we continue
to automate and digitise, bringing efficiencies in our deliverables and
strengthening our model risk management objectives.
The second phase of Consumer Duty was implemented, including compliance with
the requirements for closed book review and reporting. This helps to deliver
good outcomes for our customers and included the launch of our new
vulnerability disclosure tool.
We have successfully launched our enhanced financial crime protection
programme, with all three lines of defence collaborating to ensure we can keep
our customers and the Group safe, and enable the Group to adapt to new and
evolving threats such as Artificial Intelligence (AI) and cybercrime.
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 2024 March Interim Financial Report.
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 The risk that the Group cannot meet its obligations to repay depositors' funds
in a timely manner or that there is insufficient ability to absorb losses.
Several categories of risk are included (liquidity, funding, capital, pension
and market risks), that must all be managed in a way that maintains the
confidence of customers, investors, and regulators.
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, failing to manage legal risks
effectively, 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, facilitation of tax evasion, sanctions,
fraud, and bribery and corruption.
Risk management
Risk overview
Principal risks (continued)
Principal risks Definitions
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.
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 over the medium to long
term (12 months +). 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 throughout the year and updated.
Risks Description
Economic and Geopolitical risks Uncertainty in the UK economic environment prevails and further changes were
outlined in the UK Government's October 2024 Budget, with inflation and Bank
rate levels continuing to impact consumer confidence and housing market
activity. These uncertainties could affect customer resilience and
consequently debt affordability.
Geopolitical volatility remains with ongoing conflict in Ukraine and Gaza, and
other global tensions arising. Although the Group's direct exposures to these
areas is very limited, there is the risk of a broader macroeconomic impact,
disruption in supply chains, and the heightened risk of cyber-attacks and
economic crime.
The Group maintains robust capital and liquidity levels, with stress testing
against a range of severe but plausible market scenarios performed to
understand and mitigate risks to financial resilience.
Evolving regulatory environment Firms remain subject to constantly evolving regulation and oversight from
different regulatory bodies. This regulatory landscape requires ongoing
responses, specialist resource and funding to execute multifaceted and
large-scale change projects, to ensure compliance.
It is anticipated that continued technological advancements and the rise of AI
will drive changing regulations which the Group will need to adopt, requiring
continued investment to protect our customers.
The Group works with regulators to ensure it meets its obligations and any
implications from upcoming regulatory activity are incorporated into the
strategic planning cycle.
Third-party risk There are increasingly complex and significant dependencies on third-party
suppliers, including outsourcing of certain activities, which require
effective management of the levels of risk that arise.
Dependencies on a particular supplier for multiple business capabilities could
affect resilience and mean a single failure disrupts multiple aspects of the
business. These risks are closely managed and mitigated through our
third-party framework, policy and standards.
Emergent Technology Risks Accelerated technological change in areas such as AI, quantum computing and
data science, places increasing strategic importance on the effective and
efficient use of systems and data to remain competitive. The Group's
operations and digital strategy are increasingly dependent on the use of
quality and timely data, within scalable and secure architecture, to support
decision making.
Integration risk There are a range of operational and people risks that could arise due to
integration activity following the acquisition by NBS, which could include:
Operational risk: The harmonisation of operational processes, IT and systems,
and organisational cultures, could negatively impact efficiency, productivity
and quality, and lead to increased costs and complexities, as well as
disruption to service and delivery, if not carefully managed.
People risk: People risk is heightened, driven by an uncertain and changing
environment which could have varying adverse impacts, for example on attrition
and talent attraction.
Cyberattacks The landscape of security and cyber threats continues to advance 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 current geopolitical and macroeconomic environment
heightens the risk of cyberattacks on the Group, with wide-ranging impacts
including financial and data loss, disruption to our business and customer
service, and reputational damage.
The Group is investing in capabilities to defend against cyber threats, with
key initiatives ongoing to upgrade propositions across areas such as financial
crime prevention and cyber defence.
Risk management
Credit risk
Section Page Tables Page
Credit risk overview 8
Group credit risk exposures 8 Maximum exposure to credit risk on financial assets, contingent liabilities 9
and credit-related commitments
Key credit metrics 9 Key credit metrics 9
Gross loans and advances ECL and coverage 10
Stage 2 balances 12
Credit risk exposure and ECL, by internal probability of default (PD) rating, 13
by IFRS 9 stage allocation
IFRS 9 staging 14
Mortgage credit performance 15 Breakdown of Mortgage portfolio 15
Collateral 16 Mortgage portfolio interest rate breakdown 15
Forbearance 16 Average LTV of Mortgage portfolio by staging 16
IFRS 9 staging 17 IFRS 9 staging 17
Unsecured credit performance 18 Breakdown of Unsecured credit portfolio 18
Forbearance 19
IFRS 9 staging 19 IFRS 9 staging 19
Business credit performance 21 Breakdown of Business credit portfolio 21
Forbearance 22
IFRS 9 staging 22 IFRS 9 staging 22
Macroeconomic assumptions, scenarios, and weightings 24
Macroeconomic assumptions 24 Scenarios 24
Key macroeconomic assumptions 25
Five-year simple averages on unemployment, GDP and HPI 27
The use of estimates, judgements and sensitivity analysis 27
The use of estimates 27 Economic scenarios 27
The use of judgement 28 Impact of changes to significant increase in credit risk (SICR) thresholds 28
on staging
Impact of management adjustments (MAs) on the Group's ECL allowance and 29
coverage ratio
Macroeconomic assumptions 30
Risk management
Credit risk (continued)
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, however not all
of that information has been replicated in this Interim Financial Report.
Close monitoring, clear policies and underwriting criteria, and a disciplined
approach to credit risk management support the Group's operations and have
underpinned its resilience in recently challenging times. Inflationary
headwinds and cost of living pressures are improving but remain sufficiently
challenging to continue to 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 reducing slightly overall to £71.9bn at 30
September 2024 (30 September 2023: £73.3bn) as 7% growth in target segments
of Unsecured and Business was offset by a 4% reduction in Mortgages. The
Unsecured balances increased 6% to £7.2bn (30 September 2023 £6.8bn), driven
by 9% growth in the credit card portfolio. Business lending increased 7%
overall to £9.3bn (30 September 2023: £8.7bn), as growth in BAU balances
offset ongoing reductions in government-backed lending.
Asset quality remains robust and most of the key asset quality ratios remained
resilient with no significant deterioration.
During the 12 month period to 30 September 2024, 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. The overall impact of this
change has been a reduction of £31m in the modelled ECL in the Unsecured
portfolio.
Primarily driven by an improving economic outlook, the updated macroeconomic
inputs have resulted in a release of modelled provision across all portfolios.
MAs also reduced in the period to £71m (30 September 2023: £76m). The total
ECL provision reduced to £606m as at 30 September 2024 (30 September 2023:
£617m); the coverage ratio remained stable at 84bps.
The impairment charge to the income statement is £177m (12 months to 30
September 2023: £309m) with an associated CoR of 24bps (12 months to 30
September 2023: 42bps).
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 £10.7bn of cash and balances with
central banks and £0.5bn due from other banks at amortised cost (30 September
2023: £11.3bn and £0.7bn respectively), with a further £6.1bn (30 September
2023: £6.2bn) of financial assets at FVOCI. Cash and balances with central
banks include £9.7bn 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 (continued)
Maximum exposure to credit risk on financial assets and credit-related
commitments
Gross loans and advances to customers Credit-related commitments Total
30 September 2024
£m £m £m
Mortgages 55,409 2,458 57,867
Unsecured 7,197 10,990 18,187
Business 9,334 4,217 13,551
Total 71,940 17,665 89,605
Impairment provisions on credit exposures ((1)) (602) (4) (606)
Fair value hedge adjustment (112) - (112)
Maximum credit risk exposure on lending assets 71,226 17,661 88,887
Cash and balances with central banks 10,695
Financial instruments at FVOCI 6,087
Due from other banks 518
Other financial assets at fair value 53
Due from related entities 47
Derivative financial assets 44
Maximum credit risk exposure on all financial assets ((2)) 106,331
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 661
Other financial assets at fair value 61
Due from related entities -
Derivative financial assets 135
Maximum credit risk exposure on all financial assets ((2)) 108,509
(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. Off-balance sheet exposures
include financial guarantees and other credit commitments.
(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 12 months to
30 Sep 2024 30 Sep 2024 30 Sep 2023 30 Sep 2023
£m £m £m £m
Impairment charge on credit exposures
Mortgage lending (4) (5) (1) 2
Unsecured lending 73 154 143 269
Business lending 15 28 23 38
Total Group impairment charge 84 177 165 309
Impairment charge ((1)) to average customer loans (cost of risk (CoR)) 0.23% 0.24% 0.45% 0.42%
(1) Inclusive of gains/losses on assets held at fair value and elements of fraud
loss.
As at
30 Sep 2024 30 Sep 2023
Key asset quality ratios
Loans in Stage 2 7.34% 8.63%
Loans in Stage 3 1.61% 1.47%
Total book coverage ((1)) 0.84% 0.84%
Stage 2 coverage ((1)) 6.14% 6.33%
Stage 3 coverage ((1)) 18.40% 13.93%
(1) Excludes the guaranteed element of government-backed loan schemes.
Risk management
Credit risk (continued)
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
30 September 2024
Mortgages Cards Loans and overdrafts Combined Business((2)) To
ta
l(
(2
))
£m % £m % £m % £m % £m % £m %
Stage 1 52,370 94.5% 5,565 83.7% 296 53.6% 5,861 81.4% 7,276 78.0% 65,507 91.1%
Stage 2 - total 2,477 4.5% 946 14.3% 249 45.2% 1,195 16.6% 1,606 17.2% 5,278 7.3%
Stage 2: 0 DPD 2,122 3.8% 889 13.4% 246 44.6% 1,135 15.8% 1,586 17.0% 4,843 6.7%
Stage 2: < 30 DPD 104 0.2% 27 0.4% 1 0.2% 28 0.4% 9 0.1% 141 0.2%
Stage 2: > 30 DPD 251 0.5% 30 0.5% 2 0.4% 32 0.4% 11 0.1% 294 0.4%
Stage 3((3)) 562 1.0% 134 2.0% 7 1.2% 141 2.0% 452 4.8% 1,155 1.6%
55,409 100.0% 6,645 100.0% 552 100.0% 7,197 100.0% 9,334 100.0% 71,940 100.0%
ECLs((4))
Stage 1 7 15.0% 72 18.9% 4 11.9% 76 18.4% 25 17.1% 108 17.8%
Stage 2 - total 22 44.1% 242 63.3% 21 72.3% 263 63.9% 38 26.5% 323 53.4%
Stage 2: 0 DPD 8 15.4% 210 55.0% 20 67.0% 230 55.8% 38 26.4% 276 45.6%
Stage 2: < 30 DPD 3 5.6% 13 3.3% - 1.3% 13 3.2% - 0.1% 16 2.6%
Stage 2: > 30 DPD 11 23.1% 19 5.0% 1 4.0% 20 4.9% - 0.0% 31 5.2%
Stage 3((3)) 20 40.9% 68 17.8% 5 15.8% 73 17.7% 82 56.4% 175 28.8%
49 100.0% 382 100.0% 30 100.0% 412 100.0% 145 100.0% 606 100.0%
Coverage
Stage 1 0.01% 1.37% 1.21% 1.36% 0.35% 0.16%
Stage 2 - total 0.86% 26.73% 8.76% 22.80% 2.44% 6.14%
Stage 2: 0 DPD 0.35% 24.71% 8.22% 20.97% 2.45% 5.70%
Stage 2: < 30 DPD 2.53% 49.62% 34.49% 48.95% 1.08% 11.09%
Stage 2: > 30 DPD 4.52% 66.11% 58.25% 65.57% 1.39% 11.01%
Stage 3((3)) 3.57% 52.22% 79.25% 53.43% 33.01% 18.40%
0.09% 6.06% 5.47% 6.02% 1.61% 0.84%
Undrawn exposures
Stage 1 2,344 95.4% 10,510 98.2% 269 94.1% 10,779 98.1% 3,668 87.0% 16,791 95.1%
Stage 2 102 4.1% 172 1.6% 16 5.6% 188 1.7% 530 12.5% 820 4.6%
Stage 3 12 0.5% 22 0.2% 1 0.3% 23 0.2% 19 0.5% 54 0.3%
2,458 100.0% 10,704 100.0% 286 100.0% 10,990 100.0% 4,217 100.0% 17,665 100.0%
Risk management
Credit risk (continued)
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 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 £39m 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 off-balance sheet exposures (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 (continued)
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:
30 September 2024 Unsecured
Mortgages Cards((3)) Loans and overdrafts Combined Business To
ta
l
£m % £m % £m % £m % £m % £m %
PD deterioration 1,390 56% 465 49% 247 99% 712 60% 713 44% 2,815 53%
Forbearance 98 4% 15 2% - - 15 1% 308 19% 421 8%
AFD or Watch List ((1)) 1 - - - - - - - 574 36% 575 11%
> 30 DPD 251 10% 30 3% 2 1% 32 3% 11 1% 294 6%
Other ((2)) 737 30% 436 46% - - 436 36% - - 1,173 22%
2,477 100% 946 100% 249 100% 1,195 100% 1,606 100% 5,278 100%
ECLs
PD deterioration 7 32% 105 43% 20 95% 125 48% 11 29% 143 44%
Forbearance 2 9% 5 2% - - 5 2% 10 26% 17 5%
AFD or Watch List ((1)) - - - - - - - - 17 45% 17 5%
> 30 DPD 11 50% 19 8% 1 5% 20 8% - - 31 10%
Other ((2)) 2 9% 113 47% - - 113 42% - - 115 36%
22 100% 242 100% 21 100% 263 100% 38 100% 323 100%
30 September 2023 Unsecured
Mortgages Cards Loans and Combined Business Total
overdrafts
£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.
(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 (continued)
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
30 September 2024 Lending ECL Lending £m ECL Lending £m ECL Lending £m ECL
£m £m £m £m £m
Mortgages PD range
Strong 0 - 0.74 50,750 4 1,283 1 - - 52,033 5
Good 0.75 - 2.49 1,303 1 420 1 - - 1,723 2
Satisfactory 2.50 - 99.99 317 2 774 20 - - 1,091 22
Default 100 - - - - 562 20 562 20
Total 52,370 7 2,477 22 562 20 55,409 49
Unsecured
Strong 0 - 2.49 4,795 38 16 1 - - 4,811 39
Good 2.50 - 9.99 1,061 37 720 105 - - 1,781 142
Satisfactory 10.00 - 99.99 5 1 459 157 - - 464 158
Default 100 - - - - 141 73 141 73
Total 5,861 76 1,195 263 141 73 7,197 412
Business
Strong 0 - 0.74 2,528 2 150 - - - 2,678 2
Good 0.75 - 9.99 4,740 23 1,307 27 - - 6,047 50
Satisfactory 10.00 - 99.99 8 - 149 11 - - 157 11
Default 100 - - - - 452 82 452 82
Total 7,276 25 1,606 38 452 82 9,334 145
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 £39m 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, 96% is classified as either 'Good' or 'Strong' under the Group's
internal PD rating scale (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 model economic scenarios (MES).
Risk management
Credit risk (continued)
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.
12 months to 30 September 2024 Stage 1 Stage 2 Stage 3((1)) Total provisions
£m
Gross ecl Gross ecl Gross ecl Total Income statement £m
loans £m loans £m loans £m gross
£m £m £m loans
£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 (6,934) (53) 6,907 412 - - (27) 359 359
Transfers from Stage 2 to Stage 1 5,881 54 (5,985) (340) - - (104) (286) (286)
Transfers to Stage 3 (85) (1) (679) (152) 769 177 5 24 24
Transfers from Stage 3 70 1 162 11 (249) (11) (17) 1 1
Net movement (1,068) 1 405 (69) 520 166 (143) 98 98
New assets originated or purchased ((2)) 20,091 91 700 47 300 46 21,091 184 184
Repayments and other movements ((3)) (3,071) 1 (612) 13 191 (8) (3,492) 6 6
Repaid or derecognised((3)) (16,334) (74) (1,541) (68) (696) (187) (18,571) (329) (329)
Write-offs - - - - (240) (240) (240) (240) -
Cash recoveries - - - - - 52 - 52 -
Individually assessed impairment charge - - - - - 218 - 218 218
Closing balance at 30 September 2024 65,507 108 5,278 323 1,155 175 71,940 606 177
12 months to 30 September 2023 Stage 1 Stage 2 Stage 3((1)) Total Total provisions Income statement £m
gross £m
loans
£m
Gross ecl Gross ecl Gross ecl
loans £m loans £m loans £m
£m £m £m
Opening balance at 1 October 2022 66,385 85 5,723 268 1,036 104 73,144 457
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 (556) (22) 140 (4) (3,406) (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 £39m 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
show an improving trend with a net increase in the proportion held in Stage 1,
and reduction in Stage 2. Updates to the macroeconomic assumptions used in the
Group's IFRS 9 modelling, the SICR model changes in the unsecured portfolio
and generally improved customer account performance all contribute to this.
The level of write offs in the current 12 month period is higher than the
prior 12 month period and has been primarily driven from the credit card
portfolio, in addition to a small number of individually significant business
write offs. Overall the levels of default across the portfolio remain low.
Risk management
Credit risk (continued)
IFRS 9 staging (continued)
The contractual amount outstanding on loans and advances that were written off
during the reporting period and still subject to enforcement activity was £7m
(30 September 2023: £5m). 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.
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
30 September 2024 £m £m £m £m £m % %
Residential - capital repayment 33,537 11 5 16 33,521 0.05% 55.6%
Residential - interest only 7,251 8 1 9 7,242 0.12% 48.9%
Buy-to-let (BTL) 14,621 8 16 24 14,597 0.17% 54.6%
Total Mortgage portfolio 55,409 27 22 49 55,360 0.09% 54.6%
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 to £55.4bn (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. Interest rates
remain elevated as the Bank of England (BoE) look to steadily reduce the rate
of inflation towards their 2% target, however the BoE base rate has reduced in
the second half of the financial year, which has slightly eased affordability
pressures and prompted a partial recovery in the housing market.
The portfolio continues to evidence good underlying credit performance, with
the majority (98%) of lending not past due at the balance sheet date (30
September 2023: 98%), and 95% of loans held in Stage 1 (30 September 2023:
94%). The proportion of the portfolio rated Strong or Good at the balance
sheet date under the Group's internal PD rating scale remains high at 97% (30
September 2023: 97%) reflecting the quality of the portfolio.
Stage 3 balances have remained low at 1.0% (30 September 2023: 1.0%) and 87%
of the portfolio has an LTV of less than 75% (30 September 2023: 91%), with
the weighted average LTV relatively stable in the period at 54.6% (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.
Mortgage portfolio - interest rate profile
30 September 2024 30 September 2023
£m % £m %
Fixed rate 50,408 91.0% 52,841 91.5%
Variable rate 3,194 5.7% 3,081 5.3%
Standard variable rate (SVR) 1,807 3.3% 1,875 3.2%
Total 55,409 100.0% 57,797 100.0%
The Group is a signatory to the Mortgage Charter introduced by the Government
to support mortgage customers impacted by higher mortgage interest rates and
provide help and support to those who are in financial difficulty. This
provides an option for borrowers who are up to date on their mortgage payments
to switch to interest only payments for a six-month period. To date the number
of customers requiring this support has been low.
Risk management
Credit risk (continued)
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
30 September 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% 20,177 39% 2 1,358 55% 3 247 44% 4 21,782 39% 9
50% to 75% 25,478 49% 3 977 40% 11 223 40% 5 26,678 48% 19
76% to 80% 2,731 5% - 63 3% 2 25 4% 1 2,819 6% 3
81% to 85% 1,821 3% 1 33 1% 1 15 3% 1 1,869 3% 3
86% to 90% 1,484 3% 1 29 1% 1 16 3% 1 1,529 3% 3
91% to 95% 615 1% - 11 - 1 12 2% 1 638 1% 2
96% to 100% 40 - - 1 - - 4 1% 1 45 - 1
Greater than 100% 24 - - 5 - 3 20 3% 6 49 - 9
52,370 100% 7 2,477 100% 22 562 100% 20 55,409 100% 49
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 £39m (30 September 2023: £48m) of POCI gross loans and
advances and (£1m) ECL (30 September 2023: (£1m)).
The Mortgage portfolio remains highly secured with 87% of mortgages, by loan
value, having an indexed LTV of less than 75% (30 September 2023: 91%), and an
average portfolio LTV of 54.6% (30 September 2023: 52.9%). The introduction of
a new 2 year fixed 95% product together with increased lending to first time
buyers in the period have driven the higher value of lending in the 91% to 95%
range. The total portfolio has reduced by 4.3% 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
3,701/£522m from 3,801/£498m at 30 September 2023. This remains 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 12 month period to 30 September 2024, there were 86
repossessions (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 (continued)
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.
12 months to 30 September 2024 Stage 1 Stage 2 Stage 3((1))
Gross ecl Gross ecl Gross ecl Total Total provisions £m Income statement £m
loans £m loans £m loans £m gross
£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 (3,914) (4) 3,892 38 - - (22) 34 34
Transfers from Stage 2 to Stage 1 3,466 3 (3,491) (31) - - (25) (28) (28)
Transfers to Stage 3 (46) - (297) (11) 342 9 (1) (2) (2)
Transfers from Stage 3 60 1 107 10 (176) (5) (9) 6 6
Net movement (434) - 211 6 166 4 (57) 10 10
New assets originated or purchased ((2)) 5,578 2 - - 1 - 5,579 2 2
Repayments and other movements ((3)) (2,444) (6) (109) (7) (13) 10 (2,566) (3) (3)
Repaid or derecognised((3)) (4,870) (2) (329) (4) (142) (5) (5,341) (11) (11)
Write-offs - - - - (3) (3) (3) (3) -
Individually assessed impairment release((4)) - - - - - (3) - (3) (3)
Closing balance at 30 September 2024 52,370 7 2,477 22 562 20 55,409 49 (5)
of which:
Residential - capital repayment 31,994 3 1,272 6 271 7 33,537 16
Residential - interest only 6,483 - 590 2 178 7 7,251 9
BTL 13,893 4 615 14 113 6 14,621 24
Stage 1 Stage 2 Stage 3((1))
12 months to 30 September 2023 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 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 £39m 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.
(4) During the period the Group implemented an updated valuation and calculated
provision process, a new MA has been introduced to reflect this policy while
upstream processes are adapted. Further details are shown on page 29.
Risk management
Credit risk (continued)
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, 86% 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 an improving macroeconomic outlook and successful outcomes in either
restoring customers to fully performing or resuming satisfactory repayment
schedules, as the Group remains 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
£5m in the period (12 months to 30 September 2023: charge of £2m) and
associated CoR of (1) bps (12 months to 30 September 2023: Nil bps). Provision
coverage has remained relatively stable in the period at 9bps (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 portfolio
Gross lending Modelled ECL MA Total ECL Net lending Coverage
30 September 2024 £m £m £m £m £m %
Credit cards 6,645 337 45 382 6,263 6.06%
Personal loans 524 28 (1) 27 497 5.03%
Overdrafts 28 3 - 3 25 14.34%
Total Unsecured lending portfolio 7,197 368 44 412 6,785 6.02%
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 £7.2bn (30 September 2023:
£6.8bn) with underlying growth in the credit card portfolio offset by
repayments in the personal loan portfolio.
The overall credit quality of the Unsecured portfolio is stabilising. In the
six months ended 30 September 2024, credit card arrears has gradually
improved, however, remains elevated reflecting the ongoing maturation and
diversification into higher risk segments. The proportion of the portfolio
classed as Stage 1 or Stage 2 not past due is 97% (30 September 2023: 97%),
with 92% of the portfolio rated Strong or Good at the balance sheet date under
the Group's internal PD rating scale (30 September 2023: 92%).
Stage 3 balances have remained low at 2.0% (30 September 2023: 1.7%). The
value of credit cards written off in the period, net of recoveries, was £168m
(12 months to 30 September 2023: £116m).
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. The overall impact of these changes has been a
reduction of £31m in the modelled ECL in the Unsecured portfolio. This has
been partially offset by the ECL attributable to the credit card portfolio
growth.
Overall, coverage reduced to 602bps (30 September 2023: 665bps).
Risk management
Credit risk (continued)
Unsecured credit performance (continued)
Forbearance
The level of forbearance concessions agreed in the Unsecured portfolio,
particularly in credit cards, has increased in line with a significantly
growing portfolio, diversification and elevated arrears, although remains
relatively low in proportion at 1.88% of the total portfolio lending at 30
September 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 £122m (30,598 accounts), an increase from
the 30 September 2023 position of £90m (22,206 accounts) reflective of the
portfolio growth and diversification strategy. This represents 1.96% of total
credit cards balances (30 September 2023: 1.56%).
Limited forbearance is exercised in relation to Personal loans and overdrafts,
and remains relatively stable at £1m (30 September 2024: £2m) which equates
to 0.36% 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))
12 months to 30 September 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 5,056 46 1,642 322 116 61 6,814 429
Transfers from Stage 1 to Stage 2 (1,779) (45) 1,785 352 - - 6 307 307
Transfers from Stage 2 to Stage 1 1,560 47 (1,639) (293) - - (79) (246) (246)
Transfers to Stage 3 (22) - (233) (133) 261 157 6 24 24
Transfers from Stage 3 - - 1 - (4) (4) (3) (4) (4)
Net movement (241) 2 (86) (74) 257 153 (70) 81 81
New assets originated or purchased ((2)) 1,307 11 - - 2 2 1,309 13 13
Repayments and other movements ((3)) (42) 20 (315) 28 206 (8) (151) 40 40
Repaid or derecognised((3)) (219) (3) (46) (13) (218) (135) (483) (151) (151)
Write-offs - - - - (222) (222) (222) (222) -
Cash recoveries - - - - - 51 - 51 -
Individually assessed impairment charge - - - - - 171 - 171 171
Closing balance at 30 September 2024 5,861 76 1,195 263 141 73 7,197 412 154
12 months to 30 September 2023 Stage 1 Stage 2 Stage 3((1))
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 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 (£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 (continued)
Unsecured credit performance (continued)
The changes to the credit card SICR model that removed the requirement for a
two-month probation, is the primary driver of the increase in the balance of
Unsecured lending classed as Stage 1 to 81.4% (30 September 2023: 74.2%), with
a corresponding decrease in assets in Stage 2 from 24.1% to 16.6%. Within the
Stage 2 category, 95.0% is not past due (30 September 2023: 95.4%). The
proportion classified as Stage 3 increased slightly to 2.0% (30 September
2023: 1.7%).
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 value of fraud losses has
increased from £6m to £12m, although remains modest in context to the
portfolio size. The total ECL held on balance sheet has decreased from £429m
at 30 September 2023 to £412m at 30 September 2024 with the improved economic
outlook and the removal of the staging probation period the primary drivers.
Modelled provision coverage, excluding MAs, is 510bps (30 September 2023:
589bps).
The total Unsecured impairment charge in the period is £154m (12 months to 30
September 2023: £269m), which is net of an individually assessed charge of
£171m (12 months to 30 September 2023: £124m). The associated CoR is 230bps
(12 months to 30 September 2023: 430bps).
The total provision coverage has reduced to 602bps (30 September 2023:
665bps).
Risk management
Credit risk (continued)
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 portfolio
Gross lending Govern-ment ((1)) Total gross Model-led & IA ECL MA Total ECL Net lending Cover-age ((2))
30 September 2024 £m £m £m £m £m £m £m %
Agriculture 1,393 33 1,426 5 - 5 1,421 0.39%
Business services 1,079 163 1,242 45 1 46 1,196 4.14%
Commercial Real Estate 838 3 841 5 - 5 836 0.67%
Government, health & education 1,554 28 1,582 9 - 9 1,573 0.61%
Hospitality 882 48 930 3 - 3 927 0.38%
Manufacturing 661 53 714 20 1 21 693 3.12%
Resources 164 4 168 1 - 1 167 0.77%
Retail and wholesale trade 790 103 893 20 1 21 872 2.65%
Transport and storage 369 23 392 5 - 5 387 1.27%
Utilities, post and telecoms 501 7 508 6 - 6 502 1.30%
Other 530 108 638 21 2 23 615 3.55%
Total Business portfolio 8,761 573 9,334 140 5 145 9,189 1.61%
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 and 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 £186m (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.
Gross Business lending increased to £9.3bn (30 September 2023: £8.7bn). The
government-guaranteed lending portfolio continues to reduce as borrowers repay
balances. These schemes are closed to new applications and have been replaced
by the Growth Guarantee Scheme from 1 July 2024, this lending will not be
separately tracked and reported. 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 46% (30 September 2023: 46%).
The proportion of loans in Stage 1 has increased from 72.5% at 30 September
2023 to 78.0% at 30 September 2024, with a corresponding decrease in the
proportion of loans in Stage 2 to 17.2% (30 September 2023: 22.8%). Within the
Stage 2 category, 98.8% is not past due (30 September 2023: 98.5%) Stage 3
loans remain modest at 4.8% (30 September 2023: 4.7%).
The PDs for Business lending combine both internal ratings information and
forward-looking economic forecasts. The proportion of assets classed as
'Strong' or 'Good' has increased to 93% (30 September 2023: 90%) primarily due
to the improved outlook.
Risk management
Credit risk (continued)
Business credit performance (continued)
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 £35m to
£60m at 30 September 2024. A range of external risks have remained prevalent
throughout the period including geopolitical, general inflationary pressures,
continued high interest rate environment and ongoing supply chain distribution
and labour market disruption. However, the economic outlook is more favourable
and the updated macroeconomic inputs have resulted in a £23m release of
modelled provision.
Overall, portfolio coverage remains prudent at 161bps (30 September 2023:
160bps).
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.
Business portfolio forbearance has remained relatively stable from £493m (291
customers) at 30 September 2023 to £517m (278 customers) at 30 September
2024.
As a percentage of the Business portfolio, forborne balances are 5.27% (30
September 2023: 5.35%) with impairment coverage increasing to 14.47% (30
September 2023: 9.14%), primarily due to individually assessed provisions
raised.
The majority of forbearance arrangements relate to term extensions allowing
customers a longer term to repay their obligations in full.
All balances subject to forbearance are classed as either Stage 2 or Stage 3
for ECL purposes.
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))
12 months to 30 September 2024 Gross ecl Gross ecl Gross ecl Total Total provisions((3)) Income statement £m
loans £m loans £m loans £m gross £m
£m £m £m loans
£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 (1,241) (4) 1,230 22 - - (11) 18 18
Transfers from Stage 2 to Stage 1 855 4 (856) (16) - - (1) (12) (12)
Transfers to Stage 3 (17) - (149) (9) 166 11 - 2 2
Transfers from Stage 3 10 - 55 1 (68) (2) (3) (1) (1)
Net movement (393) - 280 (2) 98 9 (15) 7 7
New assets originated or purchased ((1)) 13,206 78 699 47 297 44 14,202 169 169
Repayments and other movements ((2)) (585) (14) (188) (8) (3) (9) (776) (31) (31)
Repaid or derecognised((2)) (11,245) (69) (1,165) (50) (336) (48) (12,746) (167) (167)
Write-offs - - - - (15) (15) (15) (15) -
Cash recoveries - - - - - 1 - 1 -
Individually assessed impairment charge - - - - - 50 - 50 50
Closing balance at 30 September 2024 7,276 25 1,606 38 452 82 9,334 145 28
Risk management
Credit risk (continued)
Business credit performance (continued)
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 1,524 55 373 50 8,167 117
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 64
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 (172) (8) (1) (1) (699) (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 £186m (30 September 2023: £143m) of guarantee claim funds
received from British Business Bank.
The level of Business lending classed as Stage 1 increased to 78.0% (30
September 2023: 72.5%), with a corresponding decrease in Stage 2 from 22.8% at
30 September 2023 to 17.2% at 30 September 2024, primarily driven by an
improving macroeconomic outlook. The proportion of loans in Stage 2 and not
past due remains high at 98.8% (30 September 2023: 98.5%). The majority of the
balances in Stage 2 are 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 4.8%
(30 September 2023: 4.7%) and are predominantly comprised of fully secured
Bounce Back Loans.
The level of write offs in the portfolio remains low, with a small number of
customers driving the majority of the £15m 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 of £50m in the period (30
September 2023: £18m).
Included within the Stage 3 ECL provision of £82m are individually assessed
balances of £60m (30 September 2023: £50m of Stage 3 ECL provision including
£25m of individually assessed balances). This results in an overall provision
of £145m (30 September 2023: £131m) and an impairment charge of £28m in the
period (12 months to 30 September 2023: £38m) and associated CoR of 30bps (12
months to 30 September 2023: 44bps).
Risk management
Credit risk (continued)
Macroeconomic assumptions, scenarios and weightings
The Group's ECL allowance at 30 September 2024 was £606m (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 August 2024 and changes in macroeconomic assumptions between
then and 30 September 2024 have been considered in concluding on the quantum
of 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.
The base case scenario reflects an upturn in economic data since August 2023,
with GDP now forecast to rise by 1.1%, up from 0.4% previously. However, with
the new UK Government indicating a tightening of fiscal policies following
their review of the public finances, the improvement is not expected to carry
forward into next year, leaving the outer years of the forecast broadly
unchanged.
While future fiscal policy remains uncertain, the Bank of England's Monetary
Policy Committee has begun the process of loosening monetary policy with the
first cut of the base rate in August 2024. The latest forecast sees a steady
reduction in base rate down to the new floor of 2% by the end of 2027, the
previous floor of 1.75% was reached in Q2 2028. Against this backdrop,
inflation is set to remain marginally above the bank's target rate of 2%,
higher than previous forecast. Unemployment is also expected to peak slightly
lower (4.4%) but will take longer to return to the long term equilibrium rate
(3.75%), remaining low by historical standards.
During the period the Group introduced a fourth macroeconomic scenario to the
IFRS 9 models. Management determined that the inclusion of an additional
scenario would more appropriately reflect a wider range of possible outcomes
than the previous three scenario view provided. In addition, management also
observed that by only selecting three scenarios, the Group was not fully
aligned to prevailing industry best practice. The choice of scenarios and
weightings was debated and decided by the newly formed Provision Adequacy
Committee (PAC). The scenarios and weightings selected were as follows:
Scenario 30 Sep 2024 30 Sep 2023
(%) (%)
Upside 10 10
Base 55 55
Downside 20 35
Severe downside 15 n/a
The Group maintained the same scenarios and weightings as previously selected
for the upside and base scenarios. The Group opted to retain the existing
downside scenario with the previous weighting of 35% split between this and
the more severe downside scenario. This has maintained the overall split of
weights between the upside, base and downside scenarios in a relatively benign
forecasting environment.
Risk management
Credit risk (continued)
Macroeconomic assumptions (continued)
The key macroeconomic assumptions used in the scenarios in the period
are((1)):
Base (55%) Upside (10%) Downside (20%) Severe downside (15%)
GDP · Growth accelerates throughout 2024, reaching 2% by Q4 · GDP growth accelerates towards the end of 2024 and into 2025 to peak at · From a high of 1.3% in Q3 2024, GDP growth falls to c. 0% in Q4 and down to · GDP growth falls from a peak of 1.3% in Q3 2024 to a low of (4.8%) in Q3
5.3% in Q3 a low of (2.45%) in Q3 2025 2025
· Overall year on year growth is forecast at 1.1% in 2024, followed by 1.8%
in 2025 · Year on year growth in 2024 is 1.5%, followed by 4.7% in 2025 · From this low point the recovery is equally as swift, moving back into · The recession lasts for six quarters, returning to a position of growth in
growth in Q1 2026 to a stable 1.75% by the end of 2028 Q2 2026, but the recovery beyond that point is slow with the lost ground not
· Having initially peaked at the end of 2024 at 2% GDP dips before peeking a · From the peak in 2025 the rate falls rapidly back to a plateau of 2.4% in
recovered until 2029
second time in H2 2025 at 1.9% before gradually falling back to an equilibrium 2027 before falling again to the long run rate of 1.5% by the end of 2028 · This volatility results in annual growth of 0.6% in 2024, followed by a
rate of c. 1.5%
contraction of 1.8% in 2025 before recovering to grow by 0.9% in 2026, · Overall year on year growth is forecast at 0.3% in 2024, followed by a
followed by 1.3% in 2027 and 1.7% in 2028 contraction of 3.8% in 2025 and growth of 0.3%, 1.0% and 1.7% across the
remainder of the forecast
Inflation · The recent fall in inflation stalls at 2.1% before climbing back to 2.5% by · From a low of 2.1% in Q3 2024, inflation grows over the next 12 months to a · From the current rate of 2.1%, just above the Bank of England's target · Inflation continues to fall through the Bank of England's target rate to a
the end of 2024 peak of 3.8% in Q3 2025 rate, inflation falls steadily to a low of c. 0.9% in Q1 2026 low of c. 0.2% in H2 2025
· The rate fluctuates between 2.3% and 2.6% in 2025, closing out at 2.4% · From the 2025 high, the rate falls steadily, finally achieving the Bank of · From this low point the rate then gradually increases back to a baseline of · From this low point, inflation grows steadily, to stabilise at the 2.0%
England's target rate of 2% by the end of 2028 just below 2% by the end of 2027 target rate in Q1 2028, before dipping back slightly to 1.9% in Q4
· From early 2026 the rate begins to fall back towards the Bank of England's
target rate of 2%, which is achieved in 2029, albeit with some small seasonal · As a result, the average rate rises from 2.6% in 2024 to 3.5% in 2026
volatility on the way before falling back to 3.1% in 2027
Risk management
Credit risk (continued)
Macroeconomic assumptions (continued)
Base (55%) Upside (10%) Downside (20%) Severe downside (15%)
Base rate · The Bank of England's MPC began the process of easing monetary policy with · Following the rate reduction in August, the MPC raise the base rate back to · The MPC follow the August rate cut with a series of cuts, at a more · The Bank of England base rate is cut at an accelerated rate, falling to
a 0.25% cut to the base rate in August, with one further 0.25% cut forecast in 5.25% in Q4 2024 accelerated rate than seen in the other scenarios 1.5% by the end of 2025 at an average of 0.25% per month
2024
· The base rate remains at this level until Q4 2025 when a series of rate · The rate falls to 4.5% in December 2024, 2.25% in December 2025 and 1.5% in · The terminal rate of 0.75% is reached by the end of 2026
· The rate continues to fall steadily at 0.25% per quarter to a terminal rate cuts are initiated, bringing it down to a new terminal rate of 2.5% by Q2 2028 December 2026
of 2.0% by the end of 2027
HPI · Growth in HPI, which began in Q2 2024, continues throughout 2024 to a peak · Following a quarter-on-quarter fall in HPI in Q1 2024 the index grows · HPI peaks in Q3 2024 at c. 2.8% before falling to a low of (7.0%) over the · HPI contracts in Q4 2024, with negative growth of 0.3%, and continues to
of 3.9% in Q1 2025 rapidly to a peak of c. 5.2% in Q1 2025 next 12 months before climbing back to 4.9% by the end of 2028 fall to a low of 10.65% in Q3 2025
· The growth rate then falls rapidly to dip below zero in Q1 2026 before it · This peak is followed by a period of more volatile growth, from a low of · On an annualised basis, Q4 v Q4 growth in 2024 is 1.0%, which is followed · The rate of the contraction eases, but the value continues to fall until
again recovers to above 4% in 2028 1.9% in Q1 2026, to a high of 6.5% in Q3 2027, to a low of 4.2% in Q3 2028 and by contractions of 6.1% in 2025 and 2.5% in 2026 the end of 2027
back to 4.5% in Q1 2029
· Q4 v Q4 in 2024 sees growth of 3.8%, followed by 0.6%, 2.3%, 3.7% and 4.5%
· Q4 v Q4 growth in the outer years is 0.5% in 2027 and 4.9% in 2028 · On an annualised basis, Q4 v Q4 HPI contracts in 2024 by 0.3%, followed by
in 2025 through to 2028 · Overall Q4 v Q4 growth is 4.6% in 2024, followed by 2.6%, 4.7%, 6.0% and
9.3% in 2025, 5.3% in 2026 and 1.7% in 2027. The index returns to growth in
4.7% from 2025 through 2028 2028 with a rise of 5.2%
Unemployment · Unemployment forecasts remain volatile due to the low response rate to the · Unemployment peaks at 4.4% in Q3 2024, the same as in the base case · From the outset unemployment grows at a steady rate, from the current low · Unemployment grows from the
Labour Force Survey.
of 4.4% in Q3 2024 to a peak of 6.9% in Q3 2027 outset, rising to a peak of 7.3% in Q3 2027
· However, unlike the base case, the rate begins to fall back immediately and
· The latest forecast sees the rate peak at 4.4% in Q3 2024, where it remains at an increased rate, achieving the new long run forecast of 3.6% in Q1 2026 · From that peak, the subsequent fall is more subdued, only reaching 6.5% by · The recovery is also subdued, falling to 6.9% by the end of 2028
until it begins to fall back in Q2 2025
the end of 2028
· The rate falls gradually throughout the remainder of the forecast,
approaching the long run forecast level of 3.75% by the end of 2028
(1) The time periods referenced in this section relate to calendar years unless
otherwise stated.
Risk management
Credit risk (continued)
Five-year simple averages on unemployment, GDP and HPI
30 September 2024 Unemployment GDP HPI
% % %
Upside 3.8 2.6 4.4
Base 4.1 1.6 3.0
Downside 5.9 0.5 (0.4)
Severe downside((1)) 6.2 (0.1) (2.3)
30 September 2023
Upside 3.9 2.2 1.3
Base 4.2 1.2 (0.2)
Downside 6.1 0.2 (3.3)
(1) The number of scenarios included in the IFRS 9 macro-economic models was
increased from three to four compared to the prior period.
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. 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:
30 September 2024 Probability Severe downside
Weighted ((1)) Upside Base Downside £m
£m £m £m £m
Mortgages 27 24 25 30 33
Unsecured of which: 368 346 353 397 408
Cards 337 319 324 360 367
Personal loans and overdrafts((2)) 31 27 29 37 41
Business((2)) 80 69 74 90 101
Total 475 439 452 517 542
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 £71m relative to MAs and £60m of IA provision (30 September
2023: £76m and £30m respectively).
(2) Salary Finance (Salary Finance Loans Limited) 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
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.
Risk management
Credit risk (continued)
The use of estimates (continued)
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 four 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 most sensitive
inputs that have the most significant ECL impact. Having accessed the ECL
across the relevant portfolios, 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:
30 Sep 2024 30 Sep 2023
£m £m
A 10% movement in the mortgage portfolio from Stage 1 to Stage 2 +13 +13
A 10% movement in the credit card portfolio from Stage 1 to Stage 2 +120((1)) +89
A 10% movement in the business portfolio from Stage 1 to Stage 2 +13 +10
A PD stress which increases PDs upwards by 20% for all portfolios +125 +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.
Risk management
Credit risk (continued)
MAs
At 30 September 2024, £71m of MAs (30 September 2023: £76m) are included
within the total ECL provision of £606m (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.
The selection of appropriate MAs is a major component in determining the
Group's ECL, the impact of these adjustments and how they impact the Group's
total reported ECL allowance and coverage ratio for each portfolio is:
30 September 2024((1))
Mortgages Unsecured Business Total
£m £m £m £m
ECL before adjustments (A) 26.7 367.7 140.2 534.6
Adjustments:
To address economic resilience - - - -
Additional BTL impact 15.0 - - 15.0
Credit card adjustments - 45.7 - 45.7
Other adjustments 7.3 (1.4) 4.8 10.7
Total adjustments (B) 22.3 44.3 4.8 71.4
Total reported ECL (A + B) 49.0 412.0 145.0 606.0
% of total ECL (B / total reported ECL) 46% 11% 3% 12%
Coverage - total 0.09% 6.02% 1.61% 0.84%
Coverage - total ex MAs 0.05% 5.11% 1.50% 0.74%
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
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
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 a £15m MA (30 September 2023: £25m) to ensure the coverage
on this portfolio remains higher than the coverage on the residential
portfolio. The improvements in the economic outlook have resulted in the
release of the MA for economic uncertainty. The Group no longer raises
individually assessed provisions on the Mortgage portfolio and has implemented
an updated valuation and calculated provision process. A new MA has been
introduced to reflect this new policy within the ECL calculations while
upstream processes are adapted. An additional new MA has also been introduced
to reflect that the observed default rate in some cohorts of the portfolio is
higher than the model assumptions. These, together with other small MAs total
£7m (30 September 2023: £2m), taking total MAs held to £22m, down from
£32m at 30 September 2023.
Risk management
Credit risk (continued)
Unsecured
The Unsecured portfolio comprises credit cards, personal loans and overdrafts,
with credit cards the largest consideration for MAs. The Salary Finance joint
venture is also included in this portfolio.
A refresh of the existing debt sale MA, held to reflect up to date contract
terms, has reduced the overall debt sale MA held from £29m at 30 September
2023 to £22m at 30 September 2024. Two new MAs were introduced during the
period, a £11m MA in advance of a probable model realignment and a £13m MA
in recognition of a scheduled modelling upgrade which was implemented in
October 2024. A negative £3m MA held for the Salary Finance joint venture,
has been raised as a result of a reduction in the facility limit. This and
some other smaller MAs take the total MA held to £44m from £29m at 30
September 2023.
Business
The full £15m relating to economic uncertainty, implemented in September
2023, has been released as economic forecasts have improved.
A new £5m MA has been introduced to better reflect origination risk for some
lending facilities where the Group's 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. This
will be released when new processes are implemented to better identify these
occurrences.
The Group assesses and reviews the need for and quantification of MAs on a
regular basis via the newly formed PAC, with the CFO recommending the level of
MAs to the Board Audit Committee at each external reporting period.
Macroeconomic assumptions
Annual macroeconomic assumptions used over the five-year forecast period in
the scenarios and their weighted averages are as follows:((1))
30 September 2024
Scenario VMUK weighting Economic measure ((2)) 2024 2025 2026 2027 2028
% % % % %
Upside 10% Base rate 5.2 5.2 4.3 3.3 2.5
Unemployment 4.3 3.8 3.6 3.6 3.6
GDP 1.5 4.7 2.8 2.4 1.7
Inflation 2.6 3.5 3.1 2.5 2.2
HPI 4.6 2.6 4.7 6.0 4.4
Base 55% Base rate 5.1 4.2 3.2 2.3 2.0
Unemployment 4.3 4.3 4.1 3.9 3.8
GDP 1.1 1.8 1.8 1.7 1.6
Inflation 2.6 2.5 2.2 2.2 2.2
HPI 3.8 0.6 2.3 3.7 4.5
Downside 20% Base rate 5.1 3.1 1.8 1.5 1.5
Unemployment 4.4 5.4 6.4 6.9 6.6
GDP 0.6 (1.8) 0.9 1.3 1.7
Inflation 2.4 1.2 1.0 1.8 2.0
HPI 1.0 (6.1) (2.5) 0.5 4.9
Severe downside((3)) 15% Base rate 5.0 2.6 1.1 0.8 0.8
Unemployment 4.5 5.6 6.8 7.2 7.0
GDP 0.3 (3.8) 0.3 1.0 1.7
Inflation 2.4 0.5 0.5 1.6 2.0
HPI (0.3) (9.3) (5.3) (1.7) 5.2
Weighted average Base rate 5.1 3.9 2.7 2.0 1.8
Unemployment 4.4 4.7 4.9 5.0 4.8
GDP 0.9 0.6 1.5 1.6 1.7
Inflation 2.5 2.0 1.8 2.1 2.1
HPI 2.7 (2.0) 0.4 2.5 4.7
Risk management
Credit risk (continued)
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 August 2024 and
reported on a calendar year basis unless otherwise stated. Any changes in
macroeconomic assumptions between this date and 30 September 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.
(3) The number of scenarios included in the IFR9 macro-economic models was
increased from three to four compared to the prior period.
Risk management
Financial risk
Section Page Tables Page
Financial risk summary 33
Capital risk 33
Regulatory capital developments 33
Capital resources 34 Regulatory capital 34
Regulatory capital flow of funds 35
Risk weighted assets 36 Minimum capital requirements 36
RWA movements 36
IFRS 9 transitional arrangements 37 IFRS 9 transitional arrangements 37
Capital requirements 37 Minimum requirements 37
MREL 38 MREL position 38
Dividend 38
Leverage 39 Leverage ratio 39
Funding and liquidity risk 39
Sources of funding 40 Sources of funding 40
Liquid assets 41 LCR 41
Liquid asset portfolio 41
Analysis of debt securities in issue by residual maturity 41
External credit ratings 42 External credit ratings 42
Net interest income 42 Net interest income sensitivity 42
Structural hedge 43
LIBOR replacement 43
Risk management
Financial risk (continued)
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.
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
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. The PRA
then 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 published in PS 9/24 in September
2024. 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 to 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. Based on the Group's initial interpretation of the
near-final rules, the Group expects a benefit to the CET1 ratio from Basel 3.1
implementation on day 1 (1 January 2026). The Group expects the RWA output
floor based on the standardised approach to bind later in the transitional
period, subject to a more granular assessment of the PRA's final rules and the
evolution of the Group's balance sheet.
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, both of the PRA's 'near-final' policy statements on Basel 3.1
discuss the PRA's plans to perform 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.
Resolvability Assessment Framework
The Resolvability Assessment Framework sets out what is required to ensure
major UK banks can be safely resolved. Along with other firms, the Group
submitted an assessment of its resolvability outcomes that was the subject of
feedback from the BoE in August 2024. No material issues were identified with
respect to the Group's approach to achieving the Adequate Financial Resources
or Co-ordination and Communication outcome. An area for further enhancement
was identified relating to the Continuity and Restructuring outcome, and the
BoE will continue to engage with the Group on this issue. The engagement will
also cover the impact of the NBS acquisition.
Risk management
Financial risk (continued)
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 is summarised below:
30 Sep 2024 30 Sep 2023
Regulatory capital((1)) £m £m
Statutory total equity 5,548 5,689
CET1 capital: regulatory adjustments((2))
Other equity instruments (693) (594)
Defined benefit pension fund assets (322) (333)
Prudent valuation adjustment (5) (5)
Intangible assets (119) (162)
Goodwill (33) (11)
Deferred tax asset relying on future profitability (253) (369)
Cash flow hedge reserve (175) (496)
AT1 coupon accrual (15) (12)
TMLA fee((3)) (218) -
Foreseeable dividend on ordinary shares - (27)
Excess expected losses (125) (103)
IFRS 9 transitional adjustments 36 112
Unconsolidated losses arising from JV (5) (4)
Total regulatory adjustments to CET1 (1,927) (2,004)
Total CET1 capital 3,621 3,685
AT1 capital
AT1 capital instruments 693 594
Total AT1 capital 693 594
Total Tier 1 capital 4,314 4,279
Tier 2 capital
Subordinated debt 773 1,022
Total Tier 2 capital 773 1,022
Total regulatory capital 5,087 5,301
(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
(3)
Details on the TMLA fee can be found in note 5.6 of the interim condensed
consolidated financial statements and is treated as a 'foreseeable charge' for
capital purposes.
Risk management
Financial risk (continued)
Capital resources (continued)
12 months to 12 months to
30 Sep 2024 30 Sep 2023
Regulatory capital flow of funds((1)) £m £m
CET1 capital((2))
CET1 capital at 1 October 3,685 3,606
Retained earnings and other reserves (including special purpose entities) 108 (345)
Intangible assets and goodwill 21 94
Deferred tax asset relying on future profitability 116 48
Defined benefit pension fund assets 11 317
Movement in AT1 foreseeable distributions (3) 1
TMLA fee((3)) (218) -
Foreseeable dividend on ordinary shares - (27)
Excess expected losses (22) (3)
IFRS 9 transitional adjustments (76) (2)
Unconsolidated losses arising from JV (1) (4)
Total CET1 capital at 30 September 3,621 3,685
AT1 capital
AT1 capital at 1 October 594 662
AT1 instrument issued net of costs 346 -
AT1 instrument redeemed (247) (68)
Total AT1 capital at 30 September 693 594
Total Tier 1 capital at 30 September 4,314 4,279
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 30 September 773 1,022
Total capital at 30 September 5,087 5,301
(1) Data in the table is reported under CRD IV as implemented by the PRA on a
fully loaded basis with IFRS 9 transitional arrangements applied.
(2) CET1 capital is comprised of shares issued and related share premium, retained
earnings and other reserves less specified regulatory adjustments.
(3)
Details on the TMLA fee can be found in note 5.6 of the interim condensed
consolidated financial statements and is treated as a 'foreseeable charge' for
capital purposes.
The Group's CET1 capital reduced by £64m during the period. The Group
reported a profit after tax of £419m, which together with reductions in
intangibles and goodwill, pension and deferred tax asset deductions of £148m,
and after absorbing other movements in reserves, along with an increase in
excess expected losses and tapering of IFRS 9 transitional relief, led to a
net increase in CET1 of £371m. Capital generated was utilised to fund £217m
distributions to fund the share buyback programme and AT1 coupons in VMUK. The
TMLA fee, payable following completion of the Nationwide acquisition of Virgin
Money, has been recognised within capital as a foreseeable charge on an
after-tax basis, absorbing a further £218m.
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 (continued)
Risk weighted assets
30 September 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 57,753 8,683 694 60,354 9,072 726
Business lending 13,385 8,661 693 12,635 6,990 559
Other retail lending 17,730 5,144 412 17,586 4,819 385
Other lending 17,656 362 29 18,322 364 29
Other((1)) 574 660 53 587 662 54
Total credit risk 107,098 23,510 1,881 109,484 21,907 1,753
Credit valuation adjustment 110 9 278 22
Operational risk 2,841 227 2,841 227
Counterparty credit risk 139 11 146 12
Total 107,098 26,600 2,128 109,484 25,172 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
12 months to 30 September 2024 12 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 6,431 3,265 25,172 2,014 14,941 6,120 3,067 24,128 1,931
Asset size 22 405 - 427 34 60 129 - 189 15
Asset quality 918 13 - 931 75 (1,011) 124 - (887) (71)
Model updates((1)) (412) - - (412) (33) 1,486 - - 1,486 119
Methodology and policy 666 - - 666 53 - 5 - 5 -
Other - (9) (175) (184) (15) - 53 198 251 20
Closing RWA 16,670 6,840 3,090 26,600 2,128 15,476 6,431 3,265 25,172 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.£1.4bn to £26.6bn primarily due to increased lending in the
retail unsecured and business portfolios offset by reduced lending within the
mortgage portfolio. Model updates include a £0.5bn decrease in the hybrid
model MA and a £0.1bn increase in the business models MA,
Methodology and policy reflects changes in relation to business lending
updates and associated changes to the SME support factor being applied. Other
non-credit risk RWA movements are largely due to movements within the credit
valuation adjustment portfolio of £0.2bn.
Risk management
Financial risk (continued)
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:
30 September 2024 (£m)
Available capital (amounts) IFRS 9 Transitional basis IFRS 9 Fully loaded basis
CET1 capital 3,621 3,585
Tier 1 capital 4,314 4,278
Total capital 5,087 5,051
RWA (amounts)
Total RWA 26,600 26,571
Capital ratios
CET1 (as a percentage of RWA) 13.6% 13.5%
Tier 1 (as a percentage of RWA) 16.2% 16.1%
Total capital (as a percentage of RWA) 19.1% 19.0%
Leverage ratio
Leverage ratio total exposure measure 84,135 84,099
UK leverage ratio 5.1% 5.1%
Transitional arrangements in Capital Requirements Regulation (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 30 September 2024, £36m 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 30 Sep 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 30 September 2024 the Group maintained CET1 capital in excess
of its maximum distributable amount requirements equal to 2.7% of RWAs
(equivalent to £716m).
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 (continued)
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 September 2024 resulted in a
modest increase in total capital requirements of £117m and CET1 requirements
of £66m. At 30 September 2024 this resulted in a TCR of 11.41% of RWAs
(equivalent to £3,035m) of which 6.4% must be met with CET1 capital
(equivalent to £1,708m).
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:
30 Sep 2024 30 Sep 2023
£m £m
Total capital resources((1)(2)) 5,087 5,301
Eligible senior unsecured securities issued by Clydesdale Bank PLC((2)) 2,580 2,707
Total MREL resources 7,667 8,008
RWA 26,600 25,172
Total MREL resources available as a percentage of RWA 28.8% 31.8%
UK leverage exposure measure 84,135 86,545
Total MREL resources available as a percentage of UK leverage exposure measure 9.1% 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.
Clydesdale Bank PLC is a material subsidiary of VMUK and as such the BoE in
its capacity as the UK Resolution Authority can set an 'Internal MREL'. The
Group's internal MREL is set equal to the greater of two times its TCR or two
times the UK Leverage Ratio requirement. The Group also has a loss-absorbing
capacity (LAC) requirement equal to MREL plus any applicable buffers.
As at 30 September 2024, the Group's risk based LAC requirement of 27.3% of
RWA exposures (or 8.6% when expressed as a percentage of leverage) was greater
than the leverage based LAC requirement of 8.3% of leverage exposures, meaning
the RWA measure is the binding requirement.
MREL resources were £7.7bn (30 September 2023: £8.0bn), equivalent to 28.8%
of RWAs exposures (30 September 2023: 31.8%) or 9.1% when expressed as a
percentage of leverage (30 September 2023: 9.3%). This provides prudent
headroom of £0.4bn or 1.5% above the LAC requirement of 27.3% of RWAs, or
0.5% above the LAC requirement of 8.6% when expressed as a percentage of
leverage exposures.
Dividend
An interim dividend of £151m in respect of the period ending 31 March 2025
was paid in November 2023.
For details of dividends paid in the year see note 4.1.1 of the interim
condensed consolidated financial statements.
Risk management
Financial risk (continued)
Leverage
30 Sep 2024 30 Sep 2023
Leverage ratio £m £m
Total Tier 1 capital for the leverage ratio
Total CET1 capital 3,621 3,685
AT1 capital 693 594
Total Tier 1 capital 4,314 4,279
Exposures for the leverage ratio
Total assets 89,902 91,884
Adjustment for off-balance sheet items 2,978 2,999
Adjustment for derivative financial instruments 585 706
Adjustment for securities financing transactions 974 2,261
Adjustment for qualifying central bank claims (8,818) (9,052)
Regulatory deductions and other adjustments (1,486) (2,253)
UK leverage ratio exposure((1)) 84,135 86,545
UK leverage ratio((1)) 5.1% 4.9%
Average UK leverage ratio exposure((2)) 84,882 86,202
Average UK leverage ratio((2)) 5.0% 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 July 2024 to 30 September 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 5.1% (30 September 2023: 4.9%) exceeds the UK
minimum ratio of 3.25%.
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.
Risk management
Financial risk (continued)
Sources of funding
The table below provides an overview of the Group's sources of funding:
30 Sep 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Total assets 89,902 91,884
Less: Other liabilities((1)) (5,730) (6,293)
Funding requirement 84,172 85,591
Funded by:
Customer deposits 69,816 66,827
Debt securities in issue 5,807 6,155
Due to other banks 3,001 6,920
of which:
Secured loans 2,988 6,291
Securities sold under agreements to repurchase - 552
Transaction balances with other banks 1 -
Deposits with other banks 12 77
Equity 5,548 5,689
Total funding 84,172 85,591
(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 30 September 2024, the Group had a funding requirement of
£84,172m (30 September 2023: £85,591m) 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 £69,816m (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
Customer deposits are supported by wholesale term funding, providing diversity
and stability in funding mix. Debt securities decrease to £5,807m (30
September 2023: £6,155m) with maturities of existing programmes partially
offset by issuance from our medium-term note and securitisation programmes.
Equity
Equity of £5,548m (30 September 2023: £5,689m) 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 (continued)
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 30 Sep 2024 30 Sep 2023
£m £m
Eligible liquidity buffer 14,676 13,798
Net stress outflows 9,368 9,424
Surplus 5,308 4,374
LCR 157% 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.
30 Sep 2024 30 Sep 2023 Change Average at Average at
30 Sep 2024 30 Sep 2023
Liquid asset portfolio((1)) £m £m % £m £m
Level 1
Cash and balances with central banks 8,709 8,940 (2.6) 9,718 9,604
UK Government treasury bills and gilts 1,717 1,655 3.7 1,479 1,182
Other debt securities 3,059 3,153 (3.0) 3,102 2,782
Total level 1 13,485 13,748 (1.9) 14,299 13,568
Level 2((2)) 596 471 26.5 528 327
Total LCR eligible assets 14,081 14,219 (1.0) 14,827 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 30 September 2024 is 138% (30
September 2023: 136%) comfortably in excess of the regulatory 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 30 Sep 2024 30 Sep 2023
£m £m £m £m £m
Covered bonds 8 15 3,838 - 3,861 4,415
Securitisation 61 176 1,709 - 1,946 1,740
Total debt securities in issue 69 191 5,547 - 5,807 6,155
Risk management
Financial risk (continued)
External credit ratings
The Group's long-term credit ratings are summarised below:
Outlook as at As at
30 Sep 2024((1)) 30 Sep 2024 30 Sep 2023
Virgin Money UK PLC
Moody's Stable A3 Baa1
Fitch Rating Watch Positive BBB+ BBB+
Standard & Poor's CreditWatch Positive BBB- BBB-
Clydesdale Bank PLC
Moody's((2)) Stable A1 A3
Fitch Rating Watch 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.
Following the announcement of the potential acquisition by Nationwide in March
2024, the rating agencies in the table above had announced potential positive
changes to the Group's credit ratings.
On 6 September 2024, following regulatory approval of the acquisition, Moody's
upgraded the long-term senior unsecured and issuer ratings of Virgin Money to
A3 from Baa1 and the Group's long-term deposit rating to A1 from A3. These
changes reflect Moody's expectation that Nationwide will provide support to
its new subsidiary in case of need and an expectation that Nationwide and
Virgin Money will be resolved as a single unit in the case of failure. The
outlook on Virgin Money's long-term issuer and senior unsecured ratings, and
the outlook on the Group's deposit rating are now Stable. This is in line with
the outlook on Nationwide's long-term deposit and senior unsecured debt
ratings, and reflects Moody's view that the asset quality of the newly
combined group will remain resilient, and capital will remain strong.
On 1 October 2024, following the completion of the acquisition, both S&P
and Fitch announced rating actions.
S&P upgraded Virgin Money's long-term issuer credit rating to BBB from
BBB- and the Group's long-term issuer credit rating to A from A-. This
reflects S&P's view of Virgin Money's status within the new Nationwide
group as highly strategic and that the Virgin Money's subgroup will benefit
from a higher-rated parent's support. Following the rating actions, the
outlook was changed to stable from CreditWatch Positive, reflecting S&P's
view that Nationwide will continue to deliver a resilient performance and
maintain a robust balance sheet, while mitigating the execution risks arising
from the acquisition given the gradual integration timeline.
Fitch upgraded Virgin Money's long-term issuer default rating to A- from BBB+
and affirmed the Group's long-term issuer default rating at A-. The upgrade to
Virgin Money's rating reflects Fitch's view that Virgin Money will benefit
from a very high likelihood of support from Nationwide, while execution risks
are mitigated by transitional resolution arrangements and a conservative and
gradual integration process. For the same reasons, at the same time, Fitch
assigned the Group a new deposit rating of A, one notch above its long-term
issuer default rating. Following the rating actions, the outlook was changed
to Stable from Rating Watch Positive, mirroring the outlook on Nationwide.
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 30 Sep 2024 30 Sep 2023
£m £m
+25 basis point parallel shift 12 11
+100 basis point parallel shift 54 42
-25 basis point parallel shift (20) (11)
-100 basis point parallel shift (63) (45)
Risk management
Financial risk (continued)
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.
Structural hedge
The Group operates a structural hedging programme to manage interest rate risk
on rate insensitive balances. The structural hedge is used to mitigate any
volatility in the prevailing rate environment by smoothing NII, with a
weighted average life of around 2.5 years.
LIBOR replacement
All regulatory milestones in relation to LIBOR cessation have been met and
there are no conduct issues to note.
At 30 September 2024, the Group holds no LIBOR exposure, in any currency, on
the balance sheet (30 September 2023: £0.9m remained on three-month GBP
synthetic LIBOR).
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) an indication of important events that have occurred during the 12 months
ended 30 September 2024 and their impact on the interim condensed consolidated
financial statements and a description of the principal risks and
uncertainties for the remaining six months of the extended financial period to
31 March 2025; and
b) material related party transactions in the 12 months ended 30 September 2024
and any material changes in the related party transactions described in the
last Annual Report of Clydesdale Bank PLC.
Signed by order of the Board
Chris Rhodes
Chief Executive Officer
26 November 2024
Independent review report to Clydesdale Bank PLC
Conclusion
We have been engaged by Clydesdale Bank PLC (the Company) to review the
condensed set of financial statements in the interim financial report for the
six and twelve month periods ended 30 September 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 5.6. 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 and twelve month periods ended 30 September 2024
is not prepared, in all material respects, in accordance with UK adopted
International Accounting Standard 34.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 "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 UK adopted International Accounting Standard 34.
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 (UK) 2410 "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
26 November 2024
Financial statements
Interim condensed consolidated income statement
6 months to 12 months to 6 months to 12 months to
30 Sep 2024 30 Sep 2024 30 Sep 2023 30 Sep 2023
(unaudited) (unaudited) (unaudited) (audited)
Note £m £m £m £m
Interest income 2,467 4,851 2,122 3,830
Other similar interest 1 3 1 3
Interest expense and similar charges (1,570) (3,097) (1,289) (2,147)
Net interest income 2.1 898 1,757 834 1,686
Gains less losses on financial instruments at fair value (1) (9) - (17)
Other operating income 96 167 77 157
Non-interest income 2.2 95 158 77 140
Total operating income 993 1,915 911 1,826
Operating and administrative expenses before impairment losses 2.3 (592) (1,143) (639) (1,173)
Operating profit before impairment losses 401 772 272 653
Impairment losses on credit exposures (84) (177) (165) (309)
Profit on ordinary activities before tax 317 595 107 344
Tax expense 2.4 (133) (176) (43) (95)
Profit for the period 184 419 64 249
Attributable to:
Ordinary shareholders 144 353 38 195
Other equity holders 40 66 26 54
Profit for the period 184 419 64 249
All material items dealt with in arriving at the profit before tax for the
periods relate to continuing activities.
The notes on pages 51 to 72 form an integral part of these interim condensed
consolidated financial statements.
Financial statements
Interim condensed consolidated statement of comprehensive income
Note 6 months to 12 months to 6 months to 12 months to
30 Sep 2024 30 Sep 2024 30 Sep 2023 30 Sep 2023
(unaudited) (unaudited) (unaudited) (audited)
£m £m £m £m
Profit for the period 184 419 64 249
Items that may be reclassified to the income statement
Change in cash flow hedge reserve
(Losses)/gains during the period 4.1.3 (87) (390) 162 (268)
Transfers to the income statement 4.1.3 (16) (53) (3) (12)
Taxation thereon - deferred tax credit/(expense) 28 122 (44) 77
(75) (321) 115 (203)
Change in FVOCI reserve
Losses during the period (18) (34) (2) (50)
Transfers to the income statement (1) (1) - (1)
Taxation thereon - deferred tax credit 6 10 1 14
(13) (25) (1) (37)
Total items that may be reclassified to the income statement (88) (346) 114 (240)
Items that will not be reclassified to the income statement
Change in defined benefit pension plan (24) (113) (123) (544)
Taxation thereon - deferred tax credit 6 46 44 188
Taxation thereon - current tax credit/(expense) - 2 (1) 1
Total items that will not be reclassified to the income statement (18) (65) (80) (355)
Other comprehensive (losses)/gains, net of tax (106) (411) 34 (595)
Total comprehensive gains/(losses) for the period, net of tax 78 8 98 (346)
Attributable to:
Ordinary shareholders 38 (58) 72 (400)
Other equity holders 40 66 26 54
Total comprehensive gains/(losses) attributable to equity holders 78 8 98 (346)
The notes on pages 51 to 72 form an integral part of these interim condensed
consolidated financial statements.
Financial statements
Interim condensed consolidated balance sheet
30 Sep 2024 30 Sep 2023
(unaudited) (audited)
As at 30 September Note £m £m
Assets
Financial instruments 3.1
At amortised cost 3.1.1
Loans and advances to customers 3.1.1.1 71,226 72,191
Cash and balances with central banks 10,695 11,282
Due from other banks 518 661
At FVOCI 6,087 6,184
At FVTPL 3.1.2
Loans and advances to customers 3.1.2.1 52 59
Derivatives 3.1.2.2 44 135
Other 1 2
Due from related entities 5.2 47 -
Intangible assets and goodwill 152 173
Deferred tax 2.4 291 296
Defined benefit pension assets 3.2 429 512
Other assets 360 389
Total assets 89,902 91,884
Liabilities
Financial instruments 3.1
At amortised cost 3.1.1
Customer deposits 69,816 66,827
Debt securities in issue 3.1.1.2 5,807 6,155
Due to other banks 3.1.1.3 3,001 6,920
At FVTPL 3.1.2
Derivatives 3.1.2.2 191 290
Due to related entities 5.2 3,453 3,605
Deferred tax 2.4 107 179
Provisions for liabilities and charges 3.3 38 69
Other liabilities 1,941 2,150
Total liabilities 84,354 86,195
Equity
Share capital and share premium 4.1.1 2,792 2,792
Other equity instruments 4.1.2 693 594
Other reserves 157 503
Retained earnings 1,906 1,800
Total equity 5,548 5,689
Total liabilities and equity 89,902 91,884
The notes on pages 51 to 72 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 26 November 2024 and were signed on its behalf by:
Chris Rhodes Clifford Abrahams
Chief Executive Officer Chief Financial Officer
Company name: Clydesdale Bank PLC, Company number: SC001111
Financial statements
Interim condensed consolidated statement of changes in equity
Other reserves
Share capital and share premium Other equity instruments FVOCI Cash flow hedge reserve Retained earnings Total equity
reserve
Note 4.1.1 4.1.2 4.1.3
£m £m £m £m £m £m
As at 1 October 2022((1)) 2,792 662 44 699 2,214 6,411
Profit for the year - - - - 249 249
Other comprehensive losses net of tax - - (37) (203) (355) (595)
Total comprehensive losses for the year - - (37) (203) (106) (346)
AT1 distributions paid - - - - (54) (54)
Dividends paid to ordinary shareholders - - - - (248) (248)
Settlement of Virgin Money Holdings (UK) PLC share awards - - - - (2) (2)
AT1 redemption - (68) - - (4) (72)
As at 30 September 2023((1)) 2,792 594 7 496 1,800 5,689
Profit for the year - - - - 419 419
Other comprehensive losses net of tax - - (25) (321) (65) (411)
Total comprehensive (losses)/income for the year - - (25) (321) 354 8
AT1 distributions paid - - - - (66) (66)
Dividends paid to ordinary shareholders - - - - (177) (177)
AT1 issuance - 346 - - - 346
AT1 redemption - (247) - - (3) (250)
Settlement of Virgin Money Holdings (UK) PLC share awards - - - - (2) (2)
As at 30 September 2024((1)) 2,792 693 (18) 175 1,906 5,548
(1) The balances as at 1 October 2022 and 30 September 2023, and the movements in
the 12 month period to 30 September 2023 have been audited; the movements in
the 12 month period to 30 September 2024 are unaudited.
The notes on pages 51 to 72 form an integral part of these interim condensed
consolidated financial statements.
Financial statements
Interim condensed consolidated statement of cash flows
12 months to 12 months to
30 Sep 2024 30 Sep 2023
(unaudited) (audited)
For the period ended 30 September Note £m £m
Operating activities
Profit on ordinary activities before tax 595 344
Adjustments for:
Non-cash or non-operating items included in profit before tax (1,516) (1,203)
Changes in operating assets 502 (551)
Changes in operating liabilities 1,856 284
Payments for short-term and low value leases (1) (3)
Interest received 4,639 3,300
Interest paid (1,965) (1,173)
Tax paid (37) (50)
Net cash provided by operating activities 4,073 948
Cash flows from investing activities
Interest received 315 232
Proceeds from sale and maturity of financial assets at FVOCI 1,709 1,868
Purchase of financial assets at FVOCI (1,401) (2,950)
Proceeds from sale of property, plant and equipment 3 1
Purchase of property, plant and equipment (7) (9)
Purchase and development of intangible assets (6) (11)
Acquisition of controlled entities (20) -
Net cash provided by/(used in) investing activities 593 (869)
Cash flows from financing activities
Interest paid (989) (743)
Repayment of principal portions of lease liabilities 5.3 (22) (24)
Issuance of RMBS and covered bonds 5.3 500 1,826
Redemption and principal repayment on RMBS and covered bonds 5.3 (894) (1,012)
Issuance of AT1 securities 347 -
Redemption of AT1 securities (250) (72)
Amounts repaid under the TFSME 5.3 (3,250) (1,000)
Net increase in amounts due from related entities - 7
Net (decrease)/increase in amounts due to related entities 5.3 (319) 297
AT1 distributions 4.1 (66) (54)
Ordinary dividends paid 4.1 (177) (248)
Net cash used in financing activities (5,120) (1,023)
Net decrease in cash and cash equivalents (454) (944)
Cash and cash equivalents at the beginning of the period 11,667 12,611
Cash and cash equivalents at the end of the period 11,213 11,667
The notes on pages 51 to 72 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 30 September 2024 have been prepared in accordance with UK adopted IAS
34. 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 1 October 2024 Virgin Money was acquired by Nationwide. The Directors'
going concern assessment has focussed on the current Board approved strategy,
with consideration of integration related risks and the monitoring and
mitigation activities around them. 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 the Bank. Following completion, Nationwide is working
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 within the
Nationwide group structure. Nationwide expects that this review will be
completed within approximately 18 months from the acquisition date. The
Directors expect that Nationwide 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. This expectation reflects Nationwide's
approach to the management of the combined group following acquisition,
including the downstreaming of capital to mitigate the impact of transaction
related adjustments on the Group as set out in note 5.6.
Looking ahead, the Group will continue to focus on supporting customers and
maintaining operational stability while supporting Nationwide in its 18-month
strategic review of Virgin Money and gradual approach to integration. Further
details are contained in the Nationwide's Interim Results for the period ended
30 September 2024.
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.
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.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 1: Basis of preparation and accounting policies (continued)
1.3 Critical accounting estimates and judgements (continued)
EIR
The EIR is determined at initial recognition based upon the Group's best
estimate of the future cash flows of the financial instrument over its
expected life. Where these estimates are subsequently revised, a present value
adjustment to the carrying value of the asset is recognised in profit or loss.
Such adjustments can introduce income statement volatility and consequently
the EIR method is a source of estimation uncertainty.
Mortgages
For mortgage products the main accounting estimates and judgements when
calculating the EIR continue to be the product life (including assumptions
based on observed historic customer behaviour when in a standard variable rate
(SVR) period) and the applicable SVR.
As at 30 September 2024, a total EIR adjustment of £200m (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 was a charge representing (0.5)% of
gross customer interest income for mortgages (12 months to 30 September 2023:
a credit in the year representing 0.5% of gross customer interest income for
mortgages).
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 53.7% and a
long run average attrition rate of 4.4% per month.
As at 30 September 2024, a total EIR adjustment of £370m (30 September 2023:
£259m) has been recognised for credit cards. This represented 5.9% (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
16.5% 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 30 Sep 2024 30 Sep 2023
£m £m
+/- 1 month change to the timing of customer repayments, redemptions and 14/(14) 21/(18)
product transfers
50bps increase to the BoE base rate not passed through to the Group's SVR (45) (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 focusing on the post-promotional period.
Sensitivity impact on the credit card EIR adjustment 30 Sep 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 (9.3% relative increase/decrease) 48/(47) n/a
+/- 0.5 ppts change to post-promotional monthly balance attrition rate n/a (7)/7
(33% relative increase/decrease)
+/- 0.5 ppts change to monthly balance attrition rate (16.0% relative (18)/21 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.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 1: Basis of preparation and accounting policies (continued)
1.3 Critical accounting estimates and judgements (continued)
The sensitivities disclosed above are provided in the context of the Group's
policies and practices adopted at the balance sheet date. Following the
acquisition of Virgin Money by Nationwide on 1 October 2024, the Group has
made changes to EIR accounting for both mortgage and credit cards to align
with Nationwide. These changes have a material impact on EIR adjustments after
the balance sheet date. Refer to note 5.6 for further information.
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.
The IASB has issued a number of new amended International Financial Reporting
Standards (IFRSs) in the current and previous periods that are not mandatory
for the current reporting period and have not been early adopted by the Group.
The majority of these are not expected to have a material impact for the
Group.
IFRS 18 'Primary Financial Statements - General Presentation and Disclosures'
was issued on 9 April 2024 and is effective for reporting periods beginning on
or after 1 January 2027 (subject to UK endorsement). The new Standard will
replace IAS 1 'Presentation of Financial Statements' and while much of IAS 1
has been retained in IFRS 18, there are a number of new requirements whose aim
is to help entities improve how they communicate their financial performance
to investors. These include i) the presentation of new defined subtotals in
the income statement; ii) the disclosure of management-defined performance
measures; and iii) enhanced requirements for grouping (aggregation and
disaggregation) of information. Whilst the changes are a few years away from
becoming mandatory, the Group is currently analysing the full potential
impacts of the new Standard and expects IFRS 18 will alter the way certain
information is presented but will not have a material effect on the values
that are ultimately reported.
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 a reduction of £31m in the modelled ECL in the Unsecured portfolio.
1.5 Presentation of risk disclosures
Certain disclosures outlined in IFRS 7 'Financial Instruments: Disclosures'
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 (continued)
Section 2: Results for the period
2.1 Net interest income
6 months to 12 months to 6 months to 12 months to
30 Sep 2024 30 Sep 2024 30 Sep 2023 30 Sep 2023
(unaudited) (unaudited) (unaudited) (audited)
£m £m £m £m
Interest income
Loans and advances to customers 1,997 3,948 1,714 3,150
Loans and advances to other banks 310 581 262 435
Financial assets at FVOCI 160 322 146 245
Total interest income 2,467 4,851 2,122 3,830
Other similar interest
Financial assets at FVTPL 1 3 1 3
Total other similar interest 1 3 1 3
Less: interest expense and similar charges
Customer deposits (1,091) (2,076) (764) (1,233)
Debt securities in issue (252) (524) (231) (395)
Due to other banks (138) (326) (215) (372)
Due to related entities (86) (166) (76) (143)
Other interest expense (3) (5) (3) (4)
Total interest expense and similar charges (1,570) (3,097) (1,289) (2,147)
Net interest income 898 1,757 834 1,686
2.2 Non-interest income
6 months to 12 months to 6 months to 12 months to
30 Sep 2024 30 Sep 2024 30 Sep 2023 30 Sep 2023
(unaudited) (unaudited) (unaudited) (audited)
£m £m £m £m
Gains less losses on financial instruments at fair value
Held for trading derivatives 2 2 5 2
Financial assets at fair value((1)) 1 2 (3) -
Ineffectiveness arising from fair value hedges (31) (53) 16 29
Amounts recycled to profit and loss from cash flow hedges((2)) 26 56 4 2
Ineffectiveness arising from cash flow hedges 1 (16) (22) (50)
(1) (9) - (17)
Other operating income
Net fee and commission income 72 132 62 128
Margin on foreign exchange derivative brokerage 11 21 10 19
Gain on sale of financial assets at FVOCI 1 1 - 1
Share of JV loss after tax - (1) - -
Other income 12 14 5 9
96 167 77 157
Total non-interest income 95 158 77 140
(1) Included within financial assets at fair value is a credit risk gain on loans
and advances at fair value of £Nil for the 6 months to 30 September 2024 and
£Nil for the 12 months to 30 September 2024 (6 months to 30 September 2023:
£Nil, 12 months to 30 September 2023: £Nil) and a fair value gain on equity
investments of £Nil for the 6 months to 30 September 2024 and £Nil for the
12 months to 30 September 2024 (6 months to 30 September 2023: £Nil, 12
months to 30 September 2023: £Nil).
(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 or loss in JVs for the 6 months to 30
September 2024 was £2m loss and for the 12 months to 30 September 2024 was
£1m profit (6 months to 30 September 2023: £3m loss, 12 months to 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 £14m (12 months to 30 September 2023:
£15m).
On 2 April 2024 the Group acquired the remaining c50% ordinary share capital
of Virgin Money Unit Trust Managers Limited (UTM), a JV with abrdn Holdings
Limited (abrdn), for £20m. UTM is now a wholly owned subsidiary. Prior to the
acquisition date, the Group classed UTM as a JV accounted for under the equity
method. Details of the acquisition are shown in note 5.5.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
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 12 months to 6 months to 12 months to
30 Sep 2024 30 Sep 2024 30 Sep 2023 30 Sep 2023
(unaudited) (unaudited) (unaudited) (audited)
£m £m £m £m
Current account and debit card fees 48 96 48 100
Credit cards 33 62 35 63
Insurance, protection and investments 15 18 3 7
Other fees((1)) 8 15 8 16
Total fee and commission income 104 191 94 186
Total fee and commission expense (32) (59) (32) (58)
Net fee and commission income 72 132 62 128
(1) Includes mortgages, invoice and asset finance and ATM fees.
2.3 Operating and administrative expenses before impairment
losses
6 months to 12 months to 6 months to 12 months to
30 Sep 2024 30 Sep 2024 30 Sep 2023 30 Sep 2023
(unaudited) (unaudited) (unaudited) (audited)
£m £m £m £m
Staff costs 275 503 241 432
Property and infrastructure 17 47 40 74
Technology and communications 68 136 68 130
Corporate and professional services 100 198 131 240
Depreciation, amortisation and impairment 50 94 63 116
Other expenses 82 165 96 181
Total operating and administrative expenses 592 1,143 639 1,173
Staff costs comprise the following items:
6 months to 12 months to 6 months to 12 months to
30 Sep 2024 30 Sep 2024 30 Sep 2023 30 Sep 2023
(unaudited) (unaudited) (unaudited) (audited)
£m £m £m £m
Salaries and wages 156 303 143 275
Social security costs 17 35 17 32
Defined contribution pension expense 31 62 29 56
Defined benefit pension credit (12) (25) (26) (50)
Compensation costs 192 375 163 313
Equity based compensation((1)) 13 19 2 6
Bonus awards 36 48 14 22
Performance costs 49 67 16 28
Redundancy and restructuring 4 7 6 7
Temporary staff costs 11 20 12 24
Other 19 34 44 60
Other staff costs 34 61 62 91
Total staff costs 275 503 241 432
(1) Includes National Insurance on equity based compensation. On sanction of the
Scheme by the Court, on 27 September 2024, existing share awards vested. At
this date, the share-based payment charge was accelerated because there are no
remaining service or performance conditions. For some employees who are
Material Risk Takers, whilst the awards vested on Court Sanction, they are
still being delivered over the original vesting schedule to meet PRA
regulations.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 2: Results for the period (continued)
2.4 Taxation
6 months to 12 months to 6 months to 12 months to
30 Sep 2024 30 Sep 2024 30 Sep 2023 30 Sep 2023
(unaudited) (unaudited) (unaudited) (audited)
£m £m £m £m
Current tax
Current period 34 66 6 29
Adjustment in respect of prior periods 2 1 (1) (2)
36 67 5 27
Deferred tax
Current period 96 108 38 71
Adjustment in respect of prior periods 1 1 - (3)
97 109 38 68
Tax expense for the period 133 176 43 95
The tax assessed for the period differs from that arising after 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 12 months to 6 months to 12 months to
30 Sep 2024 30 Sep 2024 30 Sep 2023 30 Sep 2023
(unaudited) (unaudited) (unaudited) (audited)
£m £m £m £m
Profit on ordinary activities before tax 317 595 107 344
Tax expense based on the standard rate of corporation tax in the UK of 25% 79 149 24 76
(2023: 22%)
Effects of:
Disallowable expenses 1 - 2 3
Deferred tax assets derecognised 54 62 19 19
Impact of rate changes (charge/(credit)) 3 (27) 5 9
AT1 distribution (10) (17) (6) (12)
Banking surcharge 4 7 - 5
Adjustments in respect of prior periods 2 2 (1) (5)
Tax expense for the period 133 176 43 95
The Group's effective tax rate is 29.6% (12 months ended 30 September 2023:
27.6%). This is higher than the standard rate of corporation tax due to loss
de-recognition as a result of changes to future forecast profits. The credit
for the 12 months to 30 September 2024, arising from rate changes in the
period relates to the impact of the reduction in the authorised surplus
payments charge rate from 35% to 25% with effect from 6 April 2024, which
applies to the Group's defined benefit pension scheme.
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
As at 1 October 2022((1)) (8) (267) (16) 417 111 19 256 (350) (350)
Income statement credit/(charge) 2 1 - (42) (8) (4) (51) (17) (17)
Other comprehensive income credit - 77 14 - - - 91 188 188
As at 30 September 2023((1)) (6) (189) (2) 375 103 15 296 (179) (179)
Income statement credit/(charge) 1 1 (1) (124) (9) (3) (135) 26 26
Deferred taxes acquired in business combinations - - - 2 - (4) (2) - -
Other comprehensive income credit - 122 10 - - - 132 46 46
As at 30 September 2024((1)) (5) (66) 7 253 94 8 291 (107) (107)
(1) The balances as at 1 October 2022 and 30 September 2023, and the movements in
the 12 month period to 30 September 2023 have been audited; the balances and
movements in the 12 month period to 30 September 2024 are unaudited.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 2: Results for the period (continued)
2.4 Taxation (continued)
The deferred tax assets and liabilities detailed above arise primarily in the
Bank 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 £89m (30 September 2023:
£21m) on £356m gross losses (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 30 September 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 £244m or increase to £338m respectively. If Group taxable
profit forecasts were 10% lower than anticipated, the total deferred tax asset
would be £275m. If Group taxable profit forecasts were 10% higher than
anticipated, the deferred tax asset would be £307m. All tax assets arising
will be used within the UK.
Other temporary differences include deferred tax assets for the IFRS 9
transitional adjustment of £7m and equity-based compensation of £5m (30
September 2023: £9m and £5m respectively) offset by a deferred tax liability
on the customer intangible asset created on the acquisition of the remaining
c50% of UTM in April 2024 (note 5.5).
On 11 July 2023, the UK Government enacted legislation to implement the
G20-OECD Inclusive Framework Pillar 2 rules in the UK, including a Qualified
Domestic Minimum Top-Up Tax rule. This legislation, applicable to both wholly
domestic groups and multinationals, seeks to ensure that large
UK-headquartered enterprises pay a minimum tax rate of 15% on UK and overseas
profits. The legislation is effective for accounting periods beginning on or
after 31 December 2023. As highlighted at note 5.6, Virgin Money was acquired
by Nationwide on 1 October 2024. This will be the first (tax) accounting
period for which the Group is in scope of the Pillar 2 legislation; it will
form part of the Nationwide group assessment in Nationwide's consolidated
March 2025 Annual Report and Accounts.
There is a transitional 'safe harbour' regime which aims to reduce the
compliance burden in the early years of the legislation. Where a group elects
to use this regime and meets a minimum effective tax rate then no top-up tax
arises. No material impact of Pillar 2 is expected for members of the
Nationwide group, including Virgin Money, as it is UK-based; the standard rate
of corporation tax in the UK is 25% (28% where the banking surcharge is
relevant). However, as the effective tax rate will depend upon financial
results at the time of each periodic assessment, no forward-looking assurance
can be provided. The IAS 12 exemption to recognise and disclose information
about deferred tax assets and liabilities related to Pillar 2 income taxes has
been applied.
.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
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
30 Sep 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Gross loans and advances to customers 71,940 73,295
Impairment provisions on credit exposures((1)) (602) (612)
Fair value hedge adjustment (112) (492)
71,226 72,191
(1) ECLs on off-balance sheet exposures of £4m (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 £52m (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 £71,278m (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:
30 September 2024 (unaudited) Securitisation Covered bonds Total
£m £m £m
Debt securities 1,935 3,838 5,773
Accrued interest 11 23 34
1,946 3,861 5,807
30 September 2023 (audited) Securitisation Covered bonds Total
£m £m £m
Debt securities 1,729 4,392 6,121
Accrued interest 11 23 34
1,740 4,415 6,155
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/.
12 months to 30 Sep 2024 (unaudited) 12 months to 30 Sep 2023 (audited)
Issuances Redemptions Issuances Redemptions
Denomination £m Denomination £m Denomination £m Denomination £m
Securitisation GBP 500 GBP 294 GBP 900 USD, GBP 1,012
Covered bonds - - GBP 600 EUR, GBP 926 - -
500 894 1,826 1,012
(1) Other movements relate to foreign exchange, hedging adjustments and the
capitalisation and amortisation of issuance costs.
3.1.1.3 Due to other banks
30 Sep 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Secured loans 2,988 6,291
Securities sold under agreements to repurchase((1)) - 552
Transaction balances with other banks 1 -
Deposits from other banks 12 77
3,001 6,920
(1) There are no underlying securities sold under agreements to repurchase as at
30 September 2024 (carrying value of underlying securities sold under
agreements to repurchase at 30 September 2023: £1,047m). In the prior year,
these related 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).
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 3: Assets and liabilities (continued)
3.1 Financial instruments (continued)
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 £52m (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).
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:
30 Sep 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Fair value of derivative financial assets
Designated as hedging instruments 16 96
Designated as held for trading 28 39
44 135
Fair value of derivative financial liabilities
Designated as hedging instruments 147 204
Designated as held for trading 44 86
191 290
Cash collateral totalling £151m (30 September 2023: £267m) has been pledged
and £4m 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 £Nil (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.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 3: Assets and liabilities (continued)
3.1 Financial instruments (continued)
3.1.2 Financial instruments at fair value through profit or loss
3.1.2.2 Derivative financial instruments
30 Sep 2024 (unaudited) 30 Sep 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) 31,563 394 165 51,185 1,295 545
Less: net settled interest rate swaps((1)) (31,460) (384) (162) (49,888) (1,222) (531)
Interest rate swaps (net)((2)) 103 10 3 1,297 73 14
Fair value hedges
Interest rate swaps (gross)((3)) 23,760 691 816 19,203 1,219 862
Less: net settled interest rate swaps((1)) (23,060) (691) (804) (18,113) (1,206) (820)
Interest rate swaps (net)((2)) 700 - 12 1,090 13 42
Cross currency swaps((2)) 2,477 6 132 2,350 10 148
3,177 6 144 3,440 23 190
Total derivatives designated as hedging instruments 3,280 16 147 4,737 96 204
Derivatives designated as held for trading
Foreign exchange rate related contracts
Spot and forward foreign exchange((2)) 579 8 6 654 7 9
Options((2)) - - - - - -
579 8 6 654 7 9
Interest rate related contracts
Interest rate swaps (gross) 1,997 30 30 1,910 47 50
Less: net settled interest rate swaps((1)) (911) (22) (5) (753) (43) (1)
Interest rate swaps (net)((2)) 1,086 8 25 1,157 4 49
Swaptions((2)) 10 - 1 10 - 1
Options((2)) 1,260 5 5 1,067 16 16
2,356 13 31 2,234 20 66
Commodity related contracts 128 7 7 167 12 11
Total derivatives designated as held for trading 3,063 28 44 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 £431m. These swaps are centrally
cleared and net settled.
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.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 3: Assets and liabilities (continued)
3.1 Financial instruments (continued)
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. The financial assets and liabilities exclude
certain financial instruments presented within other assets and other
liabilities relating to accruals, trade receivables, trade payables and
settlement balances which are classified as amortised cost.
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 difference
between carrying value and fair value is relevant in a trading environment but
is not relevant to balances such as loans and advances to customers and
customer deposits.
30 Sep 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)) 71,226 71,612 72,191 71,611
Financial liabilities
Customer deposits((2)) 69,816 69,806 66,827 66,625
Debt securities in issue((2)) 5,807 5,855 6,155 6,191
Due to other banks((2)) 3,001 3,001 6,920 6,940
Due to related entities((2)) 3,453 3,555 3,605 3,699
(1) Categorised as Level 3 in the fair value hierarchy with the exception of
£1,114m (30 September 2023: £1,085m) of overdrafts which are categorised as
Level 2.
(2) Categorised as Level 2 in the fair value hierarchy.
(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
30 Sep 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 6,087 - - 6,087 6,184 - - 6,184
Loans and advances to customers - 52 - 52 - 59 - 59
Derivatives - 44 - 44 - 135 - 135
Other - - 1 1 - - 2 2
Total financial assets at fair value 6,087 96 1 6,184 6,184 194 2 6,380
Financial liabilities
Derivatives - 191 - 191 - 290 - 290
Total financial liabilities at fair value - 191 - 191 - 290 - 290
There were no transfers between Level 1 and 2 in the current or prior period.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 3: Assets and liabilities (continued)
3.2 Retirement benefit obligations
The Group funds a defined benefit pension scheme, the Yorkshire and Clydesdale
Bank Pension Scheme (the Scheme). The Bank is the sponsoring employer in the
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
the present value of the defined benefit obligation:
30 Sep 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Fair value of Scheme assets 2,823 2,796
Defined benefit obligation (2,394) (2,284)
Net defined benefit pension asset 429 512
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 as at 30 September 2024 is a
liability of £27m (30 September 2023: £Nil).
The latest formal triennial valuation for the Scheme was undertaken as at 30
September 2022 and reported a surplus of £256m (previously a surplus of
£144m based on Scheme data and market conditions as at 30 September 2019) and
a technical provision funding level of 109% (previously 103%). 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.
In June 2023, His Majesty's High Court of Justice issued a ruling in respect
of Virgin Media Limited versus NTL Pension Trustees II Limited (and others)
challenging the validity of rule amendments made to pension schemes contracted
out on a Reference Scheme Test basis between 6 April 1997 and 5 April 2016. An
appeal hearing was subsequently held in June 2024 with the Court of Appeal
upholding the initial High Court determination. The Group is aware of the
resulting request for guidance across the industry from the Department of Work
& Pensions following this determination. The Scheme Trustees have taken
initial legal advice and await further industry guidance to be issued.
Directors have undertaken a high-level assessment and have concluded that the
likelihood of any impact on member liabilities is remote.
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((1)) 7 13 27 3 50
Charge to the income statement 7 - 24 2 33
Utilised (6) (3) (5) - (14)
As at 30 September 2023((1)) 8 10 46 5 69
Charge/(credit) to the income statement 10 (3) 2 (1) 8
Utilised (12) (1) (26) - (39)
As at 30 September 2024((1)) 6 6 22 4 38
(1) The balances as at 1 October 2022 and 30 September 2023, and the movements in
the 12 month period to 30 September 2023 have been audited; the balances and
movements in the 12 month period to 30 September 2024 are unaudited.
Employee related costs provision
This includes provision for staff redundancies and for NIC on equity based
compensation. During the period, provisions of £10m (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. Following a review of the
final amounts required £3m was released during the period (30 September
2023: £Nil).
Property provision
This includes costs for stores and office closures. During the period,
provisions of £2m (30 September 2023: £24m) were raised.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 4: Capital
4.1 Equity
4.1.1 Share capital and share premium
30 Sep 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Share capital 1,243 1,243
Share premium 1,549 1,549
2,792 2,792
30 Sep 2024 30 Sep 2023
(unaudited) (audited) 30 Sep 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 and closing ordinary share capital 12,431,538,208 12,431,538,208 1,243 1,243
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 Bank.
All shares in issue at 30 September 2024 rank equally with regard to the
Bank'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 0.83p per ordinary share in the Bank amounting to £103m was paid in March
2023.
· An interim dividend of £50m in respect of the year ended 30
September 2023 was paid in November 2022.
· Further interim dividends amounting to £45m and £50m, were paid
in June 2023 and August 2023 respectively.
· A final dividend in respect of the year ended 30 September 2023
of 0.21p per ordinary share in the Company, amounting to £26m, was paid in
March 2024.
· An interim dividend of £151m in respect of the period ending 31
March 2025 was paid in November 2023.
Share premium represents the aggregate of all amounts that have ever been paid
above par value to the Bank when it has issued ordinary shares.
A description of the other equity categories included within the statements of
changes in equity, together with any significant movements during the period,
is provided below.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 4: Capital (continued)
4.1 Equity (continued)
4.1.2 Other equity instruments
Other equity instruments comprises AT1 capital which consists of the following
Perpetual Contingent Convertible Notes:
30 Sep 2024 (unaudited) 30 Sep 2023 (audited)
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 - - 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 11.0% up to the first reset date) issued on 8 346 350 - -
December 2023 with an optional redemption on 8 December 2028.
693 700 594 600
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 £66m were paid in the period (12 months
ended 30 September 2023: £54m).
4.1.3 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.
12 months to 12 months to
30 Sep 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Opening cash flow hedge reserve 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 (390) (268)
Amounts transferred to the income statement (53) (12)
Taxation 122 77
Closing cash flow hedge reserve 175 496
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
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.
30 Sep 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Guarantees and assets pledged as collateral security:
Due in less than 3 months 10 12
Due between 3 months and 1 year 25 18
Due between 1 year and 3 years 10 8
Due between 3 years and 5 years 3 1
Due after 5 years 37 40
85 79
Other credit commitments
Undrawn formal standby facilities, credit lines and other commitments to lend 17,580 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 have appealed parts of the judgment. The
appeal hearing is listed to take place on 16-20 June 2025. No provision has
been made in these interim condensed consolidated 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.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 5: Other notes (continued)
5.2 Related party transactions
Amounts due from related entities 30 Sep 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Other receivables 47 -
There was no interest income recognised on the above amounts in either the
current or prior period.
Amounts due to related entities 30 Sep 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Deposits 83 40
Other payables 23 5
Medium-term notes 2,606 2,608
Subordinated debt 741 952
Total amounts due to related entities 3,453 3,605
Interest expense on the above amounts was as follows (note 2.1):
Interest expense to related parties 166 143
The balances are classified at amortised cost (Stage 1) with an immaterial ECL
impact.
Medium-term notes comprise dated, unsecured loans and are issued to Virgin
Money UK PLC. These securities will, in the event of the winding-up of the
issuer, be subordinated to the claims of the depositors and all other
creditors of the issuer, other than creditors whose claims rank junior to the
claims of the medium-term note liabilities, including those of subordinated
debt holders. The debt is employed in the general business of the Bank.
Subordinated debt comprises dated, unsecured loan capital and is issued to
Virgin Money UK PLC. This debt will, in the event of the winding-up of the
issuer, be subordinated to the claims of the depositors and all other
creditors of the issuer, other than creditors whose claims rank junior to the
claims of the holders of the subordinated liabilities. The debt is employed in
the general business of the Bank.
Other transactions with related entities 30 Sep 2024 30 Sep 2023
(unaudited) (audited)
£m £m
Other income
Non-interest income received 3 4
Other expenses
Other expenses 22 21
Equity
Ordinary dividends paid 177 248
AT1 distributions 66 54
Total dividends to related entities 243 302
In addition to the above, the Group also 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
£12m (30 September 2023: £7m). Pension contributions of £6m were made to
the Scheme in the period (12 months 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. 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 30 September 2024, the amount drawn under
both facilities was £Nil (30 September 2023: £Nil).
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 5: Other notes (continued)
5.2 Related party transactions (continued)
JVs
As at 30 September 2024 the Group's value of investments in JVs is £Nil (30
September 2023: £10m). The total share of losses recognised in the period was
£Nil (12 months to 30 September 2023: £Nil).
On 2 April 2024 the Group acquired the remaining c50% ordinary share capital
of UTM a JV with abrdn for £20m. UTM is now a wholly owned subsidiary. Prior
to the acquisition date, the Group classed UTM as a JV accounted for under the
equity method. Transactions prior to the acquisition date are shown in note
5.5.
The Group had the following transactions with Salary Finance during the
period:
· The Group provides Salary Finance with a revolving credit
facility funding line, of which the current gross lending balance was £234m
(30 September 2023: £290m) and the undrawn facility was £16m (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 £19m (30 September 2023:
£22m) held against the lending. An impairment release of £3m was recognised
in the period (12 months to 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. The Group received £15m of interest income from Salary Finance in
the period (12 months to 30 September 2023: £16m) and holds deposits of £12m
(30 September 2023: £10m). During the period the facility limit was reduced
to £250m (30 September 2023: £350m) in line with the reduction in lending.
Board approval for this limit is in place until December 2025, which is
subject to review if circumstances change.
Other related party transactions with Virgin Group((1))
The Group has related party transactions with other Virgin Group companies:
· 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 £3m (30 September 2023:
£2m) and expenses of £19m were incurred in the period (12 months to 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, PCA and investment portfolio. Amounts receivable totalled £0.3m (30
September 2023: £0.2m), amounts payable totalled £0.2m (30 September 2023:
£0.1m) and during the period this resulted in expenses of £1.5m (12 months
to 30 September 2023: £0.5m) along with income of £1m (12 months to 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 £0.3m (12 months to 30 September 2023: £0.4m).
· The Group provides lending facilities to other Virgin Group
companies. The approved facility limit is £20m (30 September 2023: £20m)
with the current gross lending balance as at 30 September 2024 being £10m (30
September 2023: £10m). The undrawn facility at September 2024 was £10m (30
September 2023: £10m). During the period this resulted in interest income of
£0.7m (12 months to 30 September 2023: £0.2m). The facility is held under
Stage 1 for credit risk purposes (30 September 2023: Stage 1), there are no
ECL provisions held against this facility and it is within the usual
parameters for the current business portfolio with commercial terms that
comply with existing credit policy.
(1) All companies were incorporated in England and Wales.
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 (12 months to 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 £0.4m (12 months to
30 September 2023: £0.5m).
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 5: Other notes (continued)
5.3 Notes to the statement of cash flows
Term funding schemes((1)) Debt securities in issue Intercompany loans Lease liabilities Total
£m £m £m £m £m
As at 1 October 2022((2)) 7,230 5,347 3,210 132 15,919
Cash flows:
Cash flows:
Issuances - 1,826 747 - 2,573
Redemptions - (1,012) (432) - (1,444)
Repayment (1,000) - (18) (24) (1,042)
Tax paid - - - (1) (1)
Non-cash flows:
Fair value and other associated adjustments - (15) 77 - 62
Additions to right-of-use asset in exchange for increased lease liabilities - - - 76 76
Remeasurement - - - (6) (6)
Movement in accrued interest 61 12 14 3 90
Unamortised costs - (3) 3 - -
Other movements - - 4 - 4
As at 30 September 2023((2)) 6,291 6,155 3,605 180 16,231
Cash flows:
Issuances - 500 641 - 1,141
Drawdowns - - 44 - 44
Redemptions - (894) (998) - (1,892)
Repayment (3,250) - (5) (22) (3,277)
Non-cash flows:
Fair value and other associated adjustments - 44 136 - 180
Additions to right-of-use asset in exchange for increased lease liabilities - - - 2 2
Movement in accrued interest (53) - 6 5 (42)
Unamortised costs - 2 - - 2
Other movements - - 24 - 24
As at 30 September 2024((2)) 2,988 5,807 3,453 165 12,413
(1) This includes amounts drawn under the TFS and TFSME.
(2) The balances as at 1 October 2022 and 30 September 2023, and the movements in
the 12 month period to 30 September 2023 have been audited; the balances and
movements in the 12 month period to 30 September 2024 are unaudited.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 5: Other notes (continued)
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 12 months to 6 months to 12 months to
30 Sep 2024 30 Sep 2024 30 Sep 2023 30 Sep 2023
(unaudited) (unaudited) (unaudited) (audited)
£m £m £m £m
Net interest income 898 1,757 834 1,686
Non-interest income 138 201 77 140
Total operating income 1,036 1,958 911 1,826
Operating and administrative expenses (635) (1,186) (639) (1,173)
Impairment losses on credit exposures (84) (177) (165) (309)
Segment profit before tax 317 595 107 344
Average interest earning assets 90,345 89,899 90,042 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 (continued)
Section 5: Other notes (continued)
5.5 Virgin Money Unit Trust Managers Limited acquisition
On 2 April 2024 the Group acquired the remaining c50% of the ordinary share
capital of UTM for cash consideration of £20m and obtained control of UTM.
UTM provides investment management services to retail customers including
general investment accounts, stocks and shares ISAs and a pension product.
Prior to obtaining control, UTM was a JV with abrdn, with the Group holding a
50% plus one share equity interest which it accounted for under the equity
method. 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.
The goodwill of £10m arising from the acquisition primarily represents the
potential for future new customer acquisition and related asset under
management growth following the adoption of the modern investment platform.
None of the goodwill recognised is expected to be deductible for income tax
purposes.
The following tables summarise the consideration paid for UTM and the amounts
of the identifiable assets acquired and liabilities assumed recognised at the
acquisition date (2 April 2024).
£m
Consideration
Cash consideration transferred 20
Fair value of the Group's equity interest in UTM held before the business 20
combination
Consideration attributed to settlement of pre-existing relationships((1)) (7)
Total consideration 33
£m
Recognised amounts of identifiable assets acquired and liabilities assumed
Financial assets 16
Other assets 3
Identifiable intangible assets 4
Total assets 23
Financial liabilities -
Other liabilities 12
Total liabilities 12
Net assets 11
£m
Fair value of net assets acquired 11
Goodwill arising on acquisition 22
Total consideration 33
(1) Pre-existing banking, debtor and creditor relationships between UTM and the
Group were deemed to be settled at carrying value on acquisition with no
resulting gains or losses. These amounts are now eliminated on consolidation
and therefore excluded from recognised assets acquired and liabilities assumed
with the deemed settlement value being deducted from total consideration.
The revenue included in the consolidated statement of comprehensive income
since 2 April 2024 contributed by UTM is £12m (recognised within other
operating income). UTM also contributed losses of £1m over the same period.
Had UTM been consolidated from 1 October 2023 the consolidated income
statement would have included total revenue of £23m and losses of £3m
relating to UTM.
In the period prior to the acquisition the Group received £5m of recharge
income (30 September 2023: £9m) from UTM in accordance with a service level
agreement in respect of resourcing, infrastructure and marketing. The Group
provided 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).
5.6 Post balance sheet events
Nationwide's acquisition of Virgin Money UK PLC
On 1 October 2024 Virgin Money and Nationwide announced that all the
conditions set out in the scheme of arrangement announced on 21 March 2024 had
been satisfied, or waived, and the scheme had become effective in accordance
with its terms. As a result, Virgin Money was delisted from the London and
Australian Stock Exchange. The completion of the transaction on 1 October 2024
has given rise to the following post balance sheet impacts for the Group.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 5: Other notes (continued)
5.6 Post balance sheet events (continued)
Nationwide's acquisition of Virgin Money UK PLC (continued)
Brand licence agreement
On 22 May 2024, Virgin Money's shareholders approved amendments to the brand
licence agreement between Virgin Money, the Bank's immediate parent, and
Virgin Enterprises Limited (Virgin Enterprises), which governs the use of the
'Virgin Money' brand (the 'TMLA').
A deed of amendment in respect of the TMLA was then subsequently entered into
by Virgin Money and Virgin Enterprises on 1 October 2024. As previously
announced, the TMLA fee of £250m plus irrecoverable VAT of £50m became due
to Virgin Enterprises following the amendment. The TMLA fee will be recharged
from Virgin Money to the Bank.
This is a non-adjusting event, and consequently has not been recognised in the
Group's 30 September 2024 interim condensed consolidated financial statements.
The TMLA fee is payable in two equal instalments, with the first paid in
October 2024 and the second due in October 2025. The full TMLA fee of £250m
and the irrecoverable VAT on the first instalment of £25m has been recognised
in October 2024. The VAT payable on the second instalment will be recognised
in October 2025 in line with the scheduled invoice. The full £300m was
reflected for regulatory capital purposes as a foreseeable charge in the
period ended 30 September 2024.
Change in accounting reference date
Following completion of the Nationwide acquisition, the Group changed its
accounting reference date from 30 September to 31 March to align with the
reporting date of the Group's new ultimate parent. The next full Annual Report
and Accounts of the Group will be for the 18-month period to 31 March 2025.
Changes to accounting policies
Following completion of the Nationwide acquisition, the Group also made the
following changes to accounting policies to align with those used by the
Group's new ultimate parent. These changes will be presented within the
Group's results for the 18-month period to 31 March 2025.
EIR accounting
The principal changes to the Group's accounting policies for mortgage and
credit card EIR are:
· Mortgage EIR: the removal of SVR interest cash flows at the end
of the initial product term and alignment in approach to ERC methodology; and
· Credit card EIR: a change to the unit of account methodology from the
current method (whereby the unit of account is the contract with the customer)
to the unit of account being the balance outstanding at the reporting date.
These changes will require restatement to previously reported prior periods,
which will be adjusted through opening retained earnings. The pre-tax impact
of this would be as follows:
Mortgages Credit cards Total
£m £m £m
Decrease in retained earnings as at 1 October 2022 (171) (285) (456)
(Decrease)/increase in retained earnings as at 30 September 2023 (7) 26 19
Total decrease in retained earnings as at 30 September 2023 (178) (259) (437)
EIR asset as at 30 September 2023 as reported 209 259 468
Adjustments as above (178) (259) (437)
Revised EIR asset as at 1 October 2023 31 - 31
There will be deferred tax implications arising from the above adjustments
that will be reported in the Group's Annual Report and Accounts for the
18-month period to 31 March 2025.
Financial statements
Notes to the interim condensed consolidated financial statements (continued)
Section 5: Other notes (continued)
5.6 Post balance sheet events (continued)
Nationwide's acquisition of Virgin Money UK PLC (continued)
In terms of the EIR asset reported at 30 September 2024, this will be revised
through a combination of the above adjustments and the reversal of income that
will be reflected in the results for the 18-month period to 31 March 2025:
Mortgages Credit cards Total
£m £m £m
EIR asset as at 30 September 2024 (note 1.3) 200 370 570
Prior period adjustments as above (178) (259) (437)
Current period adjustments (7) (111) (118)
Revised EIR asset as at 30 September 2024 15 - 15
The current period adjustments will be tax impacted as part of the Group's
results for the 18-month period to 31 March 2025.
Further detail on the Group's EIR accounting applicable as at 30 September
2024 can be found in note 1.3.
As a result of this change in accounting policy, EIR accounting will not be
presented as a critical accounting estimate and judgement in future reporting
periods.
Hedge accounting
On 1 October 2024 the Group adopted the general hedge accounting requirements
of IFRS 9 to align with the Nationwide accounting policy. This will impact the
Group's micro fair value hedges and the Group's macro cash flow hedge. The
change is prospective (meaning no restatement of prior periods is required)
and the Group continues to apply IAS 39 fair value hedge accounting for
portfolio hedges of interest rate risk (macro hedge accounting).
The changes include:
· the ability to choose to exclude currency basis spreads from
hedge designation and instead report this element of fair valuation directly
in a hedge reserve within equity;
· the performance of hedge effectiveness testing on a prospective
basis only, in line with risk management strategy; and
· the inability to voluntarily de-designate hedging relationships,
unless there has been a change to risk management objectives.
This will not have a material impact on results and will require the creation
of an 'other hedging reserve' within equity to include the impact of foreign
currency basis spreads.
Further detail on the Group's hedge accounting applicable as at 30 September
2024 can be found in note 3.1.2.2.
In addition to the above, there are other changes the Group will be required
to make as a result of alignments to Nationwide's accounting policies,
practice and presentation in the Group's Annual Report and Accounts for the
18-month period to 31 March 2025. The majority of these are likely to be
presentational adjustments only that will result in restatements to the prior
period primary statements, although some further adjustment to the opening
retained earnings position may also be necessary.
Ordinary share issuance
In order to mitigate the effect of the updates detailed above, on 1 October
2024, Virgin Money issued 298m ordinary shares to Nationwide for cash
consideration of £650m. On the same date, the Bank issued 298m ordinary
shares to Virgin Money for cash consideration of £650m, recognising share
capital of £30m and share premium of £620m. This ordinary share issue
ensures the Group's CET1 ratio remains greater than 13.5% after the impact of
the TMLA fee and the changes to accounting policies noted above.
Capital reduction
On 28 October 2024, a petition was presented to the Court of Session,
Edinburgh, Scotland by the Bank seeking an order for confirmation of the
reduction of its share premium account (the 'Reduction'). Subject to approval
of the Court at the hearing scheduled for 28 November 2024, the Reduction will
have the effect of reducing the share premium balance of the Bank by £1,549m
with a corresponding increase in retained earnings. The Reduction creates
additional distributable profits in the Bank, mitigating the negative impact
of the acquisition related impacts and expenditure detailed in this note. The
Reduction has no impact on the Bank's capital position and capability to meet
its capital and liquidity requirements, but the increase in distributable
reserves provides further flexibility to make payments of interest on its AT1
Capital and distributions to Virgin Money.
Additional information
Measuring financial performance - glossary
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 12 months to 6 months to 12 months to
30 Sep 2024 30 Sep 2024 30 Sep 2023 30 Sep 2023
£m £m £m £m Reason for inclusion as a notable item
Acquisition accounting unwinds (8) (18) (26) (29) 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 (3) (11) - (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. Hedge ineffectiveness
largely represents timing differences that will reverse out over the lives
of derivatives that are used in economic hedges, is often volatile, and
driven by accounting requirements and not generally considered as a component
of the core financial result.
Other:
UTM income 12 12 - - The post-acquisition revenue recognised within UTM since it became a wholly
owned subsidiary on 2 April 2024. This was not incorporated in the Group's
guidance for the 12-month period to 30 September 2024, first set in November
2023.
UTM acquisition gain 11 11 - - A one-off gain recognised on the Group's pre-acquisition interest in UTM.
UTM transition costs - - (1) (2) These costs relate to UTM's transformation costs principally for the build of
a new platform for administration and servicing.
Total 12 (6) (27) (47)
Notable items within operating expenses
Item 6 months to 12 months to 6 months to 12 months to
30 Sep 2024 30 Sep 2024 30 Sep 2023 30 Sep 2023
£m £m £m £m Reason for inclusion as a notable item
Restructuring charges (23) (56) (78) (131) These costs relate to the Group's £275m restructuring programme as first
announced alongside the Group's FY21 results.
Financial crime prevention programme (22) (37) - - 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 7 11 (8) (12) These credits/(costs) are historical in nature and are not indicative of the
Group's current practices.
Other:
UTM expenses (12) (12) - - The post-acquisition operating expenses recognised within UTM since it became
a wholly owned subsidiary on 2 April 2024. This was not incorporated in the
Group's guidance for the 12-month period to 30 September 2024, first set in
November 2023.
Transaction costs (16) (21) - - 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) (47) This is a write-off charge 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) (12) £6m of 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 (66) (115) (145) (202)
Additional information
Glossary
For a glossary of terms and abbreviations used within this report refer to
pages 183 to 187 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
Trademark licence agreement (TMLA) Trademark licence agreement between Virgin Money and Virgin Enterprises which
governs the use of the 'Virgin Money' brand
Abbreviations
IBB Interest bearing balance
MA Management adjustment
MES Model economic scenarios
MRM Model risk management
PAC Provision Adequacy Committee
TCR Total capital requirement
TMLA Trademark licence agreement
VMI Virgin Money Investments (legal entity name 'Virgin Money Unit Trust Managers
Limited')
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((3)) Lucinda Charles-Jones(()(2))
Elena Novokreshchenova((2))
Petra van Hoeken((2)(4))
Executive Directors Chris Rhodes((5))
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) Darren Pope stepped down as an Independent Non-Executive Director of
the Board on 1 October 2024. Sara Weller, Non-Executive Director, stepped down
from the Board on 1 October 2024.
(4) Petra van Hoeken was appointed to the Board on 1 July 2024 following
Geeta Gopalan, Independent Non-Executive Director, stepping down from the
Board on 30 June 2024.
(5) Chris Rhodes was appointed as an Executive Director on 1 October
2024 following David Duffy stepping down from the Board on 1 October 2024.
Clydesdale Bank PLC
Registered number SC001111 (Scotland)
Head Office and registered office: London Office:
177 Bothwell Street Floor 15, The Leadenhall Building
Glasgow 122 Leadenhall Street
G2 7ER London
EC3V 4AB
virginmoneyukplc.com
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END IR FFFIILILRFISRecent news on Virgin Money UK
See all newsREG - Virgin Money UK PLC - Notice to Noteholders
AnnouncementREG - Lanark Master Issuer - Notice to Noteholders
AnnouncementREG - Clydesdale Bank PLC - Publication of Final Terms
AnnouncementREG - Lanark Master Issuer - Notice to Noteholders
AnnouncementREG - Clydesdale Bank PLC - Publication of Supplement to Base Prospectus
Announcement