VMUK FY22 Financial Results
21/11/2022 07:00
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RNS Number : 9855G Virgin Money UK PLC 21 November 2022
Virgin Money UK PLC
Full Year 2022
Financial Results
Announcement
BASIS OF PRESENTATION
Virgin Money UK PLC ('Virgin Money', 'VMUK' or 'the Company'), together
with its subsidiary undertakings (which together comprise 'the Group'),
operate under the Clydesdale Bank, Yorkshire Bank and Virgin Money brands.
This results announcement covers the results of the Group for the year ended
30 September 2022.
Statutory basis
Statutory information is set out on page 16 and within
the financial statements.
Underlying basis
Management exclude certain items from the Group's statutory position to arrive
at an underlying performance basis. A reconciliation from the underlying
results to the statutory basis is shown on page 16 to 17 and rationale for
the adjustments is shown on page 134.
Alternative performance measures (APMs)
The KPIs and performance metrics used in monitoring the Group's performance
and reflected throughout this results announcement are determined on a
combination of bases (including statutory, regulatory and alternative
performance measures), as detailed at 'Measuring the Group's performance' on
pages 124 to 133. 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
The information in this document 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, as well as those included
in any other material discussed at any presentation, 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 geo-political factors, the repercussions of the outbreak
of coronaviruses (including but not limited to the COVID-19 outbreak), changes
to its Board and/or employee composition, exposures to terrorist activity, IT
system failures, cybercrime, fraud and pension scheme liabilities, changes
to law and/or the policies and practices of the Bank of England (BoE), the
Financial Conduct Authority (FCA) and/or other regulatory and governmental
bodies, inflation, deflation, interest rates, exchange rates, tax and national
insurance rates, changes in the liquidity, capital, funding and/or asset
position and/or credit ratings of the Group, future capital expenditures and
acquisitions, the repercussions of 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, Russia's invasion of Ukraine, any referendum on Scottish
independence, and any UK or global cost of living crisis or recession.
In light of these risks, uncertainties and assumptions, the events in the
forward-looking statements may not occur. Forward-looking statements involve
inherent risks and uncertainties. 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 gives any 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 this document
and/or discussed at any presentation. All forward-looking statements should
be viewed as hypothetical. No representation or warranty is made that any
forward-looking statement will come to pass. While every effort has been
made to ensure the accuracy of the information in this document, the Group
and its directors, officers, employees, agents, advisers and affiliates do not
take any responsibility for the information in this document 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. No representation or warranty,
express or implied, as to the truth, fullness, fairness, merchantability,
accuracy, sufficiency or completeness of the information in this document
or the materials used in and/or discussed at, any presentation is given.
Certain industry, market and competitive position data contained in this
document and the materials used in and/or discussed at, any presentation,
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 this document and the materials used in and/or discussed at, any
presentation, 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 this document and the
materials used in and/or discussed at, any presentation.
The information, statements and opinions contained in this document
do 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 this document in certain
jurisdictions may be restricted by law. Recipients are required by the Group
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 this document in any jurisdiction. The information, statements and
opinions contained in this document and the materials used in and/or discussed
at, any presentation are subject to change.
Virgin Money UK PLC Full Year Results 2022
David Duffy, Chief Executive Officer:
"2022 has been a milestone year for Virgin Money. We have good momentum while
delivering a strong performance and improved returns for our shareholders.
We've changed the game in purpose-led flexible working to create an engaged,
high-performing organisation that's cost-efficient and agile, which will
underpin targeted growth through further digital innovation."
"While we have solid credit quality across our lending, we are aware that some
customers will have to make difficult decisions in this environment, and we
are proactively offering them help and support."
Summary financials
12 months to 12 months to
30 Sep 2022 30 Sep 2021 Change
£m £m %
Underlying net interest income (NII) 1,592 1,412 13
Underlying non-interest income 163 160 2
Total underlying operating income 1,755 1,572 12
Underlying operating and administrative expenses (914) (902) 1
Impairment (losses)/credit on credit exposures (52) 131 n.m.
Underlying profit on ordinary activities before tax 789 801 (1)
Adjusting items (194) (384) (49)
Statutory profit on ordinary activities before tax 595 417 43
Performance measures((1))
Total customer lending (£m) 72,565 71,996 0.8%
Net interest margin (NIM) 1.85% 1.62% 0.23%pts
Underlying cost: income ratio (CIR) 52% 57% (5)%pts
Statutory return on tangible equity (RoTE) 10.3% 10.2% 0.1%pts
Dividends and share buybacks announced (£m) 267 14 n.m.
Common equity tier 1 (CET1) ratio (IFRS 9 transitional) 15.0% 14.9% 0.1%pts
(1) Refer to pages 124 to 133 for a range of metrics that are used to
measure and track the Group's performance.
Strong financial performance in 2022
· NIM expanded further to 1.85% (2021: 1.62%), supported by higher
rates and further mix optimisation (Q4: 1.86%)
· Underlying non-interest income up 2% YoY, reflecting higher
activity levels offsetting fair value movements
· Underlying costs of £914m were broadly stable YoY, in line with
guidance, while CIR reduced 5%pts to 52%
· Pre-Provision Operating Profit of £841m, up 26% on 2021,
reflecting stronger income and well-controlled costs
· Minor impairment charge of £52m (7bps cost of risk) reflecting
updated macroeconomics, but with lower post model adjustments
· Underlying profit 1% lower YoY given £131m impairment release in
2021
· Statutory profit increased 43% YoY, reflecting higher income and
lower adjusting items; statutory RoTE of 10.3% (2021: 10.2%)
· Credit quality remains robust with low and stable arrears;
provision coverage of 62bps above pre-pandemic levels
· CET1 ratio remains strong at 15.0% (2021: 14.9%); announced
further £50m buyback, taking 2022 buybacks to £125m; 7.5p final dividend
(2022: 10p) means total 2022 shareholder distributions of £267m, equivalent
to c.57% payout
Returning to net lending growth supported by continued strong relationship
deposit inflows
· Strong relationship deposits growth, increasing 13% YoY to
£34.6bn; continue to optimise overall deposits, down 2.3% to £65.4bn
· Overall lending growth (0.8%) in 2022 to £72.6bn; Unsecured
+13.8% to £6.2bn driven by credit cards; Business lending (2.7%) to £8.2bn
as lower Government lending offset 1.7% growth in BAU; Mortgages stable at
£58.2bn but returned to growth in H2
· AIEAs were £86.3bn in FY22; Sep-22 spot balances were c£90bn,
expect higher liquidity-related AIEAs through FY23
Strong Purpose-led delivery in first year of our accelerated digital strategy
· Launched cost of living hub to support customers with money
saving suggestions, budgeting tools and links to external resources
· Strong reception for new digital products with 7% YoY growth in
current account sales; record new credit card origination of c.630k (+49%
YoY); c.650k cashback users; launched new Business M-Track and Marketplace;
c.40k waitlist for Slyce
· A Life More Virgin supporting higher colleague engagement (+11%pt
YoY); launched Agile change framework, increasing the speed of change at c.25%
lower costs; property and branch footprint reduced c.50% YoY
· Delivered c.£69m of annualised gross savings this year; further
progress on digitisation with 43% of key customer journeys automated (2021:
27%); mobilising cloud migration and removing legacy applications
· Delivering further propositions in 2023 including refreshed
Wealth proposition, mortgage end-to-end digitisation and fully refreshed new
digital home and travel insurance
· Anticipating the initial launch of our digital wallet early in
2023 with additional functionality to be added through the year
Outlook upgraded
· Expect NIM to be 185-190bps in FY23, based on current rate
expectations, and including higher AIEAs; in the medium term, expect
mix-driven NIM expansion and OOI to grow from digital proposition enhancements
· Cost:income ratio expected to improve further to c.50% in FY23;
continue to target less than 50% in FY24
· Cost of risk anticipated to normalise around through the cycle
level of 30-35bps in FY23
· Targeting growth in Unsecured & BAU Business, moderating in
2023; maintain mortgage market share in the medium term
· Will maintain CET1 above 14% in FY23 during period of
macroeconomic uncertainty; expect to return to target 13-13.5% CET1 range by
the end of FY24, after growth, distributions and RWA headwinds, including
hybrid model implementation
· In line with the Group's updated capital framework, shareholder
distributions to reflect 30% full year dividend pay-out, supplemented by
buybacks, subject to ongoing assessment of surplus capital, market conditions
and regulatory approval
· Expect c.11% statutory RoTE in FY24, consistent with target of
greater than 10%
Contact details
For further information, please contact:
Investors and Analysts
Richard Smith +44 7483 399 303
Head of Investor Relations richard.smith@virginmoneyukplc.com
Amil Nathwani +44 7702 100 398
Senior Manager, Investor Relations amil.nathwani@virginmoneyukplc.com
Martin Pollard +44 7894 814 195
Senior Manager, Investor Relations martin.pollard@virginmoneyukplc.com
Media (UK)
Matt Magee +44 7411 299477
Head of Media Relations matthew.magee@virginmoneyukplc.com
Simon Hall +44 7855 257 081
Senior Media Relations Manager simon.hall@virginmoney.com
Press Office +44 800 066 5998
press.office@virginmoneyukplc.com
Media (Australia)
P&L Communications
Ian Pemberton +61 402 256 576
Sue Frost +61 409 718 572
Virgin Money UK PLC will today be hosting a presentation for analysts and
investors covering the 2022 full year financial results starting at 08:30 GMT
(19:30 AEDT) and this will be webcast live and is available at:
https://webcast.openbriefing.com/virgin-fy22/
(https://webcast.openbriefing.com/virgin-fy22/)
A recording of the webcast and conference call will be made available on our
website shortly after the meeting at:
https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/
(https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/)
A call for fixed income investors will be held at 09:00 GMT (20:00 AEDT) on
Tuesday 22(nd) November 2022: Dial-in details: UK 0800 640 6441; All other
locations: +44 20 3936 2999; Access code: 647668
Announcement authorised for release by Lorna McMillan, Group Company
Secretary.
LEI: 213800ZK9VGCYYR6O495
Business and financial review
Chief Executive Officer's introduction
Delivering against our strategy
In 2022, the Group continued to deliver on its digital strategy, launching
exciting new customer propositions
and laying the platform for profitable growth and sustainable
returns through our digital investment.
David Duffy
Chief Executive Officer
We performed strongly in FY22, delivering higher statutory profit, positive
financial momentum and increased capital returns, benefitting from higher
rates in a more uncertain environment.
Dear stakeholder,
In the first year of delivering our accelerated digital strategy, I'm pleased
with how the Group has performed. Virgin Money has made good strategic and
financial progress as we drive towards our ambition of becoming the UK's best
digital bank. I'd like to thank all our colleagues for their hard work,
and customers for their loyalty, as we execute our Purpose-led strategy.
Since we set our targets a year ago, the economic backdrop has changed
significantly, with a lower GDP outlook, higher unemployment expectations, and
higher cost of living set to impact the economy, although higher interest
rates have supported our financial performance. Despite the more difficult
near-term backdrop for customers, our strategy remains the right one and I'm
confident we are well placed to adapt to recent changes, while we continue
to support customers and deliver for all our stakeholders.
Delivering for our stakeholders
While there remains more to deliver, FY22 saw a good start against the
strategic agenda we set out a year ago. Our financial performance benefitted
from stronger income and resilient asset quality given the higher interest
rate trajectory and benign credit environment to date. Alongside this
backdrop, the Group continued to execute against our strategic agenda, which
combined with the environment, delivered robust returns as statutory RoTE
remained stable at 10.3% (FY21: 10.2%). As a reflection of this
performance, including high levels of capital generation, and after setting
out our capital framework alongside our Interim results, the Board has
announced the distribution of £267m of capital to shareholders through
dividends and buybacks.
Our innovative propositions and rewards have been well received in our
target segments of Unsecured and BAU Business lending (excluding Government
scheme lending). The overall lending book returned to growth this year, with
improved momentum in mortgages in H2 as we traded nimbly through a
continuing competitive environment. I'm also particularly pleased with the
continued growth in our low-cost relationship deposit base which is now 53%
of total Group deposits, up from 33% at FY19.
Important digitisation initiatives, which will drive improvements in our
customer service and complaints performance through automation of our core
customer journeys, have been launched and will continue to deliver greater
efficiency into FY23 and beyond. We continue to expand our loyalty
and reward programmes, leveraging the unique potential of the Virgin brand
and Virgin Red as we prepare to launch our new digital wallet.
We have continued to support colleagues at this more challenging time, with a
£1,000 cost of living allowance provided to the majority of colleagues in
August. Our A Life More Virgin flexible working model has also continued to
be well received, attracting significant positive commentary, and supporting
improved colleague engagement scores and a simplified office estate.
Our work to deliver a sustainable future took a significant step forward over
the course of the year as we set net zero roadmaps and targets for Mortgages
and priority Business sectors. We continue to embed climate and community
considerations in everything we do, ensuring we support customers and wider
society in the years ahead.
Strong financial momentum
The higher interest rate backdrop, continued benign credit conditions and the
execution of our strategy, has seen statutory profit before tax for FY22
strengthen to £595m (FY21: £417m). This has benefited from increased
pre-provision profit, continued low impairment charges and lower exceptional
costs. Underlying income increased 12% with NIM expanding to 1.85% (FY21:
1.62%) supported by higher interest rates over the course of the year, and
strategic actions to grow in higher-yielding product lines, while continuing
to optimise our funding mix with higher relationship deposits. Underlying
operating costs of £914m increased 1% on the prior year, reflecting
inflationary pressures and higher investment, offset in part by efficiency
savings.
While not directly exposed to Ukraine, we have seen second-order impacts on
the broader UK economy from higher costs, higher interest rates and
potential pressure on our customers and asset quality. At present, credit
quality indicators remain benign but we remain cautious on the outlook, and
stand ready to support customers further if needed. Against this backdrop,
impairment charges were muted as provisions taken for COVID-19 impacts
were unwound. Despite a modest reduction, we have retained above pre-COVID
levels of coverage with a potentially challenging economic outlook in mind,
and to reflect worsening macroeconomic forecasts.
Overall lending balances returned to growth in the year finishing up 1% at
£72.6bn. We achieved strong growth in our target segments of Unsecured and
BAU Business lending and returned the mortgage book to growth in the second
half of the year. Deposit balances reduced 2% to £65.4bn but with
relationship deposits increasing by 13%, as we continued to improve the mix of
our deposit base and optimise our cost of funds.
Business and financial review
Chief Executive Officer's introduction
The capital generative financial performance of the business, and strong
outcomes from our inaugural participation in the BoE's stress testing
regime, allowed us to set out our capital framework alongside our Interim
results in May. We committed to a sustainable 30% dividend payout level and
are recommending a 10p total dividend in respect of FY22, subject to
shareholder approval. We also committed to supplementing dividends with
buybacks, subject to the Board's assessment of surplus capital,
market conditions and regulatory approval.
It was pleasing therefore to commence our inaugural share buyback programme
during the year, with a £75m buyback announced in June, which we are
delighted to be adding to today, with a £50m extension. Our transitional CET1
ratio at FY22 remains robust at 15.0%, leaving the Group well placed as we
enter FY23.
Delivering against our strategic pillars
At FY21 we announced plans to accelerate our digital strategy and have made
a good start against this during FY22.
Pioneering Growth
Throughout FY22 we have launched important new propositions that will
support our future growth ambitions. These include M-Track and Marketplace
in Business, Slyce, new digital travel insurance, and improved cashback
and reward offerings for personal customers.
As we continue to focus on digital-led growth in key target segments, we've
reported growth in current accounts, underpinned by strong new account
sales, record credit card sales and strong customer usage of cashback
offers.
Digitally-enabled personal current account (PCA) sales were 131k
(FY21: 134k) benefiting from a strong value proposition, with attractive
interest rates on offer. Competitive switching propositions from peers
impacted on our ability to attract switchers at the levels we had hoped, but
we were still able to deliver book growth during the year. Business current
account (BCA) sales reported a record year at 33k (FY21: 19k) benefitting
from a new fee-free proposition and improved digital onboarding and
servicing, along with the roll-out of our innovative M-Track and Marketplace
propositions. These strong performances underpinned our 13% growth
in relationship deposits.
Unsecured balances recorded strong growth of 14% as we maintained our existing
competitive proposition, albeit with tighter underwriting to reflect
potential customer affordability challenges from the higher cost of living. We
also broadened our customer offerings, developing Slyce to challenge and
innovate, with a responsible BNPL proposition aimed at Gen-Z customers.
In Business, while we continued to see government scheme lending being
repaid as expected, with very limited fraud, we also began to grow lending
in our BAU franchise (up 2% year-on-year), without relaxing our rigorous
underwriting standards.
Mortgage balances were broadly stable during the year, as competition has
remained intense. Against this backdrop, we have continued with our strategy
to optimise for long-term value, and maintain credit quality. We were
pleased to increase our participation in the second half of the year, at
improved margins, prior to the pricing volatility that took place towards the
end of the financial year.
Delighting our customers and colleagues
For customers, we have seen expectations around service rise rapidly through
the pandemic. During the last year, external factors have had an impact on our
service levels, such as the changing rate environment, which has driven higher
demand, with more customers requiring support. As a consequence, we recognise
that there have been challenges impacting customer service this year, and
our metrics for complaints and Smile scores aren't where we want them to be.
In the second half of the year, the Group has taken action to address this,
adding resources despite a tight labour market. We have a significant
opportunity to improve service and we remain convinced that our strategy to
invest in our digital model is the right one to deliver a lasting
improvement for customers.
During the year the Group has continued to make progress in the end-to-end
digitisation of customer journeys, including improved digital on-boarding and
servicing experience across Personal and Business, to support better customer
outcomes. Following delivery of a suite of chatbots earlier in the year, the
Group has now surpassed 1m chatbot conversations with retail customers, with
the year to date resolution rate within the chatbot at around two-thirds. As
a result, the percentage of customer interactions through calls has reduced
from c.70% at FY21 to c.50% as at the end of FY22.
We will further improve our service proposition in FY23, and seek to mitigate
the impacts of digitisation on customers who prefer traditional banking
channels. Significant investment is underway to enhance, modernise and
digitise our customer service offering, which will support an improvement
in customer experience and ultimately Smile scores. Furthermore, we have a
comprehensive plan to deliver better outcomes for customers as we adopt
the FCA's consumer duty.
For colleagues, the launch of our A Life More Virgin colleague proposition and
our flexible working model has been very positively received, with colleague
engagement scores improving to 79% at FY22 from 68% a year ago. The model
has also removed geographical constraints on recruitment, enabling us to
recruit more diverse talent. We have also repurposed some of our stores and
offices during the year to create Collaboration Hubs which support the
transition to a truly flexible approach to work.
Across the organisation we continue to focus on building an inclusive
workforce and culture. The initiatives launched during the year are already
having an impact as we focus on engaging with communities where we're
currently under-represented to developing more diverse talent within Virgin
Money. We have delivered improved diversity metrics but have ambitious
targets to go further in the coming years.
Business and financial review
Chief Executive Officer's introduction
Targeting Super Straightforward Efficiency
Our investment continues to focus on driving our three-year transformation
programme to deliver a scalable, more efficient digital growth platform.
This features the deployment of Agile methodology and tools to increase
the pace and delivery of change, at lower cost (see more on this on p.24).
Our migration to Cloud-based infrastructure in partnership with Microsoft
is set to commence in FY23, enabling us to begin exiting physical data
centres. We are now starting to de-commission legacy applications, while
building the new applications required to support the Cloud infrastructure.
We are deploying Microsoft tools, such as AI and robotics, and rolling out
Agile methodology across our new change programmes, launching new Agile tribes
and training colleagues. This is delivering new functionality for customers
at greater speed, and at an average of c.25% lower unit costs. As we
continue to embed A Life More Virgin ways of working, we have continued to
rationalise our property footprint, reducing it by 50% to c450k sq ft to
align with the simpler needs of a digital bank.
Delivering Discipline and Sustainability
During the year, we have remained resolutely focused on asset quality and
supporting our customers. Across key portfolios, there are currently limited
signs of credit concerns and overall arrears remained low during the period.
However, the Group recognises the potential affordability issues that higher
living costs will cause for households and is ready to continue to support
customers, as was the case throughout the pandemic. The Group
has tightened its affordability and underwriting criteria for
new customers across all lending categories to account for higher levels
of inflation.
Sustainability remained high on our agenda throughout FY22 and we've developed
net-zero targets and roadmaps for our priority business sectors. We've
continued to support our customers' decarbonisation journeys by providing
information through the Sustainable Business Coach and supporting Carbon
Audits, as well as providing greener finance through Sustainability-Linked
Loans, Greener Mortgages and our new Agri E-Fund. We've received upgrades in
ratings from both Sustainalytics and MSCI and have updated our TCFD disclosure
in line with regulatory requirements. Our Community strategy has also
continued to drive positive outcomes, including on the Poverty Premium where
we've promoted the Turn2Us Benefits Calculator, our cost of living hub, and
set up our Customer Care team who will proactively support our most vulnerable
customers. Our partnership with the Macmillan cancer charity has also
continued to provide practical support for customers in financial difficulty.
Developing our leadership for a digital world
I have continued to evolve and simplify the Group's Executive Leadership Team
this year, ensuring we have the digital skills to deliver our strategy.
Syreeta Brown joined the Group from Citi in November 2021 as Group Chief
People and Communications Officer and brings a wealth of experience in
cultural transformation, talent development and in building a workforce that
is fit for the future. Susan Poot joined the Group from ING bank in January
2022 as Group Chief Risk Officer. Susan has significant experience across a
range of risk disciplines covering both retail and wholesale banking.
Finally, Sarah Wilkinson will join the Group in early 2023 from Thomson
Reuters, where she is currently Chief Information Officer, and has
recently held roles as Chief Executive Officer of NHS Digital and Chief
Information Officer of the Home Office. Sarah brings global leadership
experience and extensive expertise of delivering change, innovation and
digital customer experience, with a strong track record of digital
transformation and a prior background in financial services. I would like
to take this opportunity to thank Kate Guthrie, Mark Thundercliffe, Helen
Page, Fraser Ingram and Fergus Murphy for their contributions to
my Leadership Team during their time with the Group, which spanned the
acquisition of Virgin Money Holdings and the significant integration and
rebrand activity that has laid the platform for our exciting future.
Outlook
Virgin Money is well positioned to deliver a digital-led future of
profitable growth, greater cost-efficiency, improved customer service and
sustainable shareholder returns as we target our ambition of becoming the UK's
best digital bank. It is encouraging to see our strategy, and an improving
rate environment, combining to drive stronger financial performance as we now
target a c.11% statutory RoTE in FY24. Having set out our capital framework
earlier in the year, we look forward to continuing deliver robust
shareholder returns.
Looking forward, we will continue to focus our efforts on improving customer
experience and driving digitisation through the Bank, as we embed an Agile
approach. We are excited about the upcoming launch of our digital wallet,
bringing together many of the elements we've worked on, which over time will
also enable us to deliver a single, unified app. We have a unique brand, and
access to a complementary set of partner companies in the Virgin Group. The
potential to deepen the relationship with Virgin Red offers exciting
possibilities for our customers to earn and spend Virgin points.
We will continue to develop our digital wallet during FY23, combining many
of these unique features with instalment credit, loyalty and payment
capabilities.
The macroeconomic outlook has become more uncertain over the course of the
year. Following a positive recovery in expectations post-COVID, recent events
have seen forecasts deteriorate. As we enter a more volatile environment,
with higher inflation and rates, we are carefully monitoring for any
impacts. We enter this phase with a prudently underwritten loan book, robust
coverage, and a defensive asset mix. We are ready and able to continue
supporting the customers, colleagues and communities we serve.
Overall, we have the right strategy and are executing on the key components
that will underpin our delivery of improved returns and profitable growth
over the coming years, as we fulfil our Purpose of Making you happier about
money.
David Duffy
Chief Executive Officer
20 November 2022
Business and financial review
Chief Financial Officer's review
Building momentum in strategic and financial delivery
I'm pleased to report a positive operating performance in FY22 and ongoing
strategic delivery, leaving us well placed to target profitable growth in an
uncertain economic environment.
Clifford Abrahams
Chief Financial Officer
2022 has been an important year as we returned to balance sheet growth and
delivered improved momentum in financial performance, aided by the higher
interest rate environment.
Review of the year
The Group has made good progress during FY22 as we've launched new and
innovative digital propositions and continued to digitise the Bank. A
stronger rate environment and benign credit backdrop, combined with our
strategic delivery has driven good financial momentum, enabling a statutory
RoTE of 10.3%, in line with FY21.
The combination of our resilient balance sheet, digital transformation and
customer propositions leave us well placed to drive profitable growth, despite
the uncertain economic outlook.
Pre-provision profit was significantly stronger at £841m (2021: £670m),
with a strong improvement in income and broadly stable costs. NIM improved to
1.85% (2021: 1.62%), supported by rising base rates and a strong deposit
performance, while non-interest income improved 2% to £163m as improving
underlying momentum offset adverse one-off and fair value movements. Taken
together, total income improved 12% compared to a year ago. Underlying
operating costs were 1% higher compared to FY21 reflecting ongoing cost
reduction offset by digital development costs, inflation, as well as the
one-off cost of living allowance paid during the year.
The Group recognised an impairment charge of £52m (2021: £131m credit) or
7bps for FY22, below through the cycle levels, driven by prudent IFRS 9
scenario weightings that incorporate a conservative economic outlook and
updated PMAs. There are currently limited signs of credit concerns across our
key portfolios and our arrears performance remains low and stable. We
continue to monitor our customers closely for signs of financial difficulty
and remain on hand to support customers.
During the second half of the year, we tightened affordability and
underwriting criteria to account for the more uncertain economic outlook and
rising living costs. Provision coverage levels remain robust at 62bps
(2021: 70bps), above pre-pandemic levels.
Given the more normalised impairment charge during the year, underlying RoTE
was down relative to last year at 13.5% (2021: 17.8%), while statutory RoTE
was stable at 10.3% (2021: 10.2%) after adjusting for items including
restructuring spend, relating to the Group's digital investment, and
intangible asset write-offs.
We were pleased to deliver lending growth during the year, as overall customer
lending finished c.1% higher relative to FY21 at £72.6bn. Unsecured balances
performed strongly throughout the year growing 14% as the combination of the
resilience of our book and strong digital propositions allowed us to
continue to take market share. Mortgage balances were broadly stable during
the period at £58.2bn as we continued to prioritise margin over volume.
Business lending balances reduced c.3% overall, as growth in BAU
balances was offset by expected reductions in government-backed lending.
Business and financial review
Chief Financial Officer's review
Financial highlights
Statutory profit before tax Underlying profit before tax Statutory RoTE
£595m £789m 10.3%
2021: £417m 2021: £801m 2021: 10.2%
NIM Underlying CIR Cost of risk
1.85% 52% 7bps
2021: 1.62% 2021: 57% 2021: (18)bps
CET1 ratio Loan growth Relationship deposit growth
15.0% 0.8% +13.2%
2021: 14.9% 2021: (0.6)% 2021: +19.2%
Deposit balances reduced c.2% to £65.4bn as we continued to focus on
improving the mix of our deposit base. Over the course of FY22, there was a
13% increase in lower-cost relationship deposits, now comprising 53%
of overall deposits (2021: 46%), helping to underpin the Group's NIM
performance.
Capital remained strong in the period, with the transitional CET1 ratio of
15.0% (2021: 14.9%), with significant tangible net asset value (TNAV)
accretion over the year, to 383p (2021: 290p). We were pleased to outline
our capital framework alongside our Interim results following our strong
performance in the SST.
In line with our capital framework, the Board has declared a 10p dividend
for the year and has announced a £50m share buyback, adding to the £75m
share buyback that commenced in June.
I am confident that we will continue to demonstrate strategic and financial
momentum during FY23, following a strong performance this year. We recognise
the economic environment is uncertain and the potential affordability issues
that will cause for households and we will continue to prioritise our
customers as we did during the pandemic.
Underlying income
2022 2021 Change
£m £m
Underlying net interest income 1,592 1,412 13%
Underlying non-interest income 163 160 2%
Total underlying operating income 1,755 1,572 12%
NIM 1.85% 1.62% 23bps
Average interest-earning assets 86,275 86,947 (1)%
Business and financial review
Chief Financial Officer's review
NII and NIM
Net interest income (NII) increased by £180m or 13% relative to FY21,
driven by an expansion of the Group's NIM as it continued to benefit from
higher rates and optimisation of the deposit base. Asset yields increased
34bps compared to FY21 with higher swap income the primary contributor,
reflecting the rising base rate environment through the year. Given the
ongoing competitive pressure on new and retained mortgage spreads, average
balances reduced over the course of the year, as the Group remained selective
in terms of its participation, while the average yield also declined c.9bps;
together, this contributed to lower mortgage interest income. In Business,
interest income increased by £33m in the year, despite lower average
balances, as the yield of the book improved, given the lower mix of
lower-yielding government-backed lending. In Unsecured, interest income
increased by £24m in the year, driven by significant growth in average
balances, owing mainly to growth in the credit card book. Elsewhere, the
average yield on the Group's liquid assets increased 70bps reflecting the
higher rate environment across the financial year.
The balance of the Group's structural hedge was maintained at c.£32bn
throughout the year. This represents an increase from c.£26bn at the end of
FY21, following a review of deposit behaviour.
During the year, the Group generated £286m of total gross income from the
structural hedge, benefitting from ongoing hedge re-investment at higher
prevailing interest rates.
Liability rates increased at a slower rate than asset yields, increasing 14bps
relative to FY21. During the year, the Group continued to optimise its mix of
deposits, reducing traditionally more expensive term deposits and increasing
current account balances. This growth was driven by a strong performance in
new PCA sales through the Brighter Money Bundles campaign, the relaunch of our
BCA, and further supported by higher average balances as customers saved
more during the period of COVID-19 restrictions. Wholesale funding costs
increased in the year, driven by an increase in average balances following
issuance throughout the year.
Non-interest income
Non-interest income increased by £3m or 2% relative to FY21, to £163m, as
growth in other operating income offset fair value and one-off movements. The
key drivers of the improvement in other operating income included increased
Unsecured and Business fee income from higher customer transaction levels
following the removal of COVID-19 restrictions during the year. Mortgage fee
income was broadly stable during the period. One-off movements in the year
were driven by the non-repeat of equity valuation gains in the debt
restructuring unit recognised in FY21 (£16m) and fair value volatility due to
hedge ineffectiveness movements.
Average balance sheet 2022 2021
Average Interest Average Average Interest Average
balance income/ yield/(rate) balance income/ yield/(rate)
£m (expense) % £m (expense) %
£m £m
Interest earning assets
Mortgages 57,996 1,272 2.19 58,426 1,332 2.28
Unsecured lending 6,100 407 6.67 5,407 383 7.09
Business lending((1)) 8,263 331 4.00 8,801 298 3.38
Liquid assets 13,059 117 0.90 12,827 26 0.20
Due from other banks 853 2 0.22 1,482 - (0.02)
Swap income/other - 104 n/a - (87) n/a
Other interest earning assets 4 - n/a 4 - n/a
Total average interest earning assets 86,275 2,233 2.59 86,947 1,952 2.25
Total average non-interest earning assets 3,229 3,590
Total average assets 89,504 90,537
Interest bearing liabilities
Current accounts 15,829 (46) (0.29) 14,516 (14) (0.09)
Savings accounts 30,895 (147) (0.48) 30,242 (123) (0.41)
Term deposits 12,894 (149) (1.16) 18,259 (223) (1.22)
Wholesale funding 16,169 (296) (1.83) 13,591 (176) (1.30)
Other interest bearing liabilities 145 (3) n/a 164 (4) n/a
Total average interest bearing liabilities 75,932 (641) (0.84) 76,772 (540) (0.70)
Total average non-interest bearing liabilities 7,903 8,414
Total average liabilities 83,835 85,186
Total average equity 5,669 5,351
Total average liabilities and average equity 89,504 90,537
Net interest income 1,592 1.85 1,412 1.62
(1) Includes loans designated at fair value through profit or loss
(FVTPL).
Business and financial review
Chief Financial Officer's review
Underlying costs
For the year ended 30 September 2022 2021 Change
£m £m
Staff costs 375 348 8%
Property and infrastructure 42 43 (2)%
Technology and communications 116 113 3%
Corporate and professional services 114 101 13%
Depreciation, amortisation and impairment 116 155 (25)%
Other expenses 151 142 6%
Total underlying operating and administrative expenses 914 902 1%
Underlying CIR 52% 57% (5)%pts
Underlying operating expenses increased 1% relative to FY21 to £914m, while
the underlying CIR improved 5%pts to 52%. This performance was driven by the
continued delivery of savings from the Group's digitisation programme, which
were more than offset by additional costs from higher inflation and targeted
growth, ongoing digital development spend, and one-off costs relating to our
colleague cost of living allowance, which was paid during the year.
Staff costs increased during the period by 8%, as the impact of wage
increases, bonuses, the employee cost of living allowance and higher resources
working on digital initiatives offset savings from a lower average headcount
and a pension credit. Depreciation and amortisation reduced by 25% in the
year, primarily as a result of changes to D&A practices made at the end of
the last financial year, reflecting costs that are no longer capitalised and
additional changes made in FY22 as the Group adopts Agile methodology. The
increase in Corporate and professional services spend reflects the impact of
higher change investment, while the increase in Other expenses primarily
reflects higher digital development and growth related spend.
Impairments
As at 30 September 2022 Credit Gross Coverage Net cost % of % of
provisions lending ratio of risk loans in loans in
£m £bn bps bps Stage 2 Stage 3
Mortgages 56 58.5 9 (5) 5.3 1.0
Unsecured: 284 6.5 466 322 17.3 1.2
of which credit cards 246 5.5 481 347 13.9 1.3
of which personal loans and overdrafts 38 1.0 388 161 34.9 0.9
Business 117 8.1 159((1)) (112) 18.7 4.6
Total 457 73.1 62 7 7.8 1.4
of which stage 2 268 5.7 472
of which stage 3 104 1.0 1,124
(1) Government-guaranteed element of loan balances excluded for the
purpose of calculating the Business and total coverage ratio.
As at 30 September 2021 Credit Gross Coverage Net cost % of % of
provisions lending ratio of risk loans in loans in
£m £bn bps bps Stage 2 Stage 3
Mortgages 87 58.5 15 (7) 12.3% 1.1%
Unsecured: 194 5.8 380 (64) 9.7% 1.2%
of which credit cards 160 4.7 379 5 10.7% 1.3%
of which personal loans and overdrafts 34 1.1 386 (386) 5.0% 1.1%
Business 223 8.3 306((1)) (62) 29.2% 2.8%
Total 504 72.6 70 (18) 14.1% 1.3%
of which stage 2 302 10.2 302
of which stage 3 91 1.0 959
(1) Government-guaranteed element of loan balances excluded for the
purpose of calculating the Business and total coverage ratio.
During the year, the Group maintained robust credit quality across its
portfolios, with very few significant provisions given low volume
of borrowers flowing into default. Following an ECL credit in the income
statement in 2021, there was a charge of £52m during the year, equivalent to
a cost of risk of 7bps. Overall credit provisions remain robust at £457m
(2021: £504m) with the aggregate coverage level at 62bps (2021: 70bps).
Business and financial review
Chief Financial Officer's review
During the fourth quarter of the financial year, the Group refreshed the
macroeconomic scenarios used for IFRS 9 modelling, provided by Oxford
Economics in early September, incorporating a weaker UK economic outlook. The
weighted economic scenarios used at Q4 were prudently selected and
incorporated a 10% weighting to the upside scenario, 55% to the base scenario
and 35% to the downside scenario. The weighted economic scenario includes a
contraction in GDP in 2023 of 1.5%, peak average unemployment of 5.3%
in 2024 and a 7.4%/5.9% annual HPI contraction in 2023/2024, followed by a
recovery in the outer years.
The Group applied expert credit risk judgement through PMAs to supplement the
modelled provision to account for factors that the models cannot incorporate.
The overall size of the PMAs at FY22 was £85m, reflecting a significant
reduction from FY21 (£207m). The movement in PMAs during the year was
primarily driven by the release of COVID-19 related judgemental PMAs across
the portfolios, offset slightly by the introduction of a c.£27m cost of
living PMA for Mortgage and Unsecured customers and a £30m economic
resilience PMA for Business customers, recognising that the Business portfolio
continues to face into an uncertain economic environment.
Credit quality has remained robust with loans classified as stage 2 reducing
from 14% of the portfolio at FY21 to 8% at FY22, primarily as the removal of
COVID-19-linked PMAs in the retail portfolio saw customers return to stage 1.
In line with the overall reduction in provisions outlined above, the
provision coverage level has reduced but remains appropriate for the
underlying level of risk.
In Mortgages, the coverage ratio of 9bps (2021: 15bps) is deemed appropriate
for the conservative loan book and remains ahead of pre-pandemic levels.
Our Unsecured lending book coverage ratio of 466bps (2021: 380bps)
includes 481bps of coverage for our high‑quality credit card portfolio and
388bps of coverage for our smaller personal loans and overdrafts book.
Arrears levels remain modest across the portfolio, with c.99% in each of the
personal loans and cards portfolios in either stage 1 or stage 2 not past
due. The increase in the percentage of balances in stage 2 to 17.3% (2021:
9.7%) is primarily due to the movement of all personal loans made via the
Salary Finance JV into Stage 2, following an increased number of customers
entering into financial difficulty during the year.
In Business, the coverage ratio of 159bps (2021: 306bps) reflects a 147bps
reduction in the year. There has been little evidence of deterioration in
asset quality to date, with the level of specific provisions continuing to be
low. Total balances in either stage 1 or stage 2 not past due represents c.95%
of the portfolio. The reduction in the percentage of balances in stage 2 to
18.7% (2021: 29.2%) is primarily as a result of changes applied to the
significant increase in credit risk (SICR) criteria, which resulted in these
customers migrating back to stage 1.
Adjusting items and statutory profit
2022 2021
£m £m
Underlying profit on ordinary activities before tax 789 801
Adjusting items
- Restructuring charges (82) (146)
- Acquisition accounting unwinds (35) (88)
- Legacy conduct costs (8) (76)
- Other items (69) (74)
Statutory profit on ordinary activities before tax 595 417
Tax (expense)/credit (58) 57
Statutory profit for the year 537 474
Underlying RoTE 13.5% 17.8%
Statutory RoTE 10.3% 10.2%
TNAV per share 383.0p 289.8p
Overview
The Group made a statutory profit before tax of £595m after deducting
£194m of adjusting items (2021: £384m).
TNAV per share increased 93.2p in FY22 to 383.0p. The key drivers of the
increase were +38.3p of earnings and +47.7p of positive cash flow hedge
reserve movements, given the rate environment.
Restructuring charges
Restructuring charges totalled £82m in the year, driven by charges related to
the Group's digital investment. This included c.£60m related to
the delivery of IT changes and c.£17m related to closure of stores, changes
to the operating model and property footprint. The Group continues to expect
to incur a total of c.£275m of restructuring costs to implement its digital
strategy across FY22-24, with the majority now expected to be incurred in
FY23.
Acquisition accounting unwinds
The Group recognised fair value accounting adjustments at the time of the
Virgin Money acquisition that unwind through the income statement over the
remaining life of the related assets and liabilities. £35m was reflected in
FY22 and the Group expects a further c.£30m of total acquisition accounting
unwind charges over the next three years.
Legacy conduct
Charges of £8m were incurred in FY22 relating to legal proceedings and legacy
claims arising in the ordinary course of the Group's business.
Other items
Other items include a c.£60m charge recognised in the year following a
reassessment of the Group's capitalisation practices, against the backdrop of
the move to Agile project delivery and following the completion of the
annual impairment review of intangible assets.
Business and financial review
Chief Financial Officer's review
Taxation
On a statutory basis, there was a £58m tax charge during the year. This
included an overall deferred tax credit reflecting additional historical
losses recognised in the year, which offset a deferred tax charge reflecting
the impact of the enactment of the reduction in the banking surcharge from
8% to 3%, and the increase in the threshold below which it is not
chargeable, to £100m (previously £25m).
Balance sheet
As at 30 September 2022 2021 Change
Mortgages 58,155 58,104 0.1%
Unsecured 6,163 5,415 13.8%
Business((1)) 8,247 8,477 (2.7)%
Total customer lending 72,565 71,996 0.8%
Relationship deposits((2)) 34,649 30,596 13.2%
Non-linked savings 17,048 21,285 (19.9)%
Term deposits 13,663 14,989 (8.8)%
Total customer deposits 65,360 66,870 (2.3)%
Wholesale funding 17,012 13,596 25.1%
of which TFS - 1,244 (100)%
of which TFSME 7,200 4,650 54.8%
Loan to deposit ratio (LDR) 111% 108% 3%pts
Liquidity coverage ratio (LCR) 138% 151% (13)%pts
(1) Of which, £963m government lending (2021: £1,318m).
(2) Current account and linked savings balances.
Customer lending and deposits
At an aggregate level, Group lending increased by 0.8% to £72.6bn. The
increase was primarily driven by growth in Unsecured and non‑government
guaranteed Business lending, while Mortgage balances remained stable.
Total customer deposits reduced by 2.3% to £65.4bn reflecting changes to
the overall mix of customer and wholesale funding balances, with growth in
PCA and Relationship deposits offset by lower non-linked term deposits and
non-linked savings.
Mortgage balances were broadly stable at £58.2bn as the Group prioritised
margin over volume growth in a competitive environment, in line with the
longer-term strategy. Overall housing demand remained strong throughout the
year, while pricing remained competitive. During the final quarter of the
year, mortgage spreads had begun to recover as increases in customer rates
outpaced changes in swap rates, however heightened volatility towards
the end of the financial year resulted in further pressure on mortgage
margins.
Business lending reduced overall by 2.7% during the year to £8.2bn. This was
mainly driven by government-guaranteed lending, which reduced by c.27% to
£1.0bn following the closure of the schemes last year and as businesses
made repayments. Non-government business lending increased by c.2% in the
year to £7.3bn, supported by a growing pipeline of new business through the
year.
Unsecured balances grew by 13.8% in the year to £6.2bn, driven by a strong
performance in the credit cards where balances increased by c.21% in the year
to £5.2bn. This performance was supported by strong new credit card sales and
a recovery in consumer spending, as the Group increased its market share of
balances during the year by 0.9% to 8.3%. During the year, the Group observed
customer behavioural activity outperforming assumptions, resulting in the
card EIR asset performing as expected.
Personal loans and overdraft balances reduced c.14% during the year to £1.0bn
in line with the Group's strategy to reduce its participation in this
market.
The Group's strategy to optimise its overall funding mix drove a 2% reduction
in customer deposits during the year to £65.4bn. The Group also continued
to improve its mix of customer deposits, as relationship balances grew 13%,
supported by strong customer propositions, while non-linked savings and
non-linked term deposits reduced by 20% and 9% respectively.
Wholesale funding and liquidity
The Group maintains a robust funding and liquidity position. The Group's LDR
increased 3%pts in the year to 111% (2021: 108%), primarily as a result of
the continued reduction in more expensive term deposits. The Group's LCR of
138% (2021: 151%) continues to comfortably exceed both regulatory
requirements and our more prudent internal risk appetite metrics, ensuring a
substantial buffer in the event of any outflows.
The Group made further drawings of £2.6bn from the BoE's Term Funding Scheme
with additional incentives for small or medium-sized enterprises (TFSME) early
in the year ahead of its closure, taking the total outstanding amount to
£7.2bn, while at the same time repaying its remaining £1.2bn of TFS
drawings. The incremental TFSME drawings, along with successful residential
mortgage-backed securities (RMBS) and Covered Bond transactions during the
year, meant wholesale funding increased to £17.0bn (FY21: £13.6bn),
offsetting the reduction in term deposits.
Business and financial review
Chief Financial Officer's review
Capital
2022 2021 Change
CET1 ratio (IFRS 9 transitional) 15.0% 14.9% 0.1%pts
CET1 ratio (IFRS 9 fully loaded) 14.6% 14.4% 0.2%pts
Total capital ratio 22.0% 22.0% -%pts
MREL ratio 32.1% 31.9% 0.2%pts
UK leverage ratio 5.1% 5.2% (0.1)%pts
RWAs (£m) 24,148 24,232 (0.3)%
of which Mortgages (£m) 9,155 10,010 (8.5)%
of which Unsecured (£m) 4,817 4,311 11.7%
of which Business (£m) 6,196 6,040 2.6%
Unless where stated, data in the table shows the capital position on a Capital
Requirements Directive (CRD) IV 'fully loaded' basis with International
Financial Reporting Standard (IFRS) 9 transitional adjustments applied.
Overview
During 2022, the Group maintained a strong capital position with a CET1 ratio
(IFRS 9 transitional basis) of 15.0% (2021: 14.9%) and a total capital
ratio of 22.0% (2021: 22.0%). During the year, the Group announced its updated
capital framework including a 30% full year dividend payout level,
supplemented with buybacks subject to ongoing assessment of surplus capital,
market conditions and regulatory approval. In line with the updated capital
framework, the movement in the CET1 ratio during the year included a 58bps
impact from the proposed full year dividend of 10p in line with the dividend
policy and 31bps impact from the initial £75m share buyback. Excluding
shareholder distributions, capital generation was underpinned by ongoing
profitability and lower RWAs.
Capital requirements
As at 30 September 2022, the Group's Pillar 2A requirement had a CET1 element
of 1.7%. Overall, the Group's CRD IV minimum CET1 capital requirement (or
maximum distributable amount threshold) as at the end of FY22 was 8.7%.
The Group's capital framework assumes the Countercyclical buffer returns to
2%.
CET1 capital
The Group's transitional CET1 ratio increased by 12bps over the year. Total
underlying capital generation of 195bps was driven by 226bps of underlying
profit, offset by 4bps from higher RWAs (excluding the impact to RWAs from
intangible asset relief changes) and 27bps of AT1 distributions and related
costs. Adjusting items consumed c.40bps while there was 58bps of accrual for
expected dividends and 31bps from the £75m share buyback. The removal of
the CRR II software benefit consumed a further 53bps. The announcement of an
additional £50m share buyback will reduce CET1 resources in Q1 2023.
RWAs
Overall, RWAs reduced by 0.3% during FY22 to £24.1bn. To date, RWA
pro-cyclicality has remained low, although the risk still remains, with the
timing of any increase uncertain. In Mortgages, RWAs reduced by £0.9bn
as probability of default (PD) recalibrations and stronger HPI more than
offset growth in balances and other movements. In Business, RWAs increased by
£0.2bn mainly as a result of higher customer balances, excluding
government-backed balances that carry a 0% risk weight. In Unsecured, RWAs
increased by £0.5bn in line with the increase in customer lending during the
financial year. Non-credit RWAs were £3.1bn as at FY22 (2021: £2.7bn). In H1
2023, the Group expects a c.£1bn-£1.5bn increase from the implementation of
hybrid model changes.
Robust capital position in the face of economic uncertainty
While credit provisions have reduced to £457m (2021: £504m) reflecting the
robust credit performance and removal of COVID-19-related PMAs, the Group
maintains a strong level of coverage to manage the impact of a weaker
economy, and subsequent increase in credit losses. In addition, the Group
also retained a significant CET1 management buffer of £1.5bn in excess of
its CRD IV regulatory requirement as at FY22, providing further potential
loss-absorbing capacity.
Business and financial review
Chief Financial Officer's review
MREL
The Group's Minimum Requirements for Own Funds and Eligible Liabilities
(MREL) ratio increased from 31.9% to 32.1% during the year, comfortably
exceeding its 2022 end-state MREL requirement of 24.9% of RWAs.
CET1 capital movements((1)) 2022
Opening CET1 ratio 14.9%
Capital generated (bps) 226
RWA growth (bps) (4)
AT1 distributions (bps) (27)
Underlying capital generated (bps) 195
Restructuring charges (bps) (25)
Acquisition accounting unwind (bps) (10)
Conduct (bps) (3)
Foreseeable ordinary dividends (bps) (58)
Share buyback (bps) (31)
Other (bps) (3)
Reversal of intangible asset relief (bps) (53)
Net capital generated (bps) 12
Closing CET1 ratio 15.0%
(1) This table shows the capital position on a CRD IV 'fully loaded' basis
with IFRS 9 transitional adjustments applied.
FY23 outlook
In FY23, we anticipate full year NIM to be c.185-190bps, reflecting the
benefit of the current rate environment, structural hedge reinvestment and
deposit pricing, offset by ongoing competitive pricing pressures, particularly
in Mortgages, higher wholesale funding costs and higher liquidity
requirements, as a consequence of increased market volatility.
The Group now expects to deliver a CIR of around 50% in FY23. The Group
continues to expect to incur c.£275m of restructuring charges between
FY22-24, reflecting its ongoing digitisation programme, with the majority of
the remaining c.£190m expected to be incurred in FY23.
The Group now expects its cost of risk for FY23 to normalise around its
through the cycle average of c.30-35bps.
Consistent with our strategy to diversify the balance sheet, we anticipate
growth in overall lending in FY23, with more moderate growth in Unsecured
and Business (non-government) relative to FY22, and modest growth
in Mortgages.
The Group expects to issue £1.5bn-£2.5bn of secured issuance in FY23 subject
to deposit flows and relative cost, while MREL issuance is expected to be
broadly limited to maintaining the current surplus to regulatory requirements.
During H122, the Group announced its long‑term CET1 target range of
13-13.5%. During FY23, the Group expects to operate above 14%, given the level
of macroeconomic uncertainty. This includes the anticipated impact of
implementing mortgage hybrid models, which is currently anticipated to
increase RWAs by c.£1bn-£1.5bn in H123.
In line with the Company's capital framework and dividend policy, which was
outlined alongside H122 results, the Board is today announcing a £50m
extension of the Group's existing buyback programme. Given the timing of this
year's stress test results, the Group does not expect to announce further
buybacks until Q423.
Business and financial review
Chief Financial Officer's review
Guidance
FY23 outlook Medium-term outlook
NIM Statutory RoTE
185-190bps c.11% in FY24, consistent with target of >10%
Underlying costs Growth
c.50% CIR Targeting growth in Unsecured and Business (non-government), maintaining
Mortgage market share
Cost of risk Income
Normalise around the through-the-cycle level of c.30-35bps Mix-driven NIM expansion
Restructuring costs Gross savings
c.£275m across FY22-FY24, with the majority in FY23 Gross cost savings of c.£175m by FY24 generate headroom to absorb inflation
and re-investment
Dividend Underlying costs
30% dividend payout supplemented with buybacks Underlying CIR to be <50%
Business and financial review
Chief Financial Officer's review
Medium-term outlook
In the medium term the Group's digital acceleration will support the delivery
of valuable and differentiated propositions to drive profitable growth. The
Group will continue to target diversification on both sides of the balance
sheet, delivering growth in Unsecured and Business lending, while maintaining
our mortgage market share. We continue to target strong growth in new PCA and
BCA customer numbers, improving the overall cost of funds.
We continue to expect our strategy to digitise the Bank to deliver around
£175m of gross cost savings over the period FY22-24, generating headroom to
absorb inflation and reinvestment. We have made good progress to date with
savings driven by reductions in headcount and property, third party spend and
savings from digitisation. Given the uncertain economic environment that has
resulted in persistent high levels of inflation, alongside our strategy
to grow the balance sheet, the Group continues to target a CIR rather than
a nominal cost target and expects to achieve an underlying CIR of <50% by
FY24.
Following the full recognition of historical losses, the Group expects its
effective tax rate to be maintained in the mid 20%s from FY23 based on enacted
legislation.
Overall, the Group now expects to deliver a c.11% statutory RoTE by FY24
and is well placed to deliver strong, profitable growth through the
acceleration of our digital strategy.
In order to support its FY24 RoTE target, the Group anticipates returning
to its 13-13.5% CET1 target range by FY24, assuming no material change
in the economic outlook. The Group will target a 30% full year dividend
payout level and will supplement dividends with buybacks, subject to an
ongoing assessment of surplus capital, market conditions and regulatory
approval.
Clifford Abrahams
Chief Financial Officer
20 November 2022
Business and financial review
Chief Financial Officer's review
Summary income statement - statutory basis
For the year ended 30 September 2022 2021
£m £m
Net interest income 1,576 1,357
Non-interest income 140 132
Total operating income 1,716 1,489
Operating and administrative expenses (1,069) (1,203)
Operating profit before impairment losses 647 286
Impairment (losses)/credit on credit exposures (52) 131
Statutory profit on ordinary activities before tax 595 417
Tax (expense)/credit (58) 57
Statutory profit after tax 537 474
The Group has recognised a statutory profit before tax of £595m (2021:
£417m). The increase in statutory profit is driven by higher income and
lower statutory costs, offset slightly by our impairment performance, given
the scale of the writeback recognised last year. The Group continues to expect
that the difference between underlying and statutory profit will reduce
over time as we deliver our strategy and the exceptional charges reduce.
Performance measures((1))
2022 2021 Change
Profitability
RoTE 10.3% 10.2% 0.1%pts
CIR 62% 81% 19%pts
Return on assets 0.60% 0.52% 0.08%pts
Basic earnings per share (EPS) 32.4p 27.3p 5.1p
(1) For a definition of each of the performance measures, refer to
'Measuring the Group's performance' on pages 124 to 133.
Reconciliation of statutory to underlying results
The statutory basis presented within this section reflects the Group's results
as reported in the financial statements. The underlying basis reflects the
Group's financial performance as presented to the CEO, Executive Leadership
Team and Board and excludes certain items that are part of the statutory
results. The table below reconciles the statutory results to the underlying
results, and full details on the adjusted items to the underlying results are
included on page 134.
2022 income statement Statutory Restructuring Acquisition Legacy Other Underlying
results charges accounting conduct £m basis
£m £m unwinds £m £m
£m
Net interest income 1,576 - 16 - - 1,592
Non-interest income 140 - 16 - 7 163
Total operating income 1,716 - 32 - 7 1,755
Total operating and administrative expenses before impairment losses (1,069) 82 3 8 62 (914)
Operating profit before impairment losses 647 82 35 8 69 841
Impairment losses on credit exposures (52) - - - - (52)
Profit on ordinary activities before tax 595 82 35 8 69 789
Financial performance measures
RoTE 10.3% 1.4% 0.6% 0.1% 1.1% 13.5%
CIR 62.3% (4.4)% (1.8)% (0.4)% (3.6)% 52.1%
Basic EPS 32.4p 4.2p 1.8p 0.4p 3.6p 42.4p
Business and financial review
Chief Financial Officer's review
2021 income statement Statutory Restructuring Acquisition Legacy Other Underlying
results charges accounting conduct £m basis
£m £m unwinds £m £m
£m
Net interest income 1,357 - 55 - - 1,412
Non-interest income 132 - 23 - 5 160
Total operating income 1,489 - 78 - 5 1,572
Total operating and administrative expenses before impairment losses (1,203) 146 10 76 69 (902)
Operating profit before impairment losses 286 146 88 76 74 670
Impairment credit on credit exposures 131 - - - - 131
Profit on ordinary activities before tax 417 146 88 76 74 801
Financial performance measures
RoTE 10.2% 2.9% 1.7% 1.5% 1.5% 17.8%
CIR 80.8% (8.9)% (5.4)% (4.6)% (4.5)% 57.4%
Basic EPS 27.3p 7.8p 4.7p 4.1p 4.0p 47.9p
Risk Management
Credit risk
At a time of ongoing challenge for the UK economy, our lending portfolios
remain well positioned.
A disciplined approach to credit risk management supports the Group's
operations and has underpinned its resilience in recently challenging
times.
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.
Close monitoring, clear policies and a disciplined approach to credit risk
management support the Group's operations, and have underpinned its
resilience in recently challenging times. The emergence of the significant
inflationary headwinds and cost of living pressures have the potential to
affect customer resilience and debt affordability. The Group has taken a
number of steps to support customers through this period of heightened
affordability pressure, and ensure that its credit risk framework and
associated policies remain effective and appropriate.
Managing credit risk within our asset portfolios
Risk appetite
The Group controls its levels of credit risk by placing limits on the amount
of risk it is willing to take in order to achieve its strategic objectives.
This approach involves a defined set of qualitative and quantitative limits in
relation to its credit risk concentrations to one borrower, or group of
borrowers, and to geographical, product and industry segments. The management
of credit risk within the Group is achieved through ongoing approval and
monitoring of individual transactions, timely changes to application
scorecards and credit strategies, regular asset quality reviews and the
independent oversight of credit decisions and portfolios.
The Group maintained a controlled approach to portfolio management and
appetite for new lending origination as it continued to recognise some of the
delayed impacts of COVID 19, with updates to underwriting criteria to
reflect the uncertain economic environment and emerging inflationary
headwinds. The FY23 RAS continues to consider the impact of those inflationary
headwinds and cost of living pressures, and is focussed on supporting
customers through this challenging period. Climate risk is an increasingly
important component of the broader RMF and we have recognised this risk
through the inclusion of climate-related risk factors within the FY22 RAS. The
framework has been updated to embed climate risk considerations across various
aspects of customer lending and credit risk management practices.
Measurement
The Group uses a range of statistical models, supported by both internal and
external data, to measure credit risk exposures. These models underpin the IRB
capital calculation for the Mortgage and Business portfolios, and account
management activity for all portfolios. Further information on the measurement
and calculation of ECL and the Group's approach to the impairment of financial
assets can be found on page 20.
Political and economic risk is an emerging risk for the Group and includes
the future impact on macroeconomic variables, which are used in the
calculation of the Group's modelled ECL output. Further detail on the Group's
use of macroeconomic variables in the year can be found on pages 39 to 41.
Mitigation
The Group maintains a dynamic approach to credit management and takes
appropriate steps if individual issues are identified, or if credit
performance has, or is expected to, deteriorate due to borrower, economic or
sector-specific weaknesses.
The mitigation of credit risk within the Group is achieved through approval
and monitoring of automated credit strategies, individual transactions, asset
quality, analysis of the performance of the various credit portfolios, and
oversight of credit portfolios across the Group. Portfolio monitoring
techniques include product, industry, geographic concentrations and
delinquency trends, as well as considering layered risks where customers may
have more than one higher risk characteristic.
There is regular analysis of borrower ability to meet interest and capital
repayment obligations, with early support and mitigating steps taken where
required. The Group has taken additional steps to update affordability
assessments in response to the inflationary and cost of living pressures
facing customers. Credit risk mitigation is also supported, in part, by
obtaining collateral, and corporate and personal guarantees where appropriate.
The key mitigating measures are described below.
Credit assessment and mitigation
Credit risk is managed in accordance with lending policies, the Group's risk
appetite and the RMF. Lending policies and performance against risk appetite
are reviewed regularly.
The Group uses a variety of lending criteria when assessing applications for
Mortgage and Unsecured customers. The approval process uses credit scorecards,
credit strategies and affordability assessments, and involves a review of an
applicant's previous credit history using information held by credit reference
agencies. Manual underwriting assessments are also used as and when
required. The Group also utilises quantitative thresholds, for example debt to
income ratios, as well as the ratio of borrowing to collateral. Some of these
limits relate to internal approval levels and others are hard limits above
which the Group will reject the application.
For residential mortgages, the Group's policy is to accept only standard
applications within Board approved risk appetite limits. Included within these
is the maximum percentage LTV limit that is offered subject to loan size and
customer income. Product availability may be altered depending on market
conditions and outlook. Product types such as BTL and residential
interest-only mortgages are controlled by transactional limits covering both
LTV and value.
Risk Management
Credit risk
For business customers, credit risk is further mitigated by focusing on
business sectors where the Group has specific expertise, and through limiting
exposures on higher value loans and to certain sectors. When making credit
decisions for business customers the Group will routinely assess the primary
source of repayment, most typically the cash generated by the customer through
its normal trading cycle. Secondary sources of repayment are also considered
and while not the focus of the lending decision, collateral will be taken when
appropriate. The Group seeks to obtain security cover and, where relevant,
guarantees from borrowers.
Specialist expertise
Credit quality is managed and monitored by skilled teams including, where
required, specialists that provide dedicated support for vulnerable
customers experiencing financial or other types of difficulties. These
specialists act within agreed delegated authority levels set in accordance
with experience and capabilities.
Credit strategy and policy
Credit risks associated with lending are managed through the application of
detailed lending policies and standards that outline the approach to lending,
underwriting criteria, credit mandates, concentration limits and product
terms.
Significant credit risk strategies and policies are reviewed and approved
annually by the Credit Risk Committee. For complex credit products and
services, the Chief Credit Officer and Credit Risk Committee provide a policy
framework that identifies, quantifies and mitigates risks. These policies and
frameworks are delegated to, and disseminated under, the guidance and control
of the Board and senior management, with appropriate oversight through
governance committees.
Specialist credit teams provide oversight of credit portfolio performance as
well as adherence to credit risk policies and standards. Activities include
targeted risk-based reviews, providing an assessment of the effectiveness of
internal controls and risk management practices. Bespoke assignments are
also undertaken in response to emerging risks and regulatory requirements.
Independent assurance reviews are regularly undertaken by Internal Audit.
Portfolio oversight
The Group's credit portfolios, and the key benchmarks, behaviours and
characteristics that are used to manage portfolios, are regularly monitored,
with portfolio monitoring reports provided for review by senior management.
Controls over rating systems
The Group has a Model Risk Oversight team that sets common minimum standards
for risk models and associated rating systems to ensure these are developed
and monitored consistently, and are of sufficient quality to support business
decisions and meet regulatory requirements. The Group performs an annual
self-assessment of its rating systems to ensure ongoing CRR compliance.
The Group also utilises other instruments and techniques across its wider
balance sheet. These are summarised below:
Derivatives
The Group maintains control limits on net open derivative positions. At any
one time, the amount subject to credit risk is limited to the current fair
value of instruments that are favourable to the Group (i.e. assets where the
fair value is positive) and in relation to derivatives, may only be a small
fraction of the contract, or notional values associated with instruments
outstanding. This credit risk is managed as part of the customer's overall
exposure together with potential exposures from market movements.
Master netting agreements
The Group further restricts its exposure to credit losses by entering into
master netting arrangements with counterparties whom it undertakes a
significant volume of transactions. Master netting arrangements do not
generally result in an offset of balance sheet assets and liabilities, as
transactions are usually settled on a gross basis. However, credit risk
associated with the favourable contracts is reduced by a master netting
arrangement to the extent that, if any counterparty failed to meet its
obligations in accordance with the agreed terms, all amounts with the
counterparty are terminated and settled on a net basis. Derivative financial
instrument contracts are typically subject to the International Swaps and
Derivatives Association (ISDA) master netting agreements, as well as Credit
Support Annexes, where relevant, around collateral arrangements attached to
those ISDA agreements. Derivative exchange or clearing counterparty agreements
exist where contracts are settled via an exchange or clearing house.
Collateral
The Group evaluates each customer's creditworthiness on a case by case basis.
The amount of collateral obtained, if deemed necessary by the Group upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held as security, and other credit enhancements
includes the following:
Residential mortgages
Residential property is the Group's main source of collateral on mortgage
lending, and means of mitigating loss in the event of the default risk
inherent in its residential mortgage portfolios. All lending activities are
supported by an appropriate form of valuation. This valuation is applied using
either a physical valuation, or another method that is not reliant on a
physical inspection, but utilises data and modelled information, such as
desktop, automated valuation model or indexed valuations (subject to policy
rules and confidence levels).
It is the Group's policy to dispose of repossessed properties, with the
proceeds used to reduce or repay the outstanding balance. The Group does not
occupy repossessed properties for its own business use.
Commercial property
Commercial property is a source of collateral on business lending, and means
of mitigating loss in the event of default (within the Stage 3 Business
balance of £376m, £106m is collateralised on property), (2021: Stage 3
Business balance of £235m, with £117m collateralised on property).
For commercial loans, collateral comprises first legal charges over
freehold, or long leasehold property (including formal Companies House
registration where appropriate). All commercial property collateral is subject
to an independent, professional valuation when taken and thereafter subject to
periodic review in accordance with policy requirements.
Risk Management
Credit risk
Non-property related collateral
In addition to residential and commercial property based security, the Group
also takes other forms of collateral when lending. This collateral can
involve obtaining security against the underlying loan through the use of cash
collateral and/or netting agreements, both of which reduce the original
exposure by the amount of collateral held, subject to volatility and maturity
adjustments where applicable. It can also include specific or interlocking
guarantees, and loan agreements, which include affirmative and negative
covenants and, in some instances, guarantees of counterparty obligations.
The Group also provides asset-backed lending in the form of asset and invoice
finance. Security for these exposures is held in the form of direct recourse
to the underlying asset financed.
Generally, the Group does not take possession of collateral it holds as
security, or call on other credit enhancements, that would result in
recognition of an asset on its balance sheet.
Monitoring
Credit policies and procedures, which are subject to ongoing review, are
documented and disseminated in a form that supports the credit operations of
the Group.
· Credit Risk Committee: The Credit Risk Committee ensures that the
credit RMF and associated policies remain effective. The Committee has
oversight of the quality, composition and concentrations of the credit risk
portfolio. It also determines and approves strategies to adjust the portfolio
for changes in market conditions.
· RAS measures: Measures are reported monthly to ensure adherence to
appetite. A formal annual review is carried out to ensure that the measures
accurately reflect the Group's risk appetite, strategy and concerns relative
to the wider macro environment. All measures are subject to extensive
engagement with the Executive Leadership Team and the Board, and are subject
to endorsement from executive governance committees prior to Board approval.
Regulatory engagement is also scheduled as appropriate.
· Risk concentration: Concentration of risk is managed by counterparty,
product, geographical region and industry sector. In addition, single name
exposure limits exist to control exposures to a single counterparty.
Concentrations are also considered through the RAS process, focusing
particularly on the external environment, outlook and comparison against
market benchmarks, as well as considering layered risks where customers may
have more than one higher risk characteristic.
· Single large exposure excesses: Excesses on exposures under the
delegated commitment authority of the Transactional Credit Committee are
reported to the committee when above defined limits. All excess reports
include a proposed route to remediation. Exposures are also managed in
accordance with the large exposure reporting requirements of the CRR.
· Portfolio Monitoring: Continuous monitoring of the portfolio
composition and performance is undertaken through weekly and monthly
reviews.
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's forbearance policies and definitions comply
with the guidance established by the EBA for financial reporting. Forbearance
concessions include the granting of more favourable terms and conditions than
those provided at drawdown of the facility, or conditions that would not
ordinarily be available to other customers with a similar risk profile.
Forbearance parameters are regularly reviewed and refined as necessary to
ensure they are consistent with the latest industry guidance and prevailing
practice, as well as ensuring that any assessment adequately captures and
reflects the most recent customer behaviours and market conditions.
Measuring credit risk within asset portfolios
At each reporting date, the Group assesses financial assets measured at
amortised cost, as well as loan commitments and financial guarantees, for
impairment. The impairment loss allowance is calculated using an ECL
methodology and reflects: (i) an unbiased and probability weighted amount;
(ii) the time value of money, which discounts the impairment loss; and (iii)
reasonable and supportable information that is available without undue cost
or effort about past events, current conditions and forecasts of future
economic conditions.
The Group adopts two approaches in the measurement of credit risk under IFRS
9:
Individually assessed
A charge is taken to the income statement when an individually assessed
provision (IA) has been recognised, or a direct write-off has been applied to
an asset balance. These will be classified as Stage 3.
Collectively assessed
The Group uses a combination of strategies and statistical models that utilise
internal and external data to measure the exposure to credit risk within the
portfolios, and to calculate the level of ECL. This approach is supplemented
by management judgement in the form of PMAs where necessary.
ECL methodology
ECL methodology is based upon the combination of probability of default (PD),
loss given default (LGD) and exposure at default (EAD) estimates that consider
a range of factors that impact on credit risk and the level of impairment loss
provisioning. The Group uses reasonable and supportable forecasts of future
economic conditions in estimating the ECL allowance. The methodology and
assumptions used in the ECL calculation are reviewed regularly and updated
as necessary.
Risk Management
Credit risk
The calculated model ECL is determined using the following classifications:
Classification ECL calculation period Description
Stage 1 12 months An exposure that is not credit-impaired on initial recognition and has not
experienced a SICR since initial recognition.
Stage 2 Lifetime An exposure that has experienced a SICR since initial recognition, but is
not yet deemed to be credit impaired.
Stage 3 Lifetime An exposure that is credit-impaired.
In addition, purchased or originated credit-impaired (POCI) financial assets
are those that are assessed as being credit-impaired upon initial recognition.
Once a financial asset is classified as POCI, it remains there until
derecognition irrespective of any changes to its credit quality. POCI
financial assets are included in Stage 3 with corresponding values disclosed
by way of footnote to the relevant tables. The Group regards the date of
acquisition as the origination date for purchased portfolios.
A Stage 2 ECL is required where a SICR has been identified, such as a
deterioration in the PD since origination. Absent any specific SICR factors,
the Group operates a 30 DPD backstop for classification as Stage 2, and 90 DPD
for Stage 3. Forborne exposures can be classed as either Stage 2 or Stage 3
depending on the type of forbearance programme that has been applied to
the customer.
The SICR criteria and triggers are parameters within the ECL calculation
process and, as such, are considered under the same governance pathway as
the Group's IFRS 9 models. This approach means that any changes to the
triggers are initially submitted to and endorsed by the Credit
Model Technical Forum, with formal approval provided by the MGC.
During the year, refinements were made to the SICR criteria within the Group's
Business portfolio to more closely reflect the level of credit risk. On
adoption of IFRS 9 from 1 October 2018, the Group had selected eCRS based SICR
triggers as one of the tools for monitoring the credit risk on Business
customers. The effectiveness of all triggers were reviewed during the year,
including overlaps with other causes of stage migration, and the Group
concluded that its hard triggers based on internal credit risk rating were
ineffective when used in conjunction with the PD deterioration threshold. In
addition, the threshold definition has been simplified and is now set at
a 50% increase in the annualised PD since origination, subject to a 100bps
floor in the movement. The overall impact of this refinement has resulted in
more of the Business portfolio remaining in Stage 1 in the current year. As
this change represents a revision to model parameters rather than a change
of policy, comparatives have not been restated.
The Credit Risk Committee provides oversight on the adequacy of ECL
provisioning with reviews and robust challenge of the calculation and
management judgement recommendations. This includes the rationale behind the
inclusion of PMAs, the basis on which these are calculated and the proposed
timeline for their release.
The Boards' Audit Committee provides oversight to the ECL calculation and
measurement of ECL, with reviews and robust challenge of all calculated
outcomes and management judgements.
Further detail on the accounting policy applied to ECLs can be found in note
3.2 to the financial statements.
Accounting and regulatory credit loss frameworks
The approach to calculating credit losses differs between the accounting and
regulatory frameworks applicable to the Group, with the most significant
difference being that the concept of SICR, which moves exposures from a
12-month to a lifetime ECL calculation in the accounting framework, does not
exist under the regulatory framework. The approach to staging under IFRS 9
is also not applicable under regulatory credit loss reporting.
Both frameworks calculate credit losses under a PD x LGD x EAD approach, with
the regulatory IRB approach assessing these in the next 12 months, whereas the
accounting framework under IFRS 9 requires these losses assessed on a
forward-looking view, with a lifetime loss calculated where appropriate.
Credit losses are supplemented by management judgements in the form of PMAs,
where required, under the accounting framework.
Both the accounting and regulatory definitions of default are materially
aligned, with default being triggered at 90 DPD, with the exception of the
heritage Virgin Money mortgage models, that apply a 180 DPD regulatory default
trigger under existing approved permissions. The definition of default will be
fully aligned to 90 DPD when the regulatory models are updated in line with
the hybrid model adoption, which is anticipated in 2023.
Cure periods
The Group aligns the regulatory cure periods for forborne exposures in its
IFRS 9 staging criteria at a minimum period of either 24, or 36 months,
depending on the forbearance programme utilised. Where exposures are
classified as Stages 2 or 3 as a result of not being in a forbearance
programme, these can cure when the relevant staging trigger is removed and no
longer applicable.
Risk Management
Credit risk
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 relative significance of customer lending exposures to the
Group's overall credit risk position, the disclosures that follow are focused
principally on customer lending.
The Group is also exposed to credit risk on its other banking and
treasury-related activities, and holds £12.2bn (2021: £9.7bn) of cash and
balances with central banks and £0.7bn (2021: £0.8bn) due from other banks
at amortised cost, with a further £5.1bn (2021: £4.4bn) of financial assets
at fair value through other comprehensive income (FVOCI). Additionally
£11.0bn of cash is held with the BoE (2021: £8.3bn), and 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.
Maximum exposure to credit risk on financial assets and credit-related
commitments
The following tables show the levels of concentration of the Group's financial
assets and credit-related commitments:
2022 2021
Gross loans and Credit-related Total Gross loans and Credit-related Total
advances to commitments £m advances to commitments £m
customers £m customers £m
£m £m
Mortgages 58,464 4,200 62,664 58,441 2,845 61,286
Unsecured 6,513 11,057 17,570 5,770 10,507 16,277
Business 8,169 4,102 12,271 8,340 3,769 12,109
Total 73,146 19,359 92,505 72,551 17,121 89,672
Impairment provisions on credit exposures((1)) (454) (3) (457) (496) (8) (504)
Fair value hedge adjustment (941) - (941) (179) - (179)
Maximum credit risk exposure on lending assets 71,751 19,356 91,107 71,876 17,113 88,989
Cash and balances with central banks 12,221 9,711
Financial instruments at FVOCI 5,064 4,352
Due from other banks 656 800
Other financial assets at fair value 78 153
Derivative financial assets 342 140
Maximum credit risk exposure on all financial assets((2)) 109,468 104,145
(1) The total ECL provision covers both on and off-balance sheet
exposures, which are reflected in notes 3.2 and 3.13 respectively. All tables
and ratios that follow are calculated using the combined on- and off-balance
sheet ECL, which is consistent for all periods reported.
(2) Unless otherwise noted, the amount that best represents the maximum
credit exposure at the reporting date is the carrying value of the financial
asset.
Group credit highlights
In addition to the balance sheet position above, key metrics of relevance
are as follows:
Group credit highlights 2022 2021
£m £m
Impairment charge/(credit) on credit exposures
Mortgage lending (30) (44)
Unsecured lending 178 (32)
Business lending (96) (55)
Total Group impairment (credit)/charge 52 (131)
Underlying impairment (credit)/charge((1)) to average customer loans (cost of 0.07% (0.18%)
risk)
Key asset quality ratios
% Loans in Stage 2 7.76% 14.09%
Loans in Stage 3 1.41% 1.32%
Total book coverage((2)) 0.62% 0.70%
Stage 2 coverage((2)) 4.72% 3.02%
Stage 3 coverage((2)) 11.24% 9.59%
(1) Inclusive of gains/losses on assets held at fair value and elements of
fraud loss.
(2) Excludes the guaranteed element of government-backed loan schemes.
Risk Management
Credit risk
The Group has continued to maintain a stable lending book, with gross lending
to customers of £73.1bn at 30 September 2022 (2021: £72.6bn). While the
Mortgage book remained relatively stable, a small 1.2% reduction in Business
lending was more than offset by 12.9% growth in the Unsecured lending book,
mainly driven by credit card growth of £0.9bn in FY22 despite having
tightened underwriting criteria in the second half of the year in response to
rising living costs.
Asset quality was robust in the period and most of the key asset quality
ratios remained broadly stable. However, other significant economic and
geopolitical factors have the potential to impact the short to medium term
performance of the portfolio, with the most significant of these anticipated
to be cost of living pressures. The Group continues to support customers
through this challenging period, with a controlled risk appetite and focus
on responsible lending decisions.
The selection of appropriate PMAs is a major component in determining the
Group's ECL, with the following considered to be key factors for the
Group's portfolio at that date:
· All PMAs relating to the COVID-19 pandemic, including the move of
balances to Stage 2 for customers taking a payment holiday, have been fully
released from Stages 1 and 2 as the risk of potential default within the
portfolio is no longer considered to be directly attributable
to specifically pandemic effects.
· Application of a £27m adjustment for the cost of living crisis and the
impact it may have on customers' ability to absorb higher day-to-day costs
within available finances. This adjustment impacts both the Mortgage (£6m)
and Unsecured (£21m) portfolios and is held in Stage 1.
· Recognising that the Business portfolio continues to face an uncertain
economic environment, with an economic resilience PMA of £30m being
recognised and is primarily held in Stage 2.
As such, the Group has recorded a total impairment provision of £457m at 30
September 2022, reflecting a 9% reduction from £504m at 30 September 2021,
and a corresponding reduction in coverage from 70bps to 62bps. Within this,
the modelled and IA provision has increased to £372m (2021: £297m) driven by
the updated macroeconomic inputs and growth in Unsecured lending. PMAs have
reduced in the period to £85m (2021: £207m).
The net reduction in provision has been offset by the individually assessed
impairment charge of £106m in the year (2021: £79m), resulting in a net
charge to the income statement of £52m (2021: net credit of £131m), and an
associated cost of risk of 7bps (2021: (18)bps).
Gross loans and advances((1)) ECL and coverage
2022 Mortgages Unsecured Business((2)) Total((4))
Cards Loans and Overdrafts Combined
£m % £m % £m % £m % £m % £m %
Stage 1 54,791 93.7% 4,712 84.8% 612 64.1% 5,324 81.8% 6,270 76.7% 66,385 90.8%
Stage 2 - total 3,090 5.3% 774 13.9% 335 35.1% 1,109 17.0% 1,526 18.7% 5,725 7.8%
Stage 2: 0 DPD 2,763 4.7% 723 13.0% 327 34.3% 1,050 16.1% 1,499 18.4% 5,312 7.2%
Stage 2: < 30 DPD 158 0.3% 27 0.5% 3 0.3% 30 0.5% 9 0.1% 197 0.3%
Stage 2: > 30 DPD 169 0.3% 24 0.4% 5 0.5% 29 0.4% 18 0.2% 216 0.3%
Stage 3((3)) 583 1.0% 72 1.3% 8 0.8% 80 1.2% 373 4.6% 1,036 1.4%
58,464 100.0% 5,558 100.0% 955 100.0% 6,513 100.0% 8,169 100.0% 73,146 100.0%
ECLs
Stage 1 10 17.9% 57 23.2% 6 15.8% 63 22.2% 12 10.3% 85 18.6%
Stage 2 - total 32 57.1% 156 63.4% 25 65.8% 181 63.7% 55 47.0% 268 58.6%
Stage 2: 0 DPD 28 49.9% 129 52.4% 22 57.9% 151 53.1% 55 47.0% 234 51.2%
Stage 2: < 30 DPD 2 3.6% 14 5.7% 1 2.6% 15 5.3% - 0.0% 17 3.7%
Stage 2: > 30 DPD 2 3.6% 13 5.3% 2 5.3% 15 5.3% - 0.0% 17 3.7%
Stage 3((3)) 14 25.0% 33 13.4% 7 18.4% 40 14.1% 50 42.7% 104 22.8%
56 100.0% 246 100.0% 38 100.0% 284 100.0% 117 100.0% 457 100.0%
Coverage
Stage 1 0.02% 1.29% 1.06% 1.26% 0.22% 0.13%
Stage 2 - total 1.02% 21.94% 7.29% 17.22% 3.75% 4.72%
Stage 2: 0 DPD 1.02% 19.41% 6.41% 15.09% 3.76% 4.43%
Stage 2: < 30 DPD 0.81% 57.37% 33.67% 54.48% 3.57% 8.53%
Stage 2: > 30 DPD 1.25% 59.03% 52.92% 58.01% 1.47% 8.57%
Stage 3((3)) 2.28% 50.96% 73.14% 53.51% 19.96% 11.24%
0.09% 4.81% 3.88% 4.66% 1.59% 0.62%
(1) Excludes loans designated at FVTPL, 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 POCI for gross loans and advances of £56m for
Mortgages and £1m for Unsecured (2021: £67m and £2m respectively); and ECL
of (£1m) for Mortgages and (£2m) for Unsecured (2021: £Nil and (£2m)
respectively).
(4) The COVID related PMAs held in 2021 were allocated across Stages 1 and
2 and have now been fully released. The cost of living PMAs are held in Stage
1 and the economic resilience PMA is primarily held in Stage 2.
Risk Management
Credit risk
2021 Mortgages Unsecured Business((2)) Total((4))
Cards Loans and Overdrafts Combined
£m % £m % £m % £m % £m % £m %
Stage 1 50,596 86.6% 4,100 88.1% 1,048 94.0% 5,148 89.2% 5,672 68.0% 61,416 84.7%
Stage 2 - total 7,192 12.3% 497 10.7% 56 5.0% 553 9.6% 2,433 29.2% 10,178 14.0%
Stage 2: 0 DPD 6,918 11.9% 466 10.1% 46 4.2% 512 8.9% 2,390 28.7% 9,820 13.5%
Stage 2: < 30 DPD 128 0.2% 16 0.3% 5 0.4% 21 0.4% 25 0.3% 174 0.2%
Stage 2: > 30 DPD 146 0.2% 15 0.3% 5 0.4% 20 0.3% 18 0.2% 184 0.3%
Stage 3((3)) 653 1.1% 58 1.2% 11 1.0% 69 1.2% 235 2.8% 957 1.3%
58,441 100.0% 4,655 100.0% 1,115 100.0% 5,770 100.0% 8,340 100.0% 72,551 100.0%
ECLs
Stage 1 4 4.6% 32 20.0% 9 26.5% 41 21.1% 66 29.6% 111 22.0%
Stage 2 - total 64 73.6% 99 61.9% 19 55.9% 118 60.9% 120 53.8% 302 59.9%
Stage 2: 0 DPD 61 70.2% 82 51.3% 13 38.2% 95 49.0% 120 53.8% 276 54.8%
Stage 2: < 30 DPD 1 1.1% 8 5.0% 2 5.9% 10 5.2% - - 11 2.1%
Stage 2: > 30 DPD 2 2.3% 9 5.6% 4 11.8% 13 6.7% - - 15 3.0%
Stage 3((3)) 19 21.8% 29 18.1% 6 17.6% 35 18.0% 37 16.6% 91 18.1%
87 100.0% 160 100.0% 34 100.0% 194 100.0% 223 100.0% 504 100.0%
Coverage
Stage 1 0.01% 0.85% 1.13% 0.91% 1.35% 0.18%
Stage 2 - total 0.88% 22.12% 42.01% 23.92% 5.43% 3.02%
Stage 2: 0 DPD 0.87% 19.51% 33.66% 20.64% 5.48% 2.84%
Stage 2: < 30 DPD 0.85% 58.36% 52.88% 57.27% 1.51% 6.90%
Stage 2: > 30 DPD 1.36% 64.46% 99.65% 73.48% 2.85% 8.99%
Stage 3((3)) 2.81% 54.13% 64.02% 55.65% 17.31% 9.59%
0.15% 3.79% 3.86% 3.80% 3.06% 0.70%
(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 POCI for gross loans and advances of £56m for
Mortgages and £1m for Unsecured (2021: £67m and £2m respectively); and ECL
of (£1m) for Mortgages and (£2m) for Unsecured (2021: £Nil and (£2m)
respectively).
(4) The COVID related PMAs held in 2021 were allocated across Stages 1 and
2 and have now been fully released. The cost of living PMAs are held in Stage
1 and the economic resilience PMA is primarily held in Stage 2.
Risk Management
Credit risk
Stage 2 balances
There can be a number of reasons that require a financial asset to be subject
to a Stage 2 lifetime ECL calculation other than reaching the 30 DPD backstop.
The following table highlights the relevant trigger point leading to a
financial asset being classed as Stage 2:
2022 Mortgages Personal Business Total((3))
Cards Loans and Overdrafts Combined
£m % £m % £m % £m % £m % £m %
PD deterioration 2,084 69% 401 52% 329 99% 730 66% 826 55% 3,640 64%
Forbearance 106 3% 9 1% 1 0% 10 1% 235 15% 351 6%
AFD or Watch List((1)) 6 0% - 0% - 0% - 0% 447 29% 453 8%
> 30 DPD 169 5% 24 3% 5 1% 29 3% 18 1% 216 4%
Other((2)) 725 23% 340 44% - 0% 340 30% - 0% 1,065 18%
3,090 100% 774 100% 335 100% 1,109 100% 1,526 100% 5,725 100%
ECLs
PD deterioration 18 55% 73 47% 23 92% 96 53% 26 47% 140 53%
Forbearance 5 16% 3 2% - 0% 3 2% 12 22% 20 7%
AFD or Watch List((1)) - 0% - 0% - 0% - 0% 17 31% 17 6%
> 30 DPD 2 6% 13 8% 2 8% 15 8% - 0% 17 6%
Other((2)) 7 23% 67 43% - 0% 67 37% - 0% 74 28%
32 100% 156 100% 25 100% 181 100% 55 100% 268 100%
2021 Mortgages Personal Business Total((3))
Cards Loans and Overdrafts Combined
£m % £m % £m % £m % £m % £m %
PD deterioration 6,100 85% 300 60% 48 86% 348 63% 1,445 59% 7,893 78%
Forbearance 176 2% 11 2% 3 5% 14 3% 374 15% 564 6%
AFD or Watch List((1)) 11 - - - - - - - 584 24% 595 6%
> 30 DPD 146 2% 15 3% 5 9% 20 4% 18 1% 184 2%
Other((2)) 759 11% 171 35% - - 171 30% 12 1% 942 8%
7,192 100% 497 100% 56 100% 553 100% 2,433 100% 10,178 100%
ECLs
PD deterioration 43 67% 51 52% 14 74% 65 55% 52 43% 160 53%
Forbearance 4 6% 2 2% 1 5% 3 3% 24 20% 31 10%
AFD or Watch List((1)) - - - - - - - - 32 27% 32 11%
> 30 DPD 2 3% 9 9% 4 21% 13 11% - - 15 5%
Other((2)) 15 24% 37 37% - - 37 31% 12 10% 64 21%
64 100% 99 100% 19 100% 118 100% 120 100% 302 100%
(1) Approaching Financial Difficulty (AFD) and Watch markers are early
warning indicators of Business customers who may be approaching financial
difficulties. If these indicators are not reversed, they may lead to a
requirement for more proactive management by the Group.
(2) Other includes high indebtedness, county court judgments and previous
arrears, as well as a number of smaller value drivers.
(3) The COVID related PMAs held in 2021 were allocated to Stage 2 have now
been fully released. The economic resilience PMA is primarily held in Stage 2.
Risk Management
Credit risk
Credit risk exposure and ECL, by internal PD rating, by IFRS 9 stage
allocation
The distribution of the Group's credit exposures and ECL by internal PD rating
is analysed below:
2022 Stage 1 Stage 2 Stage 3((1)) Total((2))
Lending ECL Lending ECL Lending ECL Lending ECL
£m £m £m £m £m £m £m £m
Mortgages PD range
Strong 0 - 0.74 52,184 6 1,864 10 - - 54,048 16
Good 0.75 - 2.49 2,302 2 641 5 - - 2,943 7
Satisfactory 2.50 - 99.99 305 2 585 17 - - 890 19
Default 100 - - - - 583 14 583 14
Total 54,791 10 3,090 32 583 14 58,464 56
Unsecured
Strong 0 - 2.49 4,795 42 413 26 - - 5,208 68
Good 2.50 - 9.99 524 20 459 72 - - 983 92
Satisfactory 10.00 - 99.99 5 1 237 83 - - 242 84
Default 100 - - - - 80 40 80 40
Total 5,324 63 1,109 181 80 40 6,513 284
Business
Strong 0 - 0.74 4,808 5 719 17 - - 5,527 22
Good 0.75 - 9.99 1,455 7 751 31 - - 2,206 38
Satisfactory 10.00 - 99.99 7 - 56 7 - - 63 7
Default 100 - - - - 373 50 373 50
Total 6,270 12 1,526 55 373 50 8,169 117
2021 Stage 1 Stage 2 Stage 3((1)) Total((2))
Lending ECL Lending ECL Lending ECL Lending ECL
£m £m £m £m £m £m £m £m
Mortgages PD range
Strong 0 - 0.74 46,984 3 4,555 19 - - 51,539 22
Good 0.75 - 2.49 3,313 1 1,888 21 - - 5,201 22
Satisfactory 2.50 - 99.99 299 - 749 24 - - 1,048 24
Default 100 - - - - 653 19 653 19
Total 50,596 4 7,192 64 653 19 58,441 87
Unsecured
Strong 0 - 2.49 4,730 28 85 9 - - 4,815 37
Good 2.50 - 9.99 411 12 325 54 - - 736 66
Satisfactory 10.00 - 99.99 7 1 143 55 - - 150 56
Default 100 - - - - 69 35 69 35
Total 5,148 41 553 118 69 35 5,770 194
Business
Strong 0 - 0.74 3,298 13 505 53 - - 3,803 66
Good 0.75 - 9.99 2,374 53 1,823 40 - - 4,197 93
Satisfactory 10.00 - 99.99 - - 105 27 - - 105 27
Default 100 - - - - 235 37 235 37
Total 5,672 66 2,433 120 235 37 8,340 223
(1) Stage 3 includes POCI for gross loans and advances of £56m for
Mortgages and £1m for Unsecured (2021: £67m and £2m respectively); and ECL
of (£1m) for Mortgages and (£2m) for Unsecured (2021: £Nil and (£2m)
respectively).
(2) The COVID related PMAs held in 2021 were allocated across Stages 1 and
2 and have now been fully released. The cost of living PMAs are held in Stage
1 and the economic resilience PMA is primarily held in Stage 2.
Risk Management
Credit risk
In terms of credit quality, 97% (2021: 97%) of the loan commitments and
financial guarantee contracts were classed as either 'Good' or 'Strong' under
the Group's internal PD rating scale.
Movement in gross lending balances and impairment loss allowance
The following table shows the changes in the loss allowance and gross carrying
value of the portfolios. Values are calculated using the individual customer
account balances, and the stage allocation is taken as at the end of each
month. The monthly position of each account is aggregated to report a net
closing position for the period, thereby incorporating all movements an
account has made during the year.
2022 Stage 1 Stage 2 Stage 3((1)) Total gross Total
loans provisions((4))
£m £m
Gross loans ECL Gross loans ECL Gross loans ECL
£m £m £m £m £m £m
Opening balance at 1 October 2021 61,416 111 10,178 302 957 91 72,551 504
Transfers from Stage 1 to Stage 2 (8,287) (45) 8,227 294 - - (60) 249
Transfers from Stage 2 to Stage 1 10,218 27 (10,282) (145) - - (64) (118)
Transfers to Stage 3 (91) - (562) (84) 650 101 (3) 17
Transfers from Stage 3 42 - 137 8 (187) (12) (8) (4)
Changes to model methodology 443 1 (442) (8) - - 1 (7)
New assets originated or purchased((2)) 22,162 187 2,055 159 187 32 24,404 378
Repayments and other movements((3)) (3,434) (42) (155) (65) 56 (15) (3,533) (122)
Repaid or derecognised((3)) (16,084) (154) (3,431) (193) (498) (101) (20,013) (448)
Write-offs - - - - (129) (129) (129) (129)
Recoveries - - - - - 30 - 30
Individually assessed impairment charge - - - - - 107 - 107
Closing balance at 30 September 2022 66,385 85 5,725 268 1,036 104 73,146 457
2021 Stage 1 Stage 2 Stage 3((1)) Total gross Total
loans provisions((4))
£m £m
Gross loans ECL Gross loans ECL Gross loans ECL
£m £m £m £m £m £m
Opening balance at 1 October 2020 59,219 136 12,844 465 862 134 72,925 735
Transfers from Stage 1 to Stage 2 (11,131) (62) 11,076 389 - - (55) 327
Transfers from Stage 2 to Stage 1 10,397 58 (10,484) (284) - - (87) (226)
Transfers to Stage 3 (115) (1) (623) (91) 734 108 (4) 16
Transfers from Stage 3 33 - 217 23 (253) (25) (3) (2)
Changes to model methodology - - - - - - - -
New assets originated or purchased((2)) 19,276 206 1,621 158 132 22 21,029 386
Repayments and other movements((3)) (2,955) (59) (933) (140) (16) (72) (3,904) (271)
Repaid or derecognised((3)) (13,308) (167) (3,540) (218) (376) (55) (17,224) (440)
Write-offs - - - - (126) (126) (126) (126)
Recoveries - - - - - 26 - 26
Individually assessed impairment charge - - - - - 79 - 79
Closing balance at 30 September 2021 61,416 111 10,178 302 957 91 72,551 504
(1) Stage 3 includes POCI for gross loans and advances of £56m for
Mortgages and £1m for Unsecured (2021: £67m and £2m respectively), and ECL
of (£1m) for Mortgages and (£2m) for Unsecured (2021: £Nil and (£2m)
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.
(4) The COVID related PMAs held in 2021 were allocated across Stages 1 and
2 and have now been fully released. The cost of living PMAs are held in Stage
1 and the economic resilience PMA is primarily held in Stage 2.
In addition to the above on-balance sheet position, the Group also has
£19,359m of loan commitments and financial guarantee contracts (2021:
£17,121m) of which £18,454m (95.3%) are held under Stage 1, £865m in Stage
2 and £40m in Stage 3 (2021: £16,001m (93.5%) held under Stage 1, £1,090m
in Stage 2 and £30m in Stage 3). ECLs of £3m (2021: £8m) are included in
the table above, of which £1m (2021: £2m) is held under Stage 1 and £2m
(2021: £6m) under Stage 2.
Risk Management
Credit risk
Against the backdrop of a deteriorating UK economy, credit quality has
remained solid throughout the year, with the overall portfolio performing well
and no significant individually assessed provisions raised.
During the second half of 2022, refinements to the staging criteria in the
Business portfolio were implemented to further enhance the calculation and
align it more closely to the underlying level of credit risk inherent within
the Business portfolio. The impact moved c. £443m of loans from Stage 2 to
Stage 1, leading to a modelled ECL release of c. £7m, and an approx. 22%
reduction in the balance of business loans in Stage 2.
The contractual amount outstanding on loans and advances that were written off
during the reporting period, or still subject to enforcement activity was
£4.3m (2021: £2.6m). The Group has not purchased any lending assets in the
year (2021: 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 on 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
2022 Gross lending Modelled & IA ECL PMA Total ECL Net lending Coverage Average LTV
£m £m £m £m £m % %
Residential - capital repayment 36,417 13 5 18 36,399 0.05% 54.2%
Residential - interest only 7,041 3 1 4 7,037 0.05% 45.4%
BTL 15,006 6 28 34 14,972 0.22% 52.4%
Total Mortgage portfolio 58,464 22 34 56 58,408 0.09% 52.7%
2021
Residential - capital repayment 35,192 19 21 40 35,152 0.10% 57.2%
Residential - interest only 8,341 6 2 8 8,333 0.10% 47.2%
BTL 14,908 8 31 39 14,869 0.24% 54.8%
Total Mortgage portfolio 58,441 33 54 87 58,354 0.15% 55.3%
Mortgage lending has remained flat on a net basis at £58.5bn (2021: £58.4bn)
as the Group continued to prioritise margin in an increasingly competitive
environment.
The portfolio continues to evidence solid underlying credit performance, with
the majority (98%) of lending not yet past due at the balance sheet date
(2021: 98%), and 94% of loans held in Stage 1 (2021: 87%). The successful
return to normal payment patterns of customers taking advantage of COVID-19
payment holiday arrangements last year, drove the migration in balances from
Stage 2 to Stage 1. A significant proportion of the portfolio is rated Strong
at the balance sheet date (92% compared to 88% at 30 September 2021), and the
volume and value of loans in forbearance has reduced to 4,636/£640m from
6,743/£830m, primarily due to customers successfully completing the
forbearance reporting probation period and returning to fully performing
status.
Stage 3 balances have remained low at 1.0% (2021: 1.1%) and 93% of the
portfolio has an LTV of less than 75% (2021: 87%), with the weighted average
LTV further reducing in the year to 52.7% (2021: 55.3%). All of these key
metrics evidence a high quality mortgage portfolio, with relatively low risk
of default, driven by sound lending decisions and underwriting criteria.
Further detail on LTV bandings and forbearance measures is provided on the
following pages.
The stability in the Mortgage portfolio metrics together with the improvement
in the economic assumptions, such as house prices, have contributed to a
release of £9m in the modelled ECL, taking the total modelled and IA ECL
provision to £22m (2021: £33m). Total PMAs have similarly reduced in the
period, as detailed below, from £54m to £34m. The total Mortgage portfolio
impairment provision is £56m (2021: £87m).
The Group had previously introduced a PMA for payment holidays in 2020 at the
outset of the COVID-19 pandemic; this PMA, which was £22m at 30 September
2021, has now been fully released as customers have successfully exited
payment holiday arrangements and returned to normal repayment patterns. Due to
the uncertain macroeconomic environment, however, a new PMA of £6m has been
introduced in response to the cost of living crisis, to reflect the potential
impact on debt affordability from rising base rates and other inflationary
impacts. The PMA reflects the potential impact on ECL in the event of a
monthly payment shock to household finances, applied to customers in Stage 1
that are not currently, or otherwise showing signs of financial difficulty.
Asset quality metrics for the BTL mortgage book remain robust, but the Group
continues to hold a prudent level of provisioning for this customer cohort,
with the related PMA held broadly stable at £25m (2021: £28m). Other small
PMAs totalling £4m (2021: £4m) have been retained, taking total PMA's held
to £34m, down from £54m at 30 September 2021.
The release of modelled provisions and PMAs has resulted in an impairment
credit of £30m in the income statement (2021: credit of £44m) and associated
cost of risk of (4)bps (2021: (7)bps). While the total book coverage has
reduced in the year to 9bps, it remains higher than the pre-pandemic level of
7bps.
Risk Management
Credit risk
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
2022 Stage 1 Stage 2 Stage 3((2)) Total((3))
LTV((1))
Loans % ECL Loans % ECL Loans % ECL Loans % ECL
£m £m £m £m £m £m £m £m
Less than 50% 23,069 43% 2 1,659 54% 3 288 49% 2 25,016 43% 7
50% to 75% 27,452 50% 5 1,270 41% 19 242 42% 2 28,964 50% 26
76% to 80% 2,412 4% 1 103 3% 3 17 3% 1 2,532 4% 5
81% to 85% 1,108 2% 1 26 1% 1 11 2% 1 1,145 2% 3
86% to 90% 547 1% 1 25 1% 1 6 1% - 578 1% 2
91% to 95% 154 - - 4 - 1 8 1% 1 166 - 2
96% to 100% 16 - - - - - 3 1% - 19 - -
Greater than 100% 33 - - 3 - 4 8 1% 7 44 - 11
54,791 100% 10 3,090 100% 32 583 100% 14 58,464 100% 56
2021 Stage 1 Stage 2 Stage 3((2)) Total((3))
LTV((1))
Loans % ECL Loans % ECL Loans % ECL Loans % ECL
£m £m £m £m £m £m £m £m
Less than 50% 19,907 39% 1 2,268 32% 6 274 41% 2 22,449 38% 9
50% to 75% 24,383 49% 1 3,648 51% 37 256 39% 3 28,287 49% 41
76% to 80% 3,123 6% 1 729 10% 9 49 8% 1 3,901 7% 11
81% to 85% 2,346 5% 1 426 6% 6 30 5% 1 2,802 5% 8
86% to 90% 715 1% - 102 1% 3 17 3% 1 834 1% 4
91% to 95% 79 - - 7 - - 8 1% 1 94 - 1
96% to 100% 8 - - 2 - - 5 1% - 15 - -
Greater than 100% 35 - - 10 - 3 14 2% 10 59 - 13
50,596 100% 4 7,192 100% 64 653 100% 19 58,441 100% 87
(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 £56m (2021: £67m) of POCI gross loans and advances
and (£1m) ECL (2021: £Nil).
(3) The payment holiday PMA held in 2021 was allocated to Stage 2 and has
now been fully released. The cost of living PMA is held in Stage 1.
The Mortgage portfolio remains highly secured with 92.3% of mortgages, by loan
value, having an indexed LTV of less than 75% (2021: 86.8%), and an average
portfolio LTV of 52.7% (2021: 55.3%). New lending has increased the value of
loans in Stage 1 with an LTV between 91% to 95%.
Forbearance
A key indicator of underlying Mortgage portfolio health is the level of loans
subject to forbearance measures. Forbearance can occur when a customer
experiences longer-term financial difficulty. In such circumstances, the
Group considers the customer's individual circumstances, uses judgement in
assessing whether there has been a SICR, or if an impairment or default event
has occurred, and then applies tailored forbearance measures in order to
support the customer in a route to stability. Customers may potentially be
subject to more than one forbearance strategy at any one time where this is
considered to be the most appropriate course of action.
Risk Management
Credit risk
The table below summarises the level of forbearance in respect of the Group's
Mortgage portfolio at each balance sheet date. All balances subject to
forbearance are classed as either Stage 2 or Stage 3 for ECL purposes.
2022 Total loans and advances subject Impairment allowance on loans and advances subject to forbearance measures
to forbearance measures
Number of loans Gross carrying % of total Impairment Coverage
amount portfolio allowance %
£m £m
Formal arrangements 1,145 137 0.23% 8.6 6.23%
Temporary arrangements 518 82 0.14% 4.4 5.38%
Payment arrangement 1,211 133 0.23% 0.6 0.49%
Payment holiday 381 47 0.08% 0.1 0.27%
Interest only conversion 1,193 225 0.39% 0.8 0.35%
Term extension 66 5 0.01% - 0.45%
Other 14 1 - - 0.92%
Legal 108 10 0.02% 0.3 2.42%
Total mortgage forbearance 4,636 640 1.10% 14.8 2.31%
2021
Formal arrangements 1,115 133 0.23 4.9 3.66
Temporary arrangements 675 100 0.17 6.8 6.81
Payment arrangement 1,865 176 0.30 2.3 1.30
Payment holiday 1,436 123 0.21 0.5 0.41
Interest only conversion 1,390 273 0.47 1.3 0.47
Term extension 127 12 0.02 0.1 0.57
Other 19 2 0.01 - 0.68
Legal 116 11 0.02 0.3 3.09
Total mortgage forbearance 6,743 830 1.43 16.2 1.95
As at 30 September 2022, forbearance totalled £640m (4,636 customers), a
decrease from the 30 September 2021 position of £830m (6,743 customers). This
level represents 1.10% of total mortgage balances (2021: 1.43%), with the
decrease primarily driven by customers successfully completing
the forbearance reporting probation period and returning to fully performing
status.
When all other avenues of resolution, including forbearance, have been
explored, the Group will take steps to repossess and sell underlying
collateral. In 2022, there were 73 repossessions of which 7 were voluntary
(2021: 33 including 13 voluntary). The number of repossessions has increased
as court proceedings resume following the suspension during the COVID-19
pandemic. The Group remains committed to supporting the customer, and places
the right outcome for them at the centre of this strategy.
Risk Management
Credit risk
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 are presented in the tables below.
2022 Stage 1 Stage 2 Stage 3((1)) Total Total
gross loans provisions((4))
£m £m
Gross loans ECL Gross loans ECL Gross loans ECL
£m £m £m £m £m £m
Opening balance at 1 October 2021 50,596 4 7,192 64 653 19 58,441 87
Transfers from Stage 1 to Stage 2 (5,854) (1) 5,821 55 - - (33) 54
Transfers from Stage 2 to Stage 1 8,820 3 (8,851) (55) - - (31) (52)
Transfers to Stage 3 (49) - (191) (5) 238 4 (2) (1)
Transfers from Stage 3 29 - 108 5 (140) (3) (3) 2
Changes to model methodology - - - - - - - -
New assets originated or purchased((2)) 9,971 1 7 - 1 - 9,979 1
Repayments and other movements((3)) (2,484) 4 (154) (23) (26) (3) (2,664) (22)
Repaid or derecognised((3)) (6,238) (1) (842) (9) (142) (2) (7,222) (12)
Write-offs - - - - (1) (1) (1) (1)
Recoveries - - - - - - - -
Individually assessed impairment charge - - - - - - - -
Closing balance at 30 September 2022 54,791 10 3,090 32 583 14 58,464 56
2021 Stage 1 Stage 2 Stage 3((1)) Total Total
gross loans provisions((4))
£m £m
Gross loans ECL Gross loans ECL Gross loans ECL
£m £m £m £m £m £m
Opening balance at 1 October 2020 49,970 14 8,166 95 516 22 58,652 131
Transfers from Stage 1 to Stage 2 (8,172) (4) 8,140 113 - - (32) 109
Transfers from Stage 2 to Stage 1 7,479 5 (7,522) (101) - - (43) (96)
Transfers to Stage 3 (64) - (367) (9) 429 7 (2) (2)
Transfers from Stage 3 24 - 108 13 (137) (4) (5) 9
Changes to model methodology - - - - - - - -
New assets originated or purchased((2)) 9,662 2 76 2 2 - 9,740 4
Repayments and other movements((3)) (2,141) (11) (405) (36) (38) (3) (2,584) (50)
Repaid or derecognised((3)) (6,162) (2) (1,004) (13) (118) (2) (7,284) (17)
Write-offs - - - - (1) (1) (1) (1)
Recoveries - - - - - 1 - 1
Individually assessed impairment charge - - - - - (1) - (1)
Closing balance at 30 September 2021 50,596 4 7,192 64 653 19 58,441 87
(1) Stage 3 includes POCI for gross loans and advances of £56m (2021:
£67m) and ECL of (£1m) (2021: £Nil).
(2) Includes assets where the term has ended, and a new facility has been
provided.
(3) 'Repayments' comprises payments made on customer lending that 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) The payment holiday PMA held in 2021 was allocated to Stage 2 and has
now been fully released. The cost of living PMA is held in Stage 1.
Despite economic uncertainty, the Mortgage portfolio continues to evidence
strong performance and has benefited from positive house price movements.
Coupled with the successful exit from payment holiday arrangements for those
customers that took advantage of those measures during the pandemic, there has
been a shift in balances from Stage 2 to Stage 1. The level of mortgage
lending classed as Stage 1 increased from 86.6% in 2021 to 93.7%, with a
corresponding decrease of assets in Stage 2 from 12.3% to 5.3%. Within the
Stage 2 category, 4.7% of balances are not yet past due at the balance sheet
date (2021: 11.9%), but falls within the Stage 2 classification predominantly
due to PD deterioration. The proportion of mortgages classified as Stage 3
remains modest at 1.0% (2021: 1.1%).
These conditions have also contributed to an increase in assets classed as
'Strong' from 88% at 30 September 2021 to 92.4% at 30 September 2022, with
over 97% (2021: 97%) of the Mortgage portfolio classed as 'Good' or 'Strong'.
The sustained quality in the internal PD ratings and high quality of
collateral underpinning the book are key factors supporting the lower level of
provision coverage.
Risk Management
Credit risk
Unsecured credit performance
The table below presents key information important for understanding the asset
quality of the Group's Unsecured lending portfolio and should be read in
conjunction with the supplementary data presented in the following pages of
this section.
Breakdown of Unsecured credit portfolio
2022 Gross Modelled PMA Total Net Coverage
lending ECL £m ECL lending %
£m £m £m £m
Credit cards 5,558 216 30 246 5,312 4.81%
Personal loans 925 32 2 34 891 3.57%
Overdrafts 30 4 - 4 26 12.57%
Total Unsecured lending portfolio 6,513 252 32 284 6,229 4.66%
2021
Credit cards 4,655 142 18 160 4,495 3.79%
Personal loans 1,082 14 17 31 1,051 3.57%
Overdrafts 33 3 - 3 30 11.14%
Total Unsecured lending portfolio 5,770 159 35 194 5,576 3.80%
Unsecured gross lending balances increased to £6.5bn (2021: £5.8bn)
predominantly due to growth in credit card portfolio, while the personal loan
portfolio continued to contract. The credit quality of the Unsecured
portfolio remains high overall, with 97.9% of the portfolio in Stage 1 or
Stage 2 not past due (2021: 98.1%) and a 1.2% in Stage 3 (2021: 1.2%). The
level of customers in forbearance similarly remains low at 1.12% of the
portfolio (2021: 1.30%).
Credit cards
Growth in the number of credit card accounts in the year of 20% has driven an
increase in the lending balance of £0.9bn (21%). Average balances have
remained fairly static throughout the year, as has the average level of
facility utilisation. The credit quality of the cards portfolio remains high
with 97.8% (2021: 98.2%) in stage 1 and stage 2 not past due, and a modest
1.3% in Stage 3 (2021: 1.2%).
While there has been minimal evidence of a deterioration in credit quality
across the portfolio, as evidenced by these key metrics, the downturn in the
broader UK economy has been reflected through the economic scenarios,
resulting in an increase of £74m in the modelled ECL. Coverage of 481bps is
consequently up 102bps from FY21, and is 139bps higher than pre-pandemic
levels of 342bps.
The payment holiday PMAs introduced in response to COVID-19, which amounted to
£4m for the cards book at 30 September 2021, have now been fully released. A
new PMA has been established for cost-of-living shocks that are not yet fully
observed and incorporated in the modelled ECL. This has been applied to a
cohort of credit card customers who are susceptible to a payment shock, and
has resulted in a £20m PMA. This has been allocated to Stage 1. A small
number of previously held PMAs totalling £10m (2021: £14m) have also been
retained.
Personal loans
While the personal loan portfolio represents only a small portion of our
Unsecured and total Group portfolio, staging has shifted during the year with
a reduction in Stage 1 balances from 94.0% to 64.1%, and a corresponding
increase in Stage 2 not past due balances from 5.0% to 35.1%. This movement
has had an impact on the staging profile for the whole Unsecured portfolio.
This movement relates to personal lending made via the Group's JV
arrangement with Salary Finance which has a cohort of customers who can be
more susceptible to being impacted earlier, and harder, by cost of living
shocks. During the year, the JV experienced an increased number of customers
not maintaining scheduled loan repayments. Consequently, the Group has
assessed the credit risk for this specific cohort of customers, and has now
classified all lending with the JV (£318m) in Stage 2 (2021: £223m within
Stage 1), together with an associated ECL of £19m (2021: £Nil).
Loan payment holiday PMAs, which were £8m at 30 September 2021, were fully
released in the year. A new PMA of £1m has been established for
cost-of-living shocks. Other PMAs have fallen from £9m in the prior year to
£1m at the balance sheet date.
Taking the modelled provisions and PMAs together for the full Unsecured
portfolio, the total ECL provision increased to £284m at 30 September 2022
(2021: £194m), resulting in a charge to the income statement in the year of
£178m (2021: credit of £32m) and an increase in coverage ratio of 86bps to
466bps (2021: 380bps).
Risk Management
Credit risk
Forbearance
The table below summarises the level of forbearance in respect of the Group's
Unsecured lending portfolios at each balance sheet date. All balances subject
to forbearance are classed as either Stage 2 or Stage 3 for ECL purposes.
2022 Total loans and advances subject Impairment allowance on loans and advances subject to forbearance measures
to forbearance measures
Number of loans Gross carrying % of total Impairment Coverage
amount portfolio allowance %
£m £m
Credit card arrangements 15,872 62 1.19% 24.3 39.47%
Personal loan arrangements 638 3 0.56% 1.4 40.33%
Overdraft arrangements 56 - 0.04% - 30.76%
Total Unsecured lending forbearance 16,566 65 1.12% 25.7 39.51%
2021
Credit card arrangements 14,151 60 1.39% 23.9 39.88%
Personal loan arrangements 1,174 6 0.78% 3.3 49.61%
Overdraft arrangements 280 1 2.55% 0.4 51.89%
Total Unsecured lending forbearance 15,605 67 1.30% 27.6 40.98%
At 30 September 2022, credit cards forbearance totalled £62m (15,872
accounts), an increase from the 30 September 2021 position of £60m (14,151
accounts). This represents 1.19% of total credit cards balances (2021: 1.39%).
The level of impairment coverage on forborne credit cards is stable at 39.5%
(2021: 39.9%). Limited forbearance is exercised in relation to personal loans
and overdrafts, with a reduction to £3m (0.54%) in the personal loans and
overdrafts portfolio from £7m (0.85%) at 30 September 2021.
Risk Management
Credit risk
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 are presented in the
tables below.
2022 Stage 1 Stage 2 Stage 3((1)) Total Total
gross loans provisions((4))
£m £m
Gross loans ECL Gross loans ECL Gross loans ECL
£m £m £m £m £m £m
Opening balance at 1 October 2021 5,148 41 553 118 69 35 5,770 194
Transfers from Stage 1 to Stage 2 (1,051) (31) 1,059 210 - - 8 179
Transfers from Stage 2 to Stage 1 504 16 (523) (62) - - (19) (46)
Transfers to Stage 3 (19) - (116) (69) 139 83 4 14
Transfers from Stage 3 1 - 2 1 (8) (7) (5) (6)
Changes to model methodology - - - - - - - -
New assets originated or purchased((2)) 1,708 20 11 4 7 5 1,726 29
Repayments and other movements((3)) (508) 26 166 (8) 104 (4) (238) 14
Repaid or derecognised((3)) (459) (9) (43) (13) (117) (72) (619) (94)
Write-offs - - - - (114) (114) (114) (114)
Recoveries - - - - - 26 - 26
Individually assessed impairment charge - - - - - 88 - 88
Closing balance at 30 September 2022 5,324 63 1,109 181 80 40 6,513 284
2021 Stage 1 Stage 2 Stage 3((1)) Total Total
gross loans provisions((4))
£m £m
Gross loans ECL Gross loans ECL Gross loans ECL
£m £m £m £m £m £m
Opening balance at 1 October 2020 4,660 70 823 194 67 37 5,550 301
Transfers from Stage 1 to Stage 2 (954) (32) 951 209 - - (3) 177
Transfers from Stage 2 to Stage 1 859 21 (890) (113) - - (31) (92)
Transfers to Stage 3 (19) (1) (100) (68) 119 80 - 11
Transfers from Stage 3 2 - 3 2 (5) (5) - (3)
Changes to model methodology - - - - - - - -
New assets originated or purchased((2)) 1,319 17 38 6 1 - 1,358 23
Repayments and other movements((3)) (493) (28) (217) (98) 15 (52) (695) (178)
Repaid or derecognised((3)) (226) (6) (55) (14) (29) (25) (310) (45)
Write-offs - - - - (99) (99) (99) (99)
Recoveries - - - - - 24 - 24
Individually assessed impairment charge - - - - - 75 - 75
Closing balance at 30 September 2021 5,148 41 553 118 69 35 5,770 194
(1) Stage 3 includes POCI for gross loans and advances of £1m (2021:
£2m) and ECL of (£2m) (2021: (£2m).
(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) The payment holiday PMA held in 2021 was allocated to Stage 2 and has
now been fully released. The cost of living PMA is held in Stage 1.
The balance of unsecured lending in Stage 2 increased by 7.4% to 17.0% (2021:
9.6%), driven primarily by the observed deterioration of the Salary Finance
lending. Of the Stage 2 category, 16.1% is not yet past due at the balance
sheet date, but falls into the Stage 2 classification predominantly due to PD
deterioration.
There has been a corresponding reduction in Stage 1 from 89.1% to 81.7%, while
Stage 3 remains stable at 1.2% (2021: 1.2%).
Risk Management
Credit risk
Business credit performance
The table below presents key information on the asset quality of the Group's
Business lending portfolio and should be read in conjunction with the
supplementary data presented in the following pages of this section.
Breakdown of Business credit portfolio
2022 Gross lending Government((1)) Total gross Modelled & IA ECL PMA Total ECL Net lending Coverage((2))
£m £m £m £m £m £m £m %
Agriculture 1,392 66 1,458 5 1 6 1,452 0.45%
Business services 980 286 1,266 22 4 26 1,240 2.53%
Commercial Real Estate 597 10 607 3 - 3 604 0.54%
Government, health and education 1,008 54 1,062 8 2 10 1,052 0.95%
Hospitality 652 78 730 4 1 5 725 0.80%
Manufacturing 640 109 749 23 3 26 723 3.96%
Resources 133 8 141 3 1 4 137 2.37%
Retail and wholesale trade 330 128 458 7 1 8 450 2.51%
Transport and storage 291 56 347 4 1 5 342 1.44%
Other 1,089 262 1,351 20 4 24 1,327 2.11%
Total Business portfolio 7,112 1,057 8,169 99 18 117 8,052 1.59%
2021
Agriculture 1,361 80 1,441 7 5 12 1,429 0.89%
Business services 943 337 1,280 21 27 48 1,232 4.82%
Commercial Real Estate 667 13 680 4 3 7 673 1.00%
Government, health and education 1,031 73 1,104 7 10 17 1,087 1.62%
Hospitality 563 105 668 6 7 13 655 2.29%
Manufacturing 556 144 700 22 21 43 657 6.93%
Resources 95 8 103 3 4 7 96 6.85%
Retail and wholesale trade 623 248 871 14 14 28 843 4.13%
Transport and storage 300 80 380 4 4 8 372 2.50%
Other 883 230 1,113 17 23 40 1,073 4.42%
Total Business portfolio 7,022 1,318 8,340 105 118 223 8,117 3.06%
(1) Government includes all lending provided to business customers under
UK Government schemes including Bounce back loan scheme, Coronavirus business
interruption loan scheme, Coronavirus large business interruption loan scheme
and Recovery loan scheme (RLS). This excludes £66m (2021: £Nil) of
guarantee claim funds received from British Business Bank.
(2) Coverage ratio excludes the guaranteed element of government-backed
loan schemes.
Gross Business lending reduced to £8.1bn (2021: £8.3bn) driven by reductions
in government-guaranteed lending schemes as borrowers continued to repay
balances, which more than offset underlying portfolio growth in the year.
Excluding the government lending, core lending balances grew slightly as
business activity, which had been generally subdued during the pandemic, grew
in line with broader economic activity and improved business confidence.
Growth is targeted to sectors and sub sectors where the Group has a well
established expertise. Book mix remained fairly constant year on year as
sector focused strategy was maintained, 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% in both years.
Business lending credit performance remained resilient, with balances in Stage
1 and Stage 2 not past due representing 95.1% of the portfolio (2021: 96.7%).
The percentage of loans in Stage 1 increased to 76.8% (2021: 68.0%) largely
due to changes applied to the SICR criteria (outlined on page 21) which,
resulted in these customers migrating back to Stage 1. Across the portfolio
95% of lending was rated 'Strong' or 'Good' (2021: 96%). The previous
Government interventions, including the ongoing loan schemes, continue to
result in fewer customers entering forbearance; low levels were maintained
with only 5.16% of the total portfolio being forborne at 30 September 2022
(2021: 5.82%).
Notwithstanding the strength of the portfolio, ongoing economic and political
upheaval creates uncertainty over the potential for default occurring in the
future. Key asset quality metrics continue to be monitored closely and a
cautious approach to provisioning is being maintained. Stage 3 loans have
increased to 4.6% driven primarily by bounce back loans (2021: 2.8%).
Despite these uncertainties, the refreshed macroeconomic scenarios have
resulted in a small reduction of £6m in the modelled and IA provisions to
£99m. At 30 September 2021, the Group recognised PMAs for sector stress
(£80m) and PD neutralisation (£34m) together with other minor factors
(£4m); each of these PMAs has been reviewed in the current year. While the
removal of all COVID-19 restrictions is seen as a move away from the downside
impact of the pandemic and is a rationale for a reduction in some sector
stress, more recent geopolitical events in Ukraine and the cost of living
crisis in the UK contribute to ongoing uncertainty over the impact that these
broader economic conditions could have on UK businesses.
Risk Management
Credit risk
The models used to estimate ECL have been built and tested on the past two
recessions, neither of which included the combination of historically high
price inflation nor the significant shock to primary commodities and energy
which are leading to economic stagnation at a time of modest interest rates
and unemployment. Therefore, a new economic resilience PMA of £30m has been
introduced. A small negative PMA of £12m is also held pending introduction of
the Business LGD model which will be implemented in the coming year and other
technical adjustments.
The above results in an overall provision of £117m (2021: £223m) and an
impairment credit in the income statement of £96m for the year (2021: credit
of £55m). Portfolio coverage has reduced to 159bps (2021: 306bps), reflecting
the quality of the portfolio and little evidence of deterioration in asset
quality to date.
Forbearance
Forbearance is considered to exist where customers are experiencing, or are
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
shall be treated as forborne.
The tables below summarise the total number of arrangements in place and the
loan balances and impairment provisions associated with those arrangements.
All balances subject to forbearance are classed as either Stage 2 or Stage 3
for ECL purposes.
2022 Total loans and advances subject Impairment allowance on loans and advances subject to forbearance measures
to forbearance measures
Number of loans Gross carrying % of total Impairment Coverage
amount portfolio allowance %
£m £m
Term extension 154 118 1.36% 4.9 4.18%
Payment holiday((1)) 81 193 2.23% 32.6 16.86%
Reduction in contracted interest rate 2 1 0.01% 0.0 1.33%
Alternative forms of payment 0 0 0.00% 0.0 0.00%
Debt forgiveness 2 1 0.01% 0.5 97.05%
Refinancing 9 2 0.02% 0.1 5.14%
Covenant breach/reset/waiver 41 133 1.53% 5.4 4.03%
Total Business forbearance 289 448 5.16% 43.5 9.71%
2021
Term extension 188 196 2.27% 10.2 5.19%
Payment holiday((1)) 86 130 1.51% 17.6 13.48%
Reduction in contracted interest rate 1 1 0.01% - 0.02%
Alternative forms of payment 1 13 0.15% 5.6 43.14%
Debt forgiveness 2 4 0.04% - 0.67%
Refinancing 10 3 0.04% 0.2 7.21%
Covenant breach/reset/waiver 44 155 1.80% 8.2 5.27%
Total Business forbearance 332 502 5.82% 41.8 8.31%
(1) In the prior year, payment holidays granted in line with regulation
were not classified as forbearance due to the extenuating circumstances
arising from COVID-19. The standard approach of classifying payment holidays
as forbearance resumed in August 2021.
Business portfolio forbearance has reduced from £502m (332 customers) at 30
September 2021 to £448m (289 customers) at 30 September 2022. Forbearance
remains an important metric, reflecting the volume and value of concessions
granted to customers on a non-commercial basis. Changes to forbearance levels
reflect the proportion of business customers requiring support on non-standard
terms and evidencing financial difficulty. As a percentage of the Business
portfolio, forborne balances have reduced to 5.16% (2021: 5.82%) with
impairment coverage slightly increasing to 9.71% (2021: 8.31%). Most
forbearance arrangements relate to term extensions allowing customers a longer
term to repay obligations in full than initially contracted.
Customers within the forbearance portfolio have received £26m of COVID-19
related support loans: £13m CBIL, £4m BBL and £9m RLS.
The table includes a portfolio of financial assets at fair value. The gross
value of fair value loans subject to forbearance as at 30 September 2022 is
£4.7m (2021: £5.3m), representing 0.05% of the total business portfolio
(2021: 0.06%). The credit risk adjustment on these amounts totalled £0.1m
(2021: £0.1m). Coverage is 2.99% (2021: 2.32%).
Risk Management
Credit risk
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
year are presented in the tables below.
2022 Stage 1 Stage 2 Stage 3((3)) Total Total
gross loans provisions((4))
£m £m
Gross loans ECL Gross loans ECL Gross loans ECL
£m £m £m £m £m £m
Opening balance at 1 October 2021 5,672 66 2,433 120 235 37 8,340 223
Transfers from Stage 1 to Stage 2 (1,382) (13) 1,347 29 - - (35) 16
Transfers from Stage 2 to Stage 1 894 8 (908) (28) - - (14) (20)
Transfers to Stage 3 (23) - (255) (10) 273 14 (5) 4
Transfers from Stage 3 12 - 28 2 (39) (2) 1 -
Changes to model methodology 443 1 (443) (8) - - - (7)
New assets originated or purchased((1)) 10,483 166 2,037 155 179 27 12,699 348
Repayments and other movements((2)) (442) (72) (167) (34) (22) (8) (631) (114)
Repaid or derecognised((2)) (9,387) (144) (2,546) (171) (239) (27) (12,172) (342)
Write-offs - - - - (14) (14) (14) (14)
Recoveries - - - - - 4 - 4
Individually assessed impairment charge - - - - - 19 - 19
Closing balance at 30 September 2022 6,270 12 1,526 55 373 50 8,169 117
2021 Stage 1 Stage 2 Stage 3 Total Total
gross loans provisions((4))
£m £m
Gross loans ECL Gross loans ECL Gross loans ECL
£m £m £m £m £m £m
Opening balance at 1 October 2020 4,589 52 3,855 176 279 75 8,723 303
Transfers from Stage 1 to Stage 2 (2,005) (26) 1,985 67 - - (20) 41
Transfers from Stage 2 to Stage 1 2,059 32 (2,072) (70) - - (13) (38)
Transfers to Stage 3 (32) - (156) (14) 186 21 (2) 7
Transfers from Stage 3 7 - 106 8 (111) (16) 2 (8)
Changes to model methodology - - - - - - - -
New assets originated or purchased((1)) 8,295 187 1,507 150 129 22 9,931 359
Repayments and other movements((2)) (321) (20) (311) (6) 7 (17) (625) (43)
Repaid or derecognised((2)) (6,920) (159) (2,481) (191) (229) (28) (9,630) (378)
Write-offs - - - - (26) (26) (26) (26)
Recoveries - - - - - 1 - 1
Individually assessed impairment charge - - - - - 5 - 5
Closing balance at 30 September 2021 5,672 66 2,433 120 235 37 8,340 223
(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 £66m (2021: £Nil) of guarantee claim funds received
from British Business Bank.
(4) The COVID related PMAs held in 2021 were allocated across Stages 1 and
2 and have now been fully released, the remaining Business PMAs are
predominantly held in Stage 2.
The level of Business lending classed as Stage 1 has increased to 76.8% (2021:
68.0%), with a corresponding decrease of 10.5% in Stage 2 to 18.7% (2021:
29.2%), primarily driven by the revisions to the SICR triggers.
The majority (98%) of the portfolio in Stage 2 is not past due and is
primarily in Stage 2 due to PD deterioration, in addition to proactive
management measures such as early intervention, heightened monitoring and
forbearance concessions. Stage 3 loans have increased to 4.6% driven primarily
by bounce back loans (2021: 2.8%).
The proportion of assets classed as 'Strong' has increased to 68% (2021: 46%),
with assets classed as 'Strong' or 'Good' now 95% (2021: 96%).
Risk Management
Credit risk
Other credit risks
Non-property related collateral
The following table shows the total non-property collateral held at 30
September 2022 in terms of cash, guarantees (guarantees are predominantly in
relation to government-backed COVID-19 loans) and netting. The exposure amount
shown below is the total gross exposure (net of credit provisions) for
arrangements that have some form of associated collateral and is not the total
exposure for each asset class, as this balance is disclosed elsewhere in this
section.
2022 Cash Guarantee Netting Debt securities Other physical Receivables Total Exposure
£m £m £m £m collateral £m £m £m
£m
Financial assets at amortised cost
Loans and advances to customers
Business 7 970 237 - 464 501 2,179 2,397
Cash and balances with central banks - - - - - - - -
Due from other banks - - - - - - - -
Total 7 970 237 - 464 501 2,179 2,397
Of which: Stage 3
Loans and advances to customers
Business - 127 - - 1 11 139 140
2021 Cash Guarantee Netting Debt securities Other physical Receivables Total Exposure
£m £m £m £m collateral £m £m £m
£m
Financial assets at amortised cost
Loans and advances to customers
Business 9 1,235 202 - 442 507 2,395 2,621
Cash and balances with central banks 5,894 - - - - - 5,894 8,093
Due from other banks - - - 287 - - 287 331
Total 5,903 1,235 202 287 442 507 8,576 11,045
Of which: Stage 3
Loans and advances to customers
Business - 34 - - 4 9 47 46
The removal of cash collateral reflected within central governments or central
banks is due to a change in reporting following CRR II implementation, where
the Term Funding Scheme is now reported under CCR rules. The debt securities
collateral previously reported within due from other banks was in relation to
a sale and repurchase agreement (repo) which is no longer held by the Group.
Lending backed by government guarantees in response to COVID-19 are detailed
within the Guarantee column.
Following PRA approval in 2020, the Group moved to recognise asset finance and
invoice finance collateral, being other physical collateral and receivables
respectively, as eligible collateral from a credit risk mitigation perspective
in relation to the foundation internal ratings based (FIRB) approach.
Corporates is the largest sector utilising other risk mitigation techniques,
with all five methods utilised dependent on credit quality. The extent to
which these will be used is dependent on the specific circumstances of the
customer.
The Group is exposed to credit risk on its other banking and Treasury-related
activities, which are subject to mitigation and monitoring. No material ECL
provisions are held for these exposures.
Risk Management
Credit risk
Offsetting of financial assets and liabilities
The Group reduces exposure to credit risk through central clearing for
eligible derivatives, and daily posting of cash collateral on such
transactions as detailed in note 3.6 to the financial statements.
The amounts offset on the balance sheet, as shown below, represent
derivatives and variation margin collateral with central clearing houses,
which meet the criteria for offsetting under IAS 32. The table excludes
financial instruments not subject to offset and that are formally subject to
collateral arrangements (e.g. loans and advances).
The Group enters into derivatives and repurchase agreements with various
counterparties, which are governed by industry-standard master netting
agreements. The Group holds and provides collateral in respect of transactions
covered by these agreements. The right to offset balances under these master
netting agreements only arises in the event of non-payment or default and, as
a result, these arrangements do not qualify for offsetting under IAS 32.
The net amounts presented in the table are not intended to represent the
Group's exposure to credit risk, as the Group will use a wide range of
strategies to mitigate credit risk in addition to netting and collateral.
2022 Gross Gross amounts Net amounts Net amounts not offset Net amount ((3))
on balance sheet
amounts offset on presented on £m
£m balance sheet((1)) balance sheet
£m £m
Subject to Cash collateral
master netting pledged/received((2))
agreements £m
£m
Assets
Derivative financial instruments((4)) 3,340 (2,998) 342 (46) (182) 114
Liabilities
Derivative financial instruments((4)) 1,797 (1,469) 328 (46) (32) 250
Securities sold under repurchase agreement 703 - 703 (703) - -
2021
Assets
Derivative financial instruments((4)) 413 (273) 140 (76) (1) 63
Liabilities
Derivative financial instruments((4)) 678 (469) 209 (76) (50) 83
(1) The net balance of £1,529m (2021: £196m) relates to variation margin
offset under IAS 32 and reflected on other balance sheet lines.
(2) Cash collateral amounts not offset under IAS 32 in respect of
derivatives with other banks are included within due from and due to other
banks. Cash collateral amounts not offset under IAS 32 in respect of
derivative with central clearing houses is included within other assets and
other liabilities.
(3) Cash collateral amounts are limited to the net balance sheet exposure
in order to exclude any over collateralisation. In addition to cash
collateral, the Group has pledged securities collateral in respect of
derivative transactions subject to master netting agreements of £594m
(2021: £274m). This is not offset under IAS 32 or presented as collateral on
the balance sheet.
(4) Derivative financial instruments comprise both trading and hedging
derivative assets and liabilities.
Macroeconomic assumptions, scenarios, and weightings
The Group's ECL allowance at 30 September 2022 was £457m (2021: £504m).
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 1 September 2022 and changes in macroeconomic assumptions
between 1 September 2022 and 30 September 2022 have been considered as part of
the PMAs. 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.
As the UK economy gradually recovered from the impact of COVID-19, the outlook
continues to be as uncertain than it was at this point in 2021. Recent (and
further anticipated) bank base rate rises, concerns over rising energy prices
(despite recent UK Government announcements on the assistance it will provide
customers), the increase in national insurance contributions, and the
headwinds from higher inflation have all had an impact on household incomes in
2022. The potential impact on the UK economy of the Russian invasion of
Ukraine remains uncertain, but as the Group has no direct lending in that
region, it is hoped that any impact will be modest and short term. Against
this fast moving and evolving environment, the Group has continued to assess
the possible IFRS 9 economic scenarios to select appropriate forecasts and
weightings. The selection of scenarios and the appropriate weighting to apply
are considered and debated by an internal review panel quarterly with final
proposed recommendations for use in the IFRS 9 models made to ALCO for
formal approval. The three scenarios selected, together with the weightings
applied, have been updated to reflect the current economic environment and
are:
Scenario 30 Sept 2022 30 Sept 2021
(%) (%)
Upside 10 15
Base 55 50
Downside 35 35
Risk Management
Credit risk
The Group continue to select three scenarios, with the largest weighting
applied to the base scenario. In the current year, there is a 5% shift in the
weightings from the Upside scenario towards the Base scenario, reflecting a
lesser degree of confidence in the Upside scenario over the short
to medium term as a result of the updated macroeconomic assumptions. The
Group's current weighting applied to the Downside scenario is appropriate when
considered in the context of the overall scenario weightings applied and
remains unchanged from the previous year.
Upside (10%)((1))
· GDP increased sharply by 8.7% in the first quarter of 2022 (Q1 2022 v
Q1 2021), before slowing down to a c.2.0%-3.0% increase in each of the
remaining quarters in 2022 against the 2021 positions. Overall year-on-year
growth in 2022 is forecast at 3.9%, with a slight decrease to 2.8% in 2023,
before rising slightly in 2024 and 2025 and reverting to a more modest
increase in 2026.
· Inflation rises steeply and peaks at 12.9% in Q4 2022 (and lasting into
Q1 2023) from a low base of 0.6% at Q1 2021. Inflation reverts back but
remains high for the remainder of 2023, falling to 2.0% in Q2 2024 and sub
2.0% from the following quarter for the remaining forecast period.
· BoE base rate rises are anticipated throughout 2022 and are expected to
continue into 2023, peaking at 3.0% in Q2 2023 and remaining there for the
rest of 2023. Slight declines are expected throughout 2024, reaching 2.3% in
Q4 2024 and continue at that rate for the remainder of the forecast period.
· HPI Q4 annual growth of 8.3% in 2022, declining to (2.3%) in 2023,
before rising again over the next three years finishing in 2026 with a year
on year growth of 6.5%.
· Unemployment peaks in Q3 2023, at 4.3%, and drops gradually to 3.8% by
Q4 2024. From then, there is no significant movement over the remaining
forecast period, reaching 3.6% in Q1 2026 where it remains until the end of
2026.
(1) The time periods referenced in this section relate to calendar years
unless otherwise stated.
Base (55%)
· GDP increased sharply by 8.7% in the first quarter of 2022 (Q1 2022 v
Q1 2021) before contracting in Q2 2022, with overall year-on-year growth in
2022 forecast at 3.6%, and falling to 0.3% in 2023. GDP recovers over the
remaining forecast period at between 2.1% and 2.7%.
· Inflation peaks at 12.7% in Q4 2022 before recovering and reverting to
under 1% by Q1 2024. Inflation rises slightly but remains under 2% from Q1
2026 for the remaining forecast period.
· BoE base rate hits a high of 2.5% in Q1 2023 and steadily declines over
the forecast period reaching 1.8% in Q4 2023 and remaining there until the end
of 2025. A further reduction to 1.7% is anticipated in Q1 2026 and remains
at that level for the remainder of the year.
· HPI steadily rises to Q4 2022 before modestly reverting from then until
Q4 2024 when it rebounds slowly each quarter thereafter until the end of the
forecast period. Overall, HPI Q4 2022 annual growth of 6.8%, which regresses
to (4.6%) in 2023 and remains negative into 2024, before reverting to positive
growth in 2025 and finishing 2026 back up at 6.7%.
· Unemployment peaks at 4.7% in Q3 2023 and drops to 4.1% by Q4 2024.
From then, there is no significant movement with unemployment averaging just
under 4% in 2025, and steadily declining and reaching 3.7% for the final two
quarters of 2026.
Downside (35%)
· GDP increased sharply to 8.7% (Q1 2022 v Q1 2021) before turning
negative for the final quarter of 2022 to (2.8%) (Q4 2022 v Q4 2021), and
remains sluggish over the remaining forecast period. The overall year-on-year
growth is 2.6% in 2022, falling to (8.9%) in 2023, before reverting to
sluggish growth of 0.8% in 2024, rising to 2.1% for the remaining forecast
period.
· Inflation hits 11.9% in Q4 2022 before declining and turning negative
by Q4 2023, and remains negative for the first three quarters of 2024. From
there, inflation rises steadily each quarter reaching 1.7% in Q3 2026 and
remains at this level for Q4 2026.
· The BoE base rate reaches 2.3% in Q4 2022 before steadily falling back
to 0.5% by Q3 2024 where it stays for the remaining forecast period.
· HPI falls steadily and deeply from Q4 2022 to Q3 2025, but then
experiences modest increases in each quarter until the end of the forecast
period, but finishes well below the levels experienced in 2021. Overall, HPI
in Q4 2023 is forecast decline annually (13.3%), with a slight improvement to
(11.6%) in 2024, and not turning positive until 2026.
· Unemployment rises steadily and peaks at 7.4% in Q3 2025 and improves
slightly over remainder of the forecast period. Overall, unemployment averages
at 4.0% in 2022, rising to 7.3% by 2025, before improving modestly to finish
at 7.1% in 2026.
Base case-2022 v 2021((1))
The following table shows how the Group's base case assumptions in the current
year have changed from those used at 30 September 2021:
Year Assumption 2021 2022 2023 2024 2025 2026
% % % % % %
30 September 2022 Base rate 1.4 2.2 1.8 1.8 1.7
Unemployment 3.9 4.6 4.4 3.8 3.8
GDP 3.6 0.3 2.1 2.7 2.1
Inflation 9.4 7.5 0.6 0.7 1.5
HPI 6.8 (4.6) (3.0) 4.4 6.7
30 September 2021 Base rate 0.1 0.1 0.1 0.3 0.5
Unemployment 4.8 4.6 4.3 4.0 3.9
GDP 7.3 6.7 2.1 1.5 1.5
Inflation 2.1 2.7 1.9 1.8 1.8
HPI 5.0 (1.6) 0.6 2.7 3.9
(1) Macroeconomic assumptions provided by Oxford Economics on 1 September
2022 and reported on a calendar year basis unless otherwise stated. The
changes in macroeconomic assumptions between 1 September 2022 and 30 September
2022 have been considered as part of the PMAs.
Risk Management
Credit risk
The base case macroeconomic estimates and assumptions used at 30 September
2021 reflected the forward-looking view at that time, which recognised the
impact of the further lockdown measures introduced in Q4 2020, together with
the successful vaccine roll-out programme which resulted in much more positive
base case assumptions. The headwinds of inflation and cost of living crisis,
and the resultant actions of the BoE to curb inflation dominated much of 2022
and resulted in the significant changes to assumptions over the relatively
short term.
Five-year simple averages for the most sensitive inputs of unemployment, GDP
and HPI
2022 Unemployment GDP HPI
% % %
Upside 3.9 3.1 3.3
Base 4.1 2.1 2.0
Downside 6.3 0.4 (3.4)
2021
Upside 3.9 4.6 4.6
Base 4.3 3.8 2.1
Downside 6.5 2.1 (5.8)
Graphical illustrations of the above key inputs over the five-year forecast
period are:
Unemployment - simple average HPI - year-on-year movement
GDP - year-on-year movement While there are inflationary pressures at present that are impacting the
Group's ECL calculations, the following graph demonstrates the expected
relatively short-term nature of these over the forecast period (year-on-year
movement):
The full range of the key macroeconomic assumptions is included in the table
on page 45.
Risk Management
Credit risk
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
Asset lifetimes
The calculation of the ECL allowance is dependent on the expected life of the
Group's portfolios. The Group assumes the remaining contract term as the
maximum period to consider credit losses wherever possible. For the Group's
credit card and overdraft portfolios, behavioural factors such as observed
retention rates and other portfolio level assumptions are taken into
consideration in determining the estimated asset life.
Economic scenarios
The calculation of the Group's impairment provision is sensitive to changes in
the chosen weightings as highlighted above. The effect on the closing modelled
provision of each portfolio as a result of applying a 100% weighting to each
of the selected scenarios is shown below:
2022 Probability Upside Base Downside
Weighted((1)) £m £m £m
£m
Mortgages 15 12 13 23
Unsecured of which: 251 236 237 279
Cards 216 209((4)) 208 233
Personal loans and overdrafts((3)) 35 27 29 46
Business((2)) 53 39 43 97
Total 319 287 293 399
(1) In addition to the probability weighted modelled provision shown in
the table, the Group holds £85m relative to PMAs (2021: £207m) and £38m
of individually assessed provision (2021: £31m).
(2) Business and total ECLs in the above table have been calculated using
the new LGD model and while not fully implemented in the year, the impact
of this was incorporated into the total Business ECLs via the use of PMAs.
Consequently, the probability weighted Business and total ECLs reported in the
above table are £15m lower than the actual figures for the year.
(3) Salary Finance contributes more that 50% of the combined Personal
Loans and overdrafts ECL.
(4) Due to a minor model interaction effect, the 100% ECL for Upside is
marginally higher than the Base case.
2021 Probability Upside Base Downside
Weighted £m £m £m
£m
Mortgages 24 16 19 37
Unsecured of which: 159 155 155 167
Cards 142 139 139 147
Personal loans and overdrafts 17 16 16 20
Business 83 47 61 127
Total 266 218 235 331
One of the criteria for moving exposures between stages is the lifetime 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,
showing lower relative levels of sensitivity. To ensure appropriate levels
of ECL, the relative lack of sensitivity is compensated for through the
application of PMAs, further detail of which can be found on page 44.
Within each portfolio, the following are the macroeconomic inputs that are
more sensitive, and therefore more likely to drive the move from Stage 1 to
Stage 2 under a stress scenario:
Mortgages: Unemployment and HPI
Unsecured: Unemployment
Business: Unemployment and HPI
In addition to assessing the ECL impact of applying a 100% weighting to each
of the three chosen scenarios, the Group has also considered the effect
changes to key economic inputs would make to the modelled ECL output.
The Group considers the unemployment rate and HPI as the inputs that would
have the most significant impact on ECL, and has assessed how these metrics
would change ECL across the relevant portfolios, with the reported output
assessed against the base case. All changes have been implemented as immediate
effects within the first year of the base case scenario, persisting throughout
the scenario.
Risk Management
Credit risk
The following table discloses the ECL impact of HPI changes on the Group's
Mortgage and Business lending:
2022 2021
£m £m
Mortgages +10% (1) (2)
Business +10% (1) (2)
Mortgages -10% 2 3
Business -10% 2 3
Unemployment is a key input that affects all of the Group's lending categories
and the following table highlights the ECL impact of a one percent change in
the unemployment rate:
2022 2021
£m £m
Mortgages +1% 1 1
Unsecured +1% 15 4
Business +1% 4 6
Mortgages -1% (1) (1)
Unsecured -1% (15) (4)
Business -1% (3) (4)
While the above sensitivities provide a view of how the ECL would be impacted
based on these single changes, such changes would not ordinarily occur in
isolation and the economic inputs used are linked within each chosen scenario.
The use of judgement
SICR
Judgement is required in determining the point at which a SICR has occurred,
as it 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 where 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 assessment 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 that 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.
Refinements were made to the application of SICR on the Group's Business
portfolio in the year. Please refer to pages 21 and 35 for further detail.
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.
The table below illustrates this approach with reference to the Group's
Mortgage, Unsecured (credit cards) and Business portfolios. In each case the
illustration is of the PD threshold based on a 5-year full lifetime PD (not
the annualised equivalent). The business example reflects the thresholds
appropriate for term lending.
Origination PD SICR Trigger
Mortgages Low origination lifetime PD 2.00% 5.69%
High origination lifetime PD 10.00% 17.69%
Unsecured (credit cards) Low origination lifetime PD 2.00% 22.34%
High origination lifetime PD 10.00% 25.52%
Business Low origination lifetime PD 2.00% 6.03%
High origination lifetime PD 10.00% 16.70%
Risk Management
Credit risk
Changes to the overall SICR thresholds can also impact staging, driving
accounts into higher stages with the resultant impact on the ECL allowance:
2022 2021
£m £m
A 10% movement in the mortgage portfolio from Stage 1 to Stage 2((1)) +9 +6
A 10% movement in the credit card portfolio from Stage 1 to Stage 2((1)) +87 +69
A 10% movement in the business portfolio from Stage 1 to Stage 2((1)) +18 +13
A PD stress which increases PDs upwards by 20% for all portfolios +106 +94
(1) The comparative has been restated in line with the current year
presentation.
Definition of default
The PD of a credit exposure is a key input to the measurement of the ECL
allowance. Default under Stage 3 occurs when there is evidence that a
customer is experiencing significant financial difficulty, which is likely to
affect the ability to repay amounts due. The Group utilises the 90 DPD
backstop for default purposes.
PMAs
PMAs were £85m in 2022 (2021: £207m) and are included within the total ECL
provision of £457m (2021: £504m).
These are management judgements that impact the ECL provision by increasing
(or decreasing) the collectively assessed modelled output, where not all the
known risks identified in a particular product segment have been necessarily
reflected within the models. This also takes into account any time lag between
the date the macroeconomic assumptions were received and the reporting date.
Key PMAs described below:
Mortgages: the Group continue to monitor the level of ECL held on BTL
mortgages due to uncertainty of the impact on landlords and tenants and have
maintained the PMA for this cohort of customers. A new PMA was introduced to
reflect an impact on debt affordability as a result of rising energy prices
and other inflationary effects.
Unsecured: a new PMA was introduced for debt affordability as a reaction to
the reduction in customers' reduced disposable incomes. Other PMAs are also
held with the most material being £10m for the potential impact on the sale
or future recovery value of Unsecured written-off debt, which can fluctuate
in the current environment.
Business: the current uncertain economic environment is also impacting the
Business portfolio, where higher prices, wage inflation pressure and rising
interest rates are all headwinds faced by customers. The Group has recognised
these pressures and introduced an economic resilience PMA accordingly.
The impact of PMAs on the Group's ECL allowance and coverage ratios is as
follows:
Mortgages Unsecured Business Total
2022 £34m £33m((1)) £18m £85m
% of total ECL 70% 11% 21% 20%
Coverage - total 0.09% 4.66% 1.59% 0.62%
Coverage - total ex PMAs 0.02% 4.13% 0.93% 0.45%
2021 £54m £35m £118m £207m
% of total ECL 62% 18% 53% 41%
Coverage - total 0.15% 3.80% 3.06% 0.70%
Coverage - total ex PMAs 0.06% 3.11% 1.44% 0.41%
(1) The actual value £32.47m has been rounded up to ensure the table
casts.
The reduction in PMAs in the year of £122m predominantly reflects the removal
of (i) sector specific PMAs in the Business portfolio (£80m) that were
necessary as the UK economy continued to feel the effects of Covid-19 and the
outlook for businesses remained uncertain, and (ii) the impact of payment
holidays on the Mortgage portfolio (£20m) as Covid-19 related support
was withdrawn.
PMAs are primarily held in Stages 1 and 2 and are discussed in more detail in
the divisional commentary on pages 28 to 37.
The Group assesses and reviews the need for and quantification of PMAs on a
quarterly basis, with the CFO recommending the level of PMAs on a portfolio
basis to the Board Audit Committee twice a year at each external reporting
period. The Group has strengthened the governance around PMAs in the year,
with the Model Risk Oversight and Group Credit Oversight teams reviewing the
methodology supporting material PMAs and presenting their findings to the
Board Audit Committee.
In the absence of significant events that might impact ECLs going forward, the
Group expects the current level of PMAs to materially reduce over the next
18-24 months.
Risk Management
Credit risk
Macroeconomic assumptions
Annual macroeconomic assumptions used over the five-year forecast period in
the scenarios and their weighted averages are as follows:((1))
2022
Scenario VMUK weighting Economic measure((2)) 2022 2023 2024 2025 2026
% % % % %
Upside 10% Base rate 1.4 3.0 2.5 2.3 2.3
Unemployment 3.8 4.2 4.0 3.7 3.6
GDP 3.9 2.8 3.2 3.4 2.1
Inflation 9.5 8.5 1.8 0.7 1.3
HPI 8.3 (2.3) (1.8) 5.7 6.5
Base 55% Base rate 1.4 2.2 1.8 1.8 1.7
Unemployment 3.9 4.6 4.4 3.8 3.8
GDP 3.6 0.3 2.1 2.7 2.1
Inflation 9.4 7.5 0.6 0.7 1.5
HPI 6.8 (4.6) (3.0) 4.4 6.7
Downside 35% Base rate 1.3 1.7 0.6 0.5 0.5
Unemployment 4.0 6.0 7.1 7.3 7.1
GDP 2.6 (5.6) 0.8 2.1 2.1
Inflation 9.3 5.0 (1.0) 0.7 1.5
HPI 3.5 (13.3) (11.6) (2.7) 7.4
Weighted average Base rate 1.4 2.1 1.4 1.4 1.4
Unemployment 3.9 5.0 5.3 5.0 4.9
GDP 3.3 (1.5) 1.7 2.5 2.1
Inflation 9.4 6.7 0.2 0.7 1.5
HPI 5.8 (7.4) (5.9) 2.0 6.9
2021
Scenario VMUK weighting Economic measure((2)) 2021 2022 2023 2024 2025
% % % % %
Upside 15% Base rate 0.2 0.6 1.2 1.5 1.6
Unemployment 4.3 3.8 3.9 3.8 3.6
GDP 8.1 8.8 2.8 1.8 1.5
Inflation 2.4 3.7 2.5 1.6 1.8
HPI 8.2 0.8 5.2 5.2 3.6
Base 50% Base rate 0.1 0.1 0.1 0.3 0.5
Unemployment 4.8 4.6 4.3 4.0 3.9
GDP 7.3 6.7 2.1 1.5 1.5
Inflation 2.1 2.7 1.9 1.8 1.8
HPI 5.0 (1.6) 0.6 2.7 3.9
Downside 35% Base rate 0.0 (0.5) (0.5) (0.5) (0.3)
Unemployment 5.6 6.7 6.8 6.8 6.4
GDP 4.4 2.4 1.1 1.0 1.7
Inflation 1.5 0.7 0.8 2.2 1.7
HPI (2.9) (15.2) (12.1) (3.5) 4.9
Weighted average Base rate 0.1 0.0 0.1 0.2 0.4
Unemployment 5.0 5.2 5.1 4.9 4.7
GDP 6.4 5.5 1.9 1.4 1.6
Inflation 2.0 2.1 1.6 1.9 1.8
HPI 2.7 (6.0) (3.2) 0.9 4.2
(1) Macroeconomic assumptions provided by Oxford Economics on 1 September
2022 and reported on a calendar year basis unless otherwise stated. The
changes in macroeconomic assumptions between 1 September 2022 and 30 September
2022 have been considered as part of the PMAs.
(2) The percentages shown for base rate, unemployment and inflation are
averages. GDP is the year-on-year movement, with HPI the Q4 v Q4 movement.
Risk Management
Financial risk
Strong foundations supporting resilience and growth.
The financial risk framework underpins the Group's robust balance sheet,
ensuring strategy is resilient and responsive to external pressures and
changing regulatory obligations.
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.
Risk appetite
The primary objective for the management of financial risks is to control the
risk profile within approved risk limits in order to maintain the confidence
of the Group's customers and other stakeholders. Financial risks are also
managed to protect current and future earnings from the impact of market
volatility. The Group applies a prudent approach to financial risks in order
to safeguard the ongoing strength and resilience of the balance sheet. These
activities are undertaken in a manner consistent with the Group's obligations
under ring-fencing legislation and prudential rules.
Financial risk appetite is approved by the Board, with authority delegated to
ALCO for subsequent implementation and monitoring. The Board has established a
range of capital risk appetite measures including CET1, leverage and MREL.
Measures for funding and liquidity risks consider the structure of the
balance sheet, the Group's overall funding profile and compliance with the
regulatory LCR and net stable funding ratio (NSFR) requirements.
Board-approved risk appetite covers both regulatory and internal liquidity
requirements and the need to maintain access to liquidity resources sufficient
to accommodate outflows of funds in a range of stress scenarios over a
one-month and three‑month period.
The Group participates in wholesale markets and uses financial instruments to
fund its banking activities and manage the liquidity and market risks arising
from these activities. The Group establishes an appetite for these risks based
on an overriding principle that the Group will not engage in proprietary risk
taking.
The Group's pension risk appetite is a component of the Group-wide RAS
framework for the management of balance sheet risks and is considered in the
context of potential capital impacts as a result of volatility in the
Scheme's valuations and future contributions.
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.
Measurement
The Group manages capital in accordance with prudential rules issued by the
PRA and the FCA, which are implemented through the CRD IV CRR regulatory
framework. Pillar 1 capital requirements are calculated in respect of credit
risk, operational risk, market risk, counterparty credit risk and credit
valuation adjustments. The capital requirements are calculated using the
following approaches:
· Retail mortgages: IRB;
· Business lending: FIRB;
· Specialised lending: IRB slotting; and
· All other portfolios: Standardised approach, via either sequential IRB
implementation or Permanent Partial Use.
A rigorous approach is taken to assessing risks that are not adequately
covered by Pillar 1. The Group also undertakes analysis of a range of stress
scenarios to test the impact on capital arising from severe yet plausible
scenarios. These approaches to capital are documented in the Group's ICAAP
which is subject to review, challenge and approval by the Board. The outputs
from the ICAAP and regulatory stress testing are used to inform minimum
capital targets and risk appetite, ensuring survivability above peak-to-trough
stress movements.
The Group IRB framework looks at the customer PD along with loss severity (EAD
and LGD). The outputs are used in the calculation of RWA, expected loss
and IFRS 9 ECL. The IRB parameters and rating assessments are actively
embedded in the following day-to-day processes:
· Credit approval - IRB models and parameters are used to assess the
customer risk and outputs are used to inform cut-off models that drive the
lending decisions;
· Pricing - Outputs and estimates are used in the assessment of new
products and portfolio pricing reviews;
· Risk appetite - Parameters are included in the assessment of models and
are analysed to inform the Group's risk capacity and appetite; and
· Asset quality - Parameters are monitored to understand the product and
segment performance of the Group's portfolios.
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.
Risk Management
Financial risk
COVID-19 regulatory capital developments
Following the BoE's announcements in 2020 regarding supervisory and prudential
policy measures to address the challenges of COVID-19, the requirements
relating to compliance with updates to definition of default and mortgage IRB
models were extended. The Group did not adopt hybrid mortgage models in FY22
and intends to do so in FY23.
As part of the Group's implementation of mortgage IRB models (including Hybrid
PD), we will consider the need to apply an overlay to increase RWAs in advance
of formal approval of models. A final figure has not yet been determined
although this may be in the range of £1-1.5bn of RWAs.
The Group continues to apply relevant relief measures introduced by regulatory
and supervisory bodies to help address and alleviate various COVID-19 driven
financial impacts. These include amendments to the CRR introduced by the
'Quick Fix' package in June 2020, which introduced a number of beneficial
modifications, including changes to IFRS 9 transitional arrangements
for capital.
UK implementation of Basel Standards
In July 2021, the PRA published Policy Statement 17/21 which provided feedback
to Consultation Paper 5/21 with the same title: 'Implementation of Basel
standards', with the publication of Policy Statement 22/21 in October
containing final rules. The policy statements covered a range of revisions in
the areas of counterparty credit risk, large exposures, LCR, NSFR and
reporting and disclosure among other changes. These standards became effective
in the UK from 1 January 2022 and did not materially impact capital
requirements.
Policy Statement 22/21 confirmed the PRA's treatment to fully deduct software
assets from CET1 capital, applicable from 1 January 2022. The PRA's view is
that intangible assets are not sufficiently loss absorbent on a going
concern basis to warrant recognition as CET1 capital.
Basel 3.1
The Basel Committee published its final reforms to the Basel III framework in
December 2017. The amendments include changes to the standardised approaches
to credit and operational risks and the introduction of a new RWA output
floor. There are a number of areas within Basel 3.1 subject to national
discretion and choice. The PRA is due to publish a Consultation Paper on UK
implementation in the fourth quarter of 2022, with the final reforms expected
to become effective on 1 January 2025 (delayed from 2023), subject to a
five-year transitional period. Uncertainties therefore remain for a number of
topics that will be subject to revisions under Basel 3.1. In response the
Group has undertaken an assessment of potential outcomes to assist with
planning.
Solvency Stress Test and Annual Cyclical Scenarios
The Group was a participant in the BoE SST in 2021. This was the first
time the Group had been involved in the BoE's stress testing for major
banks. The Group will be an on-going participant in the BoE's Annual
Cyclical Scenario (ACS). Results from the SST were published by the BoE at the
end of 2021 and were used by the Financial Policy Committee (FPC) to assess
the stress severity required to threaten resilience and test the Group's
ability to absorb losses and continue to lend. The Group's results on both a
transitional and non-transitional basis were in excess of the published
reference rates and the Group was not required to take any additional capital
actions or to submit a revised capital plan.
The 2022 ACS was postponed due to the uncertainty caused by the Russian
invasion of Ukraine. The delay was to enable lenders to focus on managing the
disruption in the financial markets associated with the invasion. In July
2022, it was announced that the ACS stress test would commence in September
2022. The BoE published the Key Elements of the 2022 Stress Test on 26
September 2022 and the Group is in the process of undertaking the 2022 ACS
exercise. The scenario tests the resilience of the UK Banking system to deep
simultaneous recessions in the UK and global economies, real income
shocks, large falls in asset prices and higher global interest rates, as well
as a separate stress of misconduct costs. The results will be published
in summer 2023.
Resolvability Assessment Framework (RAF)
The BoE has introduced a Resolvability Assessment Framework (RAF), with full
implementation required by 2022 to ensure major UK banks can be safely
resolved. The Group has undertaken an assessment of its resolvability with
disclosures published in June 2022. The BoE concluded that, upon their first
assessment as resolution authority of the eight major banks, a major UK bank
could enter resolution safely, remaining open and continuing to provide vital
banking services to the economy.
UK Leverage Ratio Framework
In October 2021 the FPC and PRA published their changes to the UK leverage
ratio framework (Policy Statement 21/21). The changes, effective from 1
January 2022, have simplified the framework with the Group being subject to
the UK leverage ratio only rather than the two leverage ratio definitions that
previously existed. The Group exceeds the 3.25% leverage ratio requirement.
Mitigation
The Group's capital risk policy standard provides the framework for the
management of capital within the Group. The objectives of the policy standard
are to efficiently manage the capital base to optimise shareholder returns
while maintaining capital adequacy and ensuring that excessive leverage is not
taken, so meeting regulatory requirements and managing the rating agencies'
assessments of the Group.
The Group is able to accumulate additional capital through retention of profit
over time, which may be increased by: income growth and cost cutting; raising
new equity, for example via a rights issue; reducing or cancelling
distributions on capital instruments; and raising AT1 and Tier 2 capital.
The availability and cost of additional capital is dependent upon market
conditions and perceptions at the time. The Group is also able to manage the
demands for capital through management actions including adjusting its lending
strategy.
Capital optimisation remains a key strategic priority, ensuring the Group
manages the quantity and quality of resources efficiently while meeting
internal targets, stress testing requirements and maintaining regulatory
compliance.
Risk Management
Financial risk
Monitoring
The Board approves the capital risk appetite annually, defining minimum levels
of capital across a range of capital ratios and measurements. The internal
appetite ensures the Group operates above minimum regulatory requirements with
reporting conducted through ALCO, Board and Executive Risk Committee. The
capital plan, which assesses capital adequacy on a forward-looking basis,
is also approved by the Board annually. The annual planning process is
supported by rolling forecasting which is reported to ALCO monthly. This
ensures that performance trends are reviewed and that there is transparency of
the impact on capital ratios, risk appetite and the outlook. As part of the
monthly forecasting process, ALCO reviews scenario analysis, considering
adverse impacts to economic conditions and modelling sensitivities, including
changes to regulation.
In recent years, the PRA has also taken a thematic interest in the quality of
regulatory reporting across the industry, specifically focusing on the
completeness, accuracy and timing of regulatory reports. This has resulted in
a number of s166 Skilled Person Reviews being commissioned over the
governance, controls and processes supporting the regulatory reporting
framework. The Group is subject to such a review which commenced this year
and which will ultimately lead to enhancements to the governance and control
framework of the Group's regulatory reporting. In May the Board approved
that EY be recommended to the PRA as the preferred Skilled Person
to undertake the review and the PRA subsequently approved EY's appointment.
The review is scheduled to finalise towards the end of calendar year 2022.
Capital resources
The Group's capital resources position as at 30 September 2022 is summarised
below:
Regulatory capital((1)) 30 Sept 2022 30 Sept 2021
£m £m
Statutory total equity 6,340 5,473
CET1 capital: regulatory adjustments((2))
Other equity instruments (666) (915)
Defined benefit pension fund assets (650) (551)
Prudent valuation adjustment (5) (5)
Intangible assets (256) (208)
Goodwill (11) (11)
Deferred tax asset relying on future profitability (302) (258)
Cash flow hedge reserve (699) (10)
AT1 coupon accrual (13) (19)
Foreseeable dividend on ordinary shares (106) (14)
Excess expected loss (100) -
Share buyback (13) -
IFRS 9 transitional adjustments 114 134
Total regulatory adjustments to CET1 (2,707) (1,857)
Total CET1 capital 3,633 3,616
AT1 capital
AT1 capital instruments 666 697
Total AT1 capital 666 697
Total Tier 1 capital 4,299 4,313
Tier 2 capital
Subordinated debt 1,020 1,019
Total Tier 2 capital 1,020 1,019
Total regulatory capital 5,319 5,332
(1) This table shows the capital position on a CRD IV 'fully loaded' basis
and transitional IFRS 9 basis.
(2) A number of regulatory adjustments to CET1 capital are required under
CRD IV regulatory capital rules.
Risk Management
Financial risk
Regulatory capital flow of funds((1)) 2022 2021
£m £m
CET1 capital((2))
CET1 capital at 1 October 3,616 3,271
Share capital and share premium (1) 2
Retained earnings and other reserves (including special purpose entities) 428 449
Prudent valuation adjustment - 1
Amendment to software asset deduction rules((3)) (151) 151
Intangible assets 103 118
Deferred tax asset relying on future profitability (44) (107)
Defined benefit pension fund assets (99) (81)
AT1 distribution paid already deducted from CET1 19 21
Dividend paid already deducted from CET1 14 -
Foreseeable distributions (119) (33)
Share buyback (13) -
Excess expected losses (100) -
IFRS 9 transitional relief (20) (176)
Total CET1 capital at 30 September 3,633 3,616
AT1 capital
AT1 capital at 1 October 697 915
AT1 instrument issued net of costs 346 -
AT1 instrument repurchased (377) -
Less other equity instruments not qualifying as AT1 - (218)
Total AT1 capital at 30 September 666 697
Total Tier 1 capital at 30 September 4,299 4,313
Tier 2 capital
Tier 2 capital at 1 October 1,019 749
Capital instruments issued: subordinated debt - 298
Capital instruments purchased: subordinated debt - (30)
Amortisation of issue costs 1 2
Tier 2 capital at 30 September 1,020 1,019
Total capital 5,319 5,332
(1) Data in the table is reported under CRD IV on a fully loaded basis
with IFRS 9 transitional arrangements applied.
(2) CET1 capital is comprised of shares issued and related share premium,
retained earnings and other reserves less specified regulatory adjustments.
(3) The full deduction treatment for software assets was reinstated by the
PRA in January 2022.
The Group's CET1 capital increased by £17m during the year. Statutory profit
after tax of £537m drove an overall increase in retained earnings, which
when offset against other reserves movements resulted in a net increase in
CET1 capital of £428m. The Group used this surplus principally to fund
capital returns in the year of £282m (comprising payments of £36m for
interim dividends, £51m for AT1 distributions, a total £76m deduction for
share buyback, and a final dividend and AT1 accrual for the current year of
£119m) and further investment in digital software assets of £53m.
In addition, £100m of CET1 capital was absorbed by the movement in excess
expected losses, as releases in IFRS 9 provisions widened the gap between
regulatory and accounting credit losses.
In June 2022, the Group successfully issued £350m of new AT1 securities,
achieving significantly tighter pricing on a spread basis than prior
issuances. Concurrently, the Group repurchased £377m of its existing AT1
securities that are callable in December of this year. The net impact
reduced AT1 capital by £31m (after costs) as at 30 September 2022.
Subsequent to the report date, the Group announced its intention to redeem the
remaining £73m of those AT1 securities on their call date in December 2022.
Risk Management
Financial risk
Risk weighted assets
Minimum capital requirements 2022 2021
Exposure RWA Minimum Exposure RWA Minimum
£m £m capital £m £m capital
requirements requirements
£m £m
Retail mortgages 62,545 9,155 732 61,146 10,010 801
Business lending 11,959 6,196 497 11,670 6,040 483
Other retail lending 17,408 4,817 385 16,201 4,311 345
Other lending 18,165 277 22 15,467 326 26
Other((1)) 584 637 51 765 856 69
Total credit risk 110,661 21,082 1,687 105,249 21,543 1,724
Credit valuation adjustment 258 21 103 8
Operational risk 2,623 210 2,481 198
Counterparty credit risk 185 15 105 8
Total 110,661 24,148 1,933 105,249 24,232 1,938
(1) The items included in the Other exposure class that attract a capital
charge include items in the course of collection, fixed assets, intangible
assets on software less than three years old (2021 only), prepayments, other
debtors and deferred tax assets that are not deducted.
RWA movements 12 months to 30 September 2022 12 months to 30 September 2021
IRB STD Non-credit risk Total Minimum IRB STD Non-credit risk Total Minimum
RWA RWA RWA((2)) £m capital RWA RWA RWA((2)) £m capital
£m £m £m requirements £m £m £m requirements
£m £m
Opening RWA 15,699 5,844 2,689 24,232 1,938 15,846 5,642 2,911 24,399 1,953
Asset size 267 575 - 842 68 (553) 152 - (401) (32)
Asset quality (959) 4 - (955) (75) (644) 16 - (628) (50)
Model updates((1)) (64) - - (64) (5) 1,086 - - 1,086 87
Methodology and policy - (160) - (160) (13) (36) 151 - 115 9
Other - (124) 377 253 20 - (117) (222) (339) (29)
Closing RWA 14,943 6,139 3,066 24,148 1,933 15,699 5,844 2,689 24,232 1,938
(1) Model updates include the mortgage quarterly PD calibrations.
(2) Other RWA includes operational risk, credit valuation adjustment and
counterparty credit risk.
RWA reduced c.£0.1bn to £24.1bn primarily due to the impact of improvements
to the HPI offsetting the impact of higher lending and increased other
non-credit RWAs.
As well as the HPI improvements of £1.5bn, the asset quality movement
includes RWA increases relating to the increased risk weights associated with
higher mortgage pipeline commitments.
Model updates include a reversal of the £344m in RWA specific to COVID-19
related PMAs, with a new PMA of £280m to account for increased RWAs
arising from Forced Sale Discounts. A further PMA of £47m to the Business
portfolio relating to the new definition of default was introduced in January
2022, and this was largely offset by a reduction of £46m RWAs following
recalibration of PDs throughout the year.
Methodology and policy movement is largely driven by the removal of the
£151m RWA uplift in relation to the CRR Quick Fix amendments in respect of
intangible assets, which was removed from January 2022.
The other movement in standardised RWAs reflects reductions to exposures to
fixed assets (£39m RWA), deferred tax assets (£43m RWA) and SPV deposits
with other institutions (£58m RWA), partially offset by increases to other
assets including prepayments and items in the course of collection.
Other non-credit risk RWA movements include an Operational Risk RWA uplift of
£142m due to a higher proportion of revenue within Commercial Banking
business line over the last three years, compared to the three years prior
to September 2021. CCR and CVA RWAs have increased by £80m and £155m
respectively, driven by the move to the more risk sensitive SA-CCR methodology
per PS22/21 from 1 January 2022 and increased market volatility in recent
months.
Risk Management
Financial risk
IFRS 9 transitional arrangements
The table below shows a comparison of capital resources, requirements and
ratios with and without the application of transitional arrangements for
IFRS 9.
Available capital (amounts) 30 September 2022
IFRS 9 IFRS 9
Transitional basis Fully loaded basis
£m £m
CET1 capital 3,633 3,519
Tier 1 capital 4,299 4,185
Total capital 5,319 5,205
RWA (amounts)
Total RWA 24,148 24,056
Capital ratios
CET1 (as a percentage of RWA) 15.0% 14.6%
Tier 1 (as a percentage of RWA) 17.8% 17.4%
Total capital (as a percentage of RWA) 22.0% 21.6%
Leverage ratio
Leverage ratio total exposure measure 83,771 83,657
UK leverage ratio 5.1% 5.0%
Transitional arrangements in CRR mean the regulatory capital impact of ECL is
being phased in over time. Following the CRR Quick Fix amendments package,
which applied from 27 June 2020, relevant provisions raised from 1 January
2020 through to 2024 have a CET1 add-back percentage of 75% in 2022, reducing
to 50% in 2023 and 25% in 2024.
At 30 September 2022, £114m of IFRS 9 transitional adjustments (2021: £134m)
have been applied to the Group's capital position in accordance with CRR: £7m
of static and £107m of dynamic adjustments (2021: £10m static and £124m
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.
Minimum requirements 30 September 2022
CET1 Total capital
Pillar 1((1)) 4.5% 8.0%
Pillar 2A 1.7% 3.1%
Total capital requirement 6.2% 11.1%
Capital conservation buffer 2.5% 2.5%
UK countercyclical capital buffer 0.0% 0.0%
Total (excluding PRA buffer)((2)) 8.7% 13.6%
(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 are
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 September the group maintained CET1 capital in excess of its
requirements equal to 6.3% of RWAs (equivalent to £1,521m).
The PRA sets a Group specific Pillar 2A requirement for risks which are not
captured within the Pillar 1 requirement. Together Pillar 1 and Pillar 2A
represent the Group's Total Capital Requirement or TCR, which is the minimum
requirement which must be met at all times. During the year the PRA updated
the Group's Pillar 2A requirement to £744m, representing a material reduction
in Pillar 2A from 30 September 2021 of £209m. At September 2022 this
resulted in a TCR of 11.1% of RWAs (equivalent to £2,676m) of which 6.2% must
be met with CET1 capital (equivalent to £1,505m).
Risk Management
Financial risk
In October 2022 the PRA communicated an update to the Group's Pillar 2A
requirement setting it as 2.97% of RWAs, of which 1.67% must be met with
CET1 capital. In line with previous guidance this requirement has been set as
a percentage of RWAs, rather than the fixed nominal Pillar 2A requirements set
during 2020 and 2021 in response to COVID-19. Applying this updated
requirement as at 30 September 2022 would result in a modest reduction in
total capital requirements of £27m and CET1 requirements of £15m.
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 Institutions (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. In December 2021, the FPC announced it felt that
domestic risks to UK financial stability have returned to around their
pre-COVID levels. It subsequently provided guidance that the UK CCyB rate
would increase to 1%, effective December 2022, rising to 2% from July 2023 to
align with its guidance for the CCyB rate under standard risk conditions. The
FPC has noted the considerable uncertainties in relation to the economic
outlook and will continue to monitor the situation and stands ready to vary
the UK CCyB rate - in either direction - in line with the evolution of
economic conditions, underlying vulnerabilities and the overall risk
environment.
Currently, the Group does not meet the criteria for the application of either
a global or domestic systemically important institution buffer.
MREL
MREL position 2022 2021
£m £m
Total capital resources((1)(2)) 5,319 5,332
Eligible senior unsecured securities issued by Virgin Money UK PLC((2)) 2,423 2,408
Total MREL resources 7,742 7,740
Risk-weighted assets 24,148 24,232
Total MREL resources available as a percentage of risk-weighted assets 32.1% 31.9%
UK leverage exposure measure 83,771 83,415
Total MREL resources available as a percentage of UK leverage 9.2% 9.3%
exposure measure
(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. From September 2022, unamortised costs are also deducted
from eligible senior unsecured securities.
The BoE as the UK Resolution Authority has published its framework for setting
a minimum requirement for own funds and eligible liabilities (MREL). This
requires the Group to hold capital resources and eligible debt instruments
equal to the greater of two times the Total Capital Requirement (TCR) or 6.5%
of the leverage exposure measure. In addition to MREL the Group must also
hold any applicable capital buffers, which together with MREL represent the
Group's loss-absorbing capacity (LAC) requirement.
As at 30 September 2022, MREL resources were £7.7bn (FY21: £7.7bn),
equivalent to 32.1% of RWAs (FY21: 31.9%). This provides prudent headroom of
£1.7bn or 7.2% above LAC requirement of 24.9%.
Dividend
Distributable reserves are determined as required by the Companies Act 2006 by
reference to a company's individual financial statements. At 30 September
2022, the Company had accumulated distributable reserves of £1,056m (2021:
£792m).
The Board has recommended a final dividend for the financial year ended 30
September 2022 of 7.5p per share.
Share buyback
At the end of June 2022, the Group announced a share buyback programme with an
initial repurchase of £75m in aggregate between ordinary shares of £0.10
each listed on the LSE and CDIs, each representing one share listed on the
ASX. Subject to trading liquidity, Virgin Money intends to repurchase shares
and CDIs in approximately equal proportions. The buyback commenced on 30 June
2022 and will end no later than 17 December 2022.
On 21 November 2022 an extension to the share buyback programme was announced
with an intent to repurchase a further £50m in aggregate of shares and
CDIs, ending no later than 2 May 2023.
Risk Management
Financial risk
Leverage
Leverage ratio 2022 2021
£m £m
Total Tier 1 capital for the leverage ratio
Total CET1 capital 3,633 3,616
AT1 capital 666 697
Total Tier 1 capital 4,299 4,313
Exposures for the leverage ratio
Total assets 91,907 89,100
Adjustment for off-balance sheet items 3,204 2,884
Adjustment for derivative financial instruments 282 91
Adjustment for securities financing transactions 2,974 2,235
Adjustment for qualifying central bank claims (11,955) (9,094)
Other adjustments (2,641) (1,801)
UK leverage ratio exposure((1)) 83,771 83,415
UK leverage ratio((1)(2)) 5.1% 5.2%
Average UK leverage ratio exposure((3)) 83,985 83,213
Average UK leverage ratio((3)) 5.0% 5.0%
(1) As the UK leverage ratio is now the single leverage ratio exposure
measure, the analysis of the CRD IV leverage ratio has been replaced with the
UK equivalent for this period and the comparative.
(2) IFRS 9 transitional capital arrangements have been applied to the
leverage ratio calculation.
(3) The transitional 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 2022 to 30 September 2022).
The UK leverage ratio framework is relevant to PRA regulated banks and
building societies with consolidated retail deposits equal to or greater than
£50bn. The Group exceeds this threshold and accordingly the average UK
leverage ratio exposure and average UK leverage ratio are disclosed.
The PRA simplified the leverage framework from 1 January 2022 with UK banks
now subject to a single UK leverage ratio exposure measure. The CRD IV
leverage ratio is no longer applicable to UK banks.
The leverage ratio is monitored monthly against a Board-approved RAS, 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
PRA regulations 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% (2021: 5.2%) exceeds the UK minimum
ratio of 3.25%.
Funding and liquidity risk
Funding risk occurs when 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
Exposures
The Group is predominantly funded by Personal and Business customers. Customer
funding is supported by the Group's ongoing wholesale funding programmes,
medium-term secured funding issuance (e.g. the Group's securitisation
programmes), Regulated Covered Bonds and unsecured medium-term notes. The
Group also has access to and has drawn against the BoE TFS and TFSME, both
schemes introduced to support the UK through periods of instability.
Funding risk exposures arise from an unsustainable or undiversified funding
base, for example, a reliance on short-term wholesale deposits. The risk may
result in deviation from funding strategy, negatively impact market or
customer perception, increase the acquisition cost of new funds or reduce
lending capacity, thereby adversely impacting financial performance and
stability.
The Group's primary liquidity risk exposure arises through the redemption of
retail deposits where customers have the ability to withdraw funds with
limited or no notice. Exposure also arises from the refinancing of customer
and wholesale funding at maturity and the requirement to fund new and existing
committed lending obligations including mortgage pipeline and credit card
facilities.
Measurement
Funding and liquidity risks are subject to a range of measures contained
within the Group's RAS which reflect both regulatory requirements, as a
minimum, and the Group's own view on risk sensitivities. The Group RAS is
supported by a series of limits agreed by ALCO. These measures provide a
short- and long-term view of risks under both normal and stressed conditions.
The measures focus on: cash outflows and inflows under stress; concentration
risks; refinancing risks; asset encumbrance; and the quantum, diversity and
operational capability of mitigating actions.
The Group's funding plan establishes an acceptable level of funding risk which
is approved by the Board and is consistent with risk appetite and the Group's
strategic objectives. The development of the Group's funding plan is
informed by the requirements of the Group's financial risk policy standards. A
series of metrics is used across the Group to measure risk exposures,
including funding ratios, limits to concentration risk and maximum levels of
encumbrance.
Liquidity is managed in accordance with the ILAAP, which is approved by the
Board. Liquidity risk exposures are subject to assessment under both
regulatory and internal requirements. The volume and quality of the Group's
liquid asset portfolio is defined through a series of stress tests across a
range of time horizons and stress conditions. The High-Quality Liquid Asset
(HQLA) requirement is quantified as the outflow of funds under a series of
stress scenarios less the impact of inflows from assets. Stress cash outflow
assumptions have been established for individual liquidity risk drivers across
idiosyncratic and market-wide stresses.
The Treasury function is responsible for the development and execution of
strategy subject to oversight from the Risk function and review at ALCO. The
Group continues to maintain its strong funding and liquidity position and
seeks to achieve an appropriate balance between profitability, liquidity risk
and capital optimisation.
Monitoring
Liquidity is monitored and measured daily by the Group, with reporting
conducted through ALCO and the Executive Risk Committee. In a stress
situation or in adverse conditions, the level of monitoring and reporting is
increased commensurate with the nature of the stress event, as demonstrated
in the Group's response to COVID-19.
Monitoring and control processes are in place against internal and regulatory
liquidity requirements. The Group monitors a range of market and internal
early warning indicators on a routine basis for early signs of liquidity
risk in the market or specific to the Group. These indicators cover a mixture
of quantitative and qualitative measures including daily variation of customer
balances, measurement against stress requirements and monitoring of the
macroeconomic environment.
Mitigation
The Group holds a portfolio of HQLA that can be utilised to raise funding in
times of stress. The size of the HQLA portfolio is calibrated based on a view
of potential outflows under both systemic and idiosyncratic stress events. In
addition, the Group can use the repo market and bilateral relationships to
generate funds and can also participate in BoE operations through the Sterling
Monetary Framework (SMF). The Group has several sources of funding which are
well-diversified in terms of the type of instrument and product,
counterparty, term structure and market. In addition to customer funding,
wholesale funding is used to support balance sheet growth, lengthen the
contractual tenor of funding and diversify funding sources. These funding
programmes are a source of strength for the Group and leverage the Group's
high-quality mortgage book as collateral for secured funding.
As a participant in the BoE SMF, the Group had access to funding via the TFS
and TFSME. TFSME was launched in April 2020 to provide cost-effective funds to
banks to support additional lending to the real economy and incentivise
lending to SMEs during a period of economic disruption caused by COVID-19.
During 2022, the Group repaid the remaining outstanding TFS amounts.
The funding plan includes an assessment of the Group's capacity for raising
funds across a wide range of primary funding sources, thereby mitigating
funding risk. Refinancing risks are carefully managed and are subject to
controls overseen by ALCO. The Group's funding plan includes TFSME repayment
profiles designed to manage refinancing risk within a suitably prudent time
frame.
The Group recovery plan has been established for management of an escalated
liquidity requirement, if the Group experiences either restricted access to
wholesale funding or a significant increase in the withdrawal of funds. The
plan identifies triggers for escalation, assesses capacity, details the action
required, allocates the key tasks to individuals, provides a time frame and
defines a management committee to manage the action plan and return the
balance sheet structure within appetite.
The Group operates a Funds Transfer Pricing system, a key purpose of which is
to ensure that liquidity risk is a factor in the pricing of loans and
deposits.
Risk Management
Financial risk
Sources of funding
The table below provides an overview of the Group's sources of funding as at
30 September 2022:
2022 2021
£m £m
Total assets 91,907 89,100
Less: other liabilities((1)) (3,122) (3,060)
Funding requirement 88,785 86,040
Funded by:
Customer deposits 65,434 66,971
Debt securities in issue 8,509 7,678
Due to other banks 8,502 5,918
of which:
Secured loans 7,230 5,896
Securities sold under agreements to repurchase 1,205 -
Transaction balances with other banks 17 -
Deposits with other banks 50 22
Equity 6,340 5,473
Total funding 88,785 86,040
(1) Other liabilities include derivative financial instruments, deferred
tax liabilities, provisions for liabilities and charges, and other liabilities
as per the balance sheet line item.
The Group's funding objective is to prudently manage the sources and tenor of
funds in order to provide a sound base from which to support sustainable
lending growth. At 30 September 2022, the Group had a funding requirement of
£88,785m (2021: £86,040m) with the majority being used to support loans and
advances to customers.
Customer deposits
The majority of the Group's funding requirement was met by customer deposits
of £65,434m (2021: £66,971m). Customer deposits comprise interest-bearing
deposits, term deposits and non-interest-bearing demand deposits from a range
of sources including Personal and Business customers. Throughout the year,
funding has been managed at a level to support customer lending, with a higher
proportion from wholesale, including usage of TFSME and reduced volumes of
customer deposits.
Equity
Equity of £6,340m (2021: £5,473m) 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 consolidated financial statements.
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.
The LCR decreased from 149% to 138% during the year and remains comfortably
above regulatory and internal risk appetite.
LCR 2022 Restated
£m 2021((1))
£m
Eligible liquidity buffer 13,139 10,996
Net stress outflows 9,537 7,369
Surplus 3,602 3,627
LCR 138% 149%
(1) In the prior year, certain business customer deposits were incorrectly
classified as Corporates, as opposed to Financial Institutions. Due to the
different liquidity outflow assumptions applied, this resulted in net outflows
being understated by £80m and the LCR overstated by 2%. These deposits have
been reclassified as Financial Institutions and the prior year comparative
has been updated to align with the current year presentation.
Risk Management
Financial risk
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 key risk driver assumptions applied to the scenarios are:
Liquidity Risk Driver Internal Stress Assumption
Retail funding Severe unexpected withdrawal of retail deposits by customers arising from
redemption or refinancing risk.
No additional deposit inflows are assumed.
Wholesale funding Limited opportunity to refinance wholesale contractual maturities. Full
outflow of secured and unsecured funding during the refinancing period, with
no reinvestment of funding.
Off-balance sheet Cash outflows during the period of stress as a result of off-balance sheet
commitments such as mortgage pipeline, undrawn credit card facilities and
collateral commitments. Lending outflows, over and above contractual
obligations, are honoured as the Group preserves ongoing viability.
Intra-day Other participants in the payment system withhold or delay payments or
customers increase transactions resulting in reduced liquidity.
Liquid assets The liquidity portfolio value is reduced, reflecting stressed market
conditions.
The Group monitors the movements in its credit ratings and the related
requirement to post collateral for payment systems and clearing houses. These
figures are not considered material compared to the volume of unencumbered
liquid assets.
As at 30 September 2022, the Group held eligible liquid assets well in excess
of 100% of net stress outflows and Pillar 2 liquidity requirements, as
defined through internal risk appetite.
Liquid asset portfolio((1)) 2022 2021 Change Average Average
£m £m % 2022 2021
£m £m
Level 1
Cash and balances with central banks 9,795 7,060 38.7 7,632 7,232
UK Government treasury bills and gilts 512 771 (33.6) 905 779
Other debt securities 2,827 3,239 (12.7) 2,993 3,296
Total level 1 13,134 11,070 18.6 11,530 11,307
Level 2((2)) 117 23 408.7 32 24
Total LCR eligible assets 13,251 11,093 19.5 11,562 11,331
(1) Excludes encumbered assets.
(2) Includes Level 2A and Level 2B.
Cash and balances with central banks of £12,221m, as per note 3.4, include:
£2,094m of assets that are encumbered to support the issuance of Scottish
bank notes (excluding notes not in circulation) and to support payments
systems; £266m of mandatory central bank deposits; and £62m excluded from
LCR to cover operating expenses.
Financial assets at FVOCI of £5,064m, as per note 3.7, include: £1,535m of
encumbered UK government treasury bills and gilts, £317m of which is
encumbered to support Operational Continuity in Resolution.
The NSFR was implemented by the PRA on 1 January 2022 based on Basel
standards. The ratio as at 30 September 2022 is 136% (2021: 134%) comfortably
in excess of the binding minimum requirement of 100%.
Risk Management
Financial risk
Encumbered assets
The Group manages the level of asset encumbrance to ensure appropriate volumes
of assets are maintained to support future planned and potential stressed
funding requirements. Encumbrance limits are set in the Group RAS and
calibrated to ensure that after a stress scenario is applied, the balance
sheet can recover over an acceptable period of time. Reasons for asset
encumbrance include, among others, supporting the Group's secured funding
programmes to provide stable term funding to the Group, the posting of assets
in respect of drawings under the TFSME scheme, use of assets as collateral
for payments systems in order to support customer transactional activity and
providing security for the Group's issuance of Scottish bank notes.
Encumbered assets by asset category
30 September 2022 Assets encumbered with Positioned Other assets Total
non-central bank counterparties at the £m
central bank
(including
encumbered)
£m
Assets not positioned at the central bank Total
£m
Covered Securitisations Other Total Readily Other assets Cannot be
Bonds £m £m £m available for capable of being encumbered
£m encumbrance encumbered £m
£m £m
Loans and advances to customers 4,268 4,620 - 8,888 14,879 28,647 17,054 2,353 62,933 71,821
Cash and balances with central banks - - - - 2,879 9,342 - - 12,221 12,221
Due from other banks 67 305 269 641 - - 15 - 15 656
Derivative financial instruments - - - - - - - 342 342 342
Financial instruments at FVOCI - - 1,535 1,535 - 3,529 - - 3,529 5,064
Other assets - - 40 40 - - 218 1,545 1,763 1,803
Total assets 4,335 4,925 1,844 11,104 17,758 41,518 17,287 4,240 80,803 91,907
30 September 2021 Assets encumbered with Positioned Other assets Total
non-central bank counterparties at the £m
central bank
(including
encumbered)
£m
Assets not positioned at the central bank Total
£m
Covered Securitisations Other Total Readily Other assets Cannot be
Bonds £m £m £m available for capable of being encumbered
£m encumbrance encumbered £m
£m £m
Loans and advances to customers 2,618 4,970 - 7,588 14,108 30,175 17,419 2,719 64,421 72,009
Cash and balances with central banks - - - - 2,827 6,884 - - 9,711 9,711
Due from other banks 352 310 76 738 - - 62 - 62 800
Derivative financial instruments - - - - - - - 140 140 140
Financial instruments at FVOCI - - 586 586 - 3,766 - - 3,766 4,352
Other assets - - 296 296 - - 270 1,522 1,792 2,088
Total assets 2,970 5,280 958 9,208 16,935 40,825 17,751 4,381 79,892 89,100
The Group's total non-central bank asset encumbrance increased by £1,896m to
£11,104m as at 30 September 2022. This was primarily due to an increase in
encumbered mortgages, supporting Covered Bond funding.
Risk Management
Financial risk
Assets and liabilities by maturity
The following tables represent a breakdown of the Group's balance sheet,
according to the contractual maturity of the assets and liabilities. Many of
the longer-term monetary assets are variable rate products, with behavioural
maturities shorter than the contractual terms. The majority of customer
deposits are repayable on demand or at short notice on a contractual basis,
with behavioural maturities typically longer than their contractual maturity.
Accordingly, this information is not relied upon by the Group in its
management of interest rate risk. The Group has disclosed certain term
facilities within loans and advances to customers with a revolving element at
the maturity of the facility as this best reflects their contractual maturity.
30 September 2022 Call 3 months 3 to 12 1 to 5 Over 5 No specified Total
£m or less months years years maturity((1)) £m
£m £m £m £m £m
Assets
Financial assets at amortised cost
Loans and advances to customers 764 2,378 1,019 7,241 55,053 5,296 71,751
Cash and balances with central banks 11,015 - - - - 1,206 12,221
Due from other banks 575 81 - - - - 656
Financial assets at FVTPL
Loans and advances to customers - 2 1 21 46 - 70
Derivative financial instruments 2 46 71 190 33 - 342
Other financial assets - - - - - 8 8
Financial assets at FVOCI - 620 602 1,917 1,925 - 5,064
Other assets - 7 152 1 1 1,634 1,795
Total assets 12,356 3,134 1,845 9,370 57,058 8,144 91,907
Liabilities
Financial liabilities at amortised cost
Customer deposits 48,750 3,786 10,209 2,689 - - 65,434
Debt securities in issue - 485 1,047 6,669 308 - 8,509
Due to other banks 67 285 250 7,900 - - 8,502
Financial liabilities at FVTPL
Derivative financial instruments 3 9 29 253 33 - 327
Other liabilities 1,822 135 134 54 59 591 2,795
Total liabilities 50,642 4,700 11,669 17,565 400 591 85,567
Off-balance sheet items
Financial guarantees - 33 23 12 44 - 112
Other credit commitments 19,247 - - - - - 19,247
Total off-balance sheet items 19,247 33 23 12 44 - 19,359
(1) The no specified maturity balance within loans and advances to
customers relates to credit cards.
Risk Management
Financial risk
30 September 2021 Call 3 months 3 to 12 1 to 5 Over 5 No specified Total
£m or less months years years maturity((1)) £m
£m £m £m £m £m
Assets
Financial assets at amortised cost
Loans and advances to customers 766 1,966 1,051 6,654 56,812 4,627 71,876
Cash and balances with central banks 8,337 - - - - 1,374 9,711
Due from other banks 800 - - - - - 800
Financial assets at FVTPL
Loans and advances to customers - 3 12 44 74 - 133
Derivative financial instruments 1 8 21 102 8 - 140
Other financial assets - - - - - 20 20
Financial assets at FVOCI - 35 448 2,176 1,693 - 4,352
Other assets - 14 192 2 1 1,859 2,068
Total assets 9,904 2,026 1,724 8,978 58,588 7,880 89,100
Liabilities
Financial liabilities at amortised cost
Customer deposits 49,477 4,079 9,327 4,088 - - 66,971
Debt securities in issue - 145 1,141 6,392 - - 7,678
Due to other banks 18 2 1,248 4,650 - - 5,918
Financial liabilities at FVTPL
Derivative financial instruments 1 5 38 94 71 - 209
Other liabilities 2,104 52 87 65 70 473 2,851
Total liabilities 51,600 4,283 11,841 15,289 141 473 83,627
Off-balance sheet items
Financial guarantees - 20 21 15 45 - 101
Other credit commitments 17,020 - - - - - 17,020
Total off-balance sheet items 17,020 20 21 15 45 - 17,121
(1) The no specified maturity balance within loans and advances to
customers relates to credit cards.
Risk Management
Financial risk
Cash flows payable under financial liabilities by contractual maturity
30 September 2022 Call 3 months 3 to 12 1 to 5 Over 5 No specified Total
£m or less months years years maturity £m
£m £m £m £m £m
Liabilities
Financial liabilities at amortised cost
Customer deposits 48,750 3,801 10,291 2,732 - - 65,574
Debt securities in issue - 521 1,294 7,863 315 - 9,993
Due to other banks 67 289 492 8,793 - - 9,641
Financial liabilities at FVTPL
Trading derivative financial instruments - 12 40 63 14 - 129
Hedging derivative liabilities
Contractual amounts payable - 21 557 1,720 - - 2,298
Contractual amounts receivable - (6) (459) (1,477) - - (1,942)
Other liabilities 1,822 135 134 54 59 591 2,795
Total liabilities 50,639 4,773 12,349 19,748 388 591 88,488
30 September 2021 Call 3 months 3 to 12 1 to 5 Over 5 No specified Total
£m or less months years years maturity £m
£m £m £m £m £m
Liabilities
Financial liabilities at amortised cost
Customer deposits 49,477 4,104 9,403 4,127 - - 67,111
Debt securities in issue - 148 1,283 6,886 - - 8,317
Due to other banks 18 2 1,258 4,756 - - 6,034
Financial liabilities at FVTPL
Trading derivative financial instruments - 16 38 31 20 - 105
Hedging derivative liabilities
Contractual amounts payable - 5 244 1,750 25 - 2,024
Contractual amounts receivable - (9) (199) (1,614) - - (1,822)
All other liabilities 2,104 52 87 65 70 473 2,851
Total liabilities 51,599 4,318 12,114 16,001 115 473 84,620
The balances in the cash flow table above do not agree directly to the
balances in the balance sheet or the assets and liabilities by maturity table
presented above, as the table incorporates all cash flows, on an
undiscounted basis, related to both principal and future coupon payments.
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 1 to 5 Over 5 Total Total
or less months years years 2022 2021
£m £m £m £m £m £m
Covered bonds 4 13 3,450 - 3,467 1,852
Securitisation 462 586 524 308 1,880 2,389
Medium-term notes 6 447 1,796 - 2,249 2,422
Subordinated debt 13 1 899 - 913 1,015
Total debt securities in issue 485 1,047 6,669 308 8,509 7,678
Of which issued by Virgin Money UK PLC 19 448 2,695 - 3,162 3,437
Risk Management
Financial risk
External credit ratings
The Group's long-term credit ratings are summarised below:
Material risk for the Group Outlook as at As at
30 Sept 2022((1)) 30 Sept 2022 30 Sept 2021
Virgin Money UK PLC
Moody's Stable Baa1 Baa2
Fitch Stable BBB+ BBB+
Standard & Poor's Stable BBB- BBB-
Clydesdale Bank PLC
Moody's((2)) Stable A3 Baa1
Fitch Stable A- A-
Standard & Poor's Stable 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.
In March 2022, Standard & Poor's affirmed Virgin Money UK PLC's and
Clydesdale Bank PLC's ratings with stable outlook, reflecting their view that
the Group will maintain a sound capital position, deliver statutory profit for
full-year 2022 and maintain strong asset quality metrics. This rating
reflects the agency's view of the UK economy at the time, coupled with the
Group's improving asset quality outlook, conservative risk appetite and
robust provisioning.
In June 2022, Moody's upgraded the long-term ratings of Virgin Money UK PLC
and Clydesdale Bank PLC by 1-notch, reflecting the closure of payment
protection insurance (PPI), finalisation of integration, stable asset quality
during the pandemic and strong allowance against loan losses, sound funding
& liquidity position and new long-term CET1 target of 13-13.5%. At the
same time Moody's reaffirmed the 'Stable' outlook on all of Virgin Money UK
PLC's and Clydesdale Bank PLC's ratings.
In July 2022, Fitch affirmed the ratings of Virgin Money UK PLC and Clydesdale
Bank PLC with 'Stable' outlook.
As at 20 November 2022, there have been no other changes to the Group's
long-term credit ratings or outlooks since the report date.
Market risk
Market risk is the risk of loss associated with adverse changes in the value
of assets and liabilities held by the Group as a result of movements in market
factors such as foreign exchange risk, interest rates (duration risk),
customer behaviour (optionality risk), and the movement in rate spreads across
types of assets or liabilities (basis risk and credit spread risk). The
Group's balance sheet is predominantly UK based and is denominated in GBP,
therefore foreign exchange risk is not a material risk for the Group.
Exposures
The Group's principal exposure comes from structural interest rate risk. It
comprises the sensitivity of the Group's current and future NII and economic
value to movements in market interest rates. The major contributors to
interest rate risk are:
· the mismatch, or duration, between repricing dates of interest-bearing
assets and liabilities;
· basis risk or assets and liabilities repricing to different reference
rates, for example, customer asset and liability products repricing against
BoE base rate and Sterling Overnight Index Average (SONIA); and
· customer optionality, for example, the right to repay borrowing in
advance of contractual maturity dates.
The Group provides foreign exchange products and derivative products to enable
customers to manage risks within their businesses. As a result of these
activities, the Group may be exposed to forms of market risk that would arise
from movements in the price on these products. These risks are not a material
component of the Group's risk profile. Controls include the hedging of these
products as and when they arise.
Risk Management
Financial risk
Measurement
IRRBB is measured, monitored, and managed from both an internal management
and regulatory perspective. The RMF incorporates both market valuation and
earnings-based approaches. In accordance with the Group IRRBB policy standard,
risk measurement techniques include: basis point sensitivity, NII sensitivity,
value at risk (VaR), economic value of equity, interest rate risk stress
testing, and scenario analysis.
The key features of the internal interest rate risk management model are:
· basis point sensitivity analysis is performed daily and compares the
potential impact of a one basis point (0.01%) change on the present value of
all future cash flows;
· NII sensitivity assesses changes to earnings over a 12-month time
horizon as a result of interest rate movements and changes to customer
behaviour;
· VaR is measured on a statistical basis using a 99% confidence level
based on daily rate movements over a ten-year history set with a one-year
holding period;
· economic value of equity is measured in line with PRA Rulebook with all
six interest rate shock scenarios assessed on a quarterly basis, including
customer optionality stresses. Reporting is performed including and excluding
equity;
· static balance sheet (i.e. any new business is assumed to be matched,
hedged or subject to immediate repricing);
· investment term for capital is modelled with a benchmark term agreed by
ALCO;
· investment term for core non-interest-bearing assets and liabilities is
modelled on a behavioural basis with a benchmark term agreed by ALCO;
· assumptions covering the behavioural life of products and customer
behaviour for optionality are reviewed and approved by ALCO; and
· credit spread risk in the banking book (CSRBB) is assessed through VaR
applied to the Group's liquid asset buffer portfolio. CSRBB is measured at a
99% confidence level based on daily spread movements over a ten-year history
set with a three-month holding period.
Foreign exchange risk is assessed based on the absolute exposure to each
currency.
Mitigation
Market risks are overseen by ALCO with delegation for day-to-day management
given to Treasury. Treasury uses a number of techniques and products to manage
market risks including interest rate swaps, cash flow netting and foreign
exchange.
The Group uses derivative financial instruments to manage interest rate and
foreign currency risk within approved limits. The Group elects to apply hedge
accounting for the majority of its risk management activity that uses
derivatives. Certain derivatives are designated as either fair value hedge or
cash flow hedge:
Fair value hedges - the Group hedges part of its existing interest rate risk,
resulting from potential movements in the fair value of fixed rate assets and
liabilities. The fair value of these swaps is disclosed within note 3.6 to the
Group's consolidated financial statements. There were no transactions for
which fair value hedge accounting had to be discontinued in the year.
Cash flow hedges - the Group hedges a portion of the variability in future
cash flows attributable to interest rate risk. The interest risk arises from
variable interest rate assets and liabilities which are hedged using interest
rate swaps. There were no transactions for which cash flow hedge accounting
had to be discontinued in the year as a result of the highly probable cash
flows no longer being expected to occur. The fair value of derivatives is
disclosed within note 3.6 to the Group's consolidated financial statements.
Monitoring
Model parameters and assumptions are reviewed and updated on at least an
annual basis. Material changes require the approval of ALCO. Oversight of
market risk is conducted by the Group's Financial Risk team which is
independent of the Treasury function. The Board and Executive Risk Committee,
through ALCO's oversight, monitor risk to ensure it remains within approved
policy limits and Board requirements.
Value at Risk Duration risk((1)) Credit spread
2022 £m 2021 £m 2022 £m 2021 £m
As at 30 September 17 2 41 45
Average value during the year 19 2 48 48
Minimum value during the year 14 1 41 45
Maximum value during the year 27 3 52 52
(1) The history set for duration risk VaR was increased from two years to
ten years and the holding period increased from one day to one year from 1
October 2021 under internal methodology. This results in the significant
increase in the reported risk positions year on year with the change in
parameters resulting in larger rate shocks applied in the VaR analysis.
Risk Management
Financial risk
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 Sept 2022 30 Sept 2021
£m £m
+ 25 basis point parallel shift 18 30
+100 basis point parallel shift 66 100
- 25 basis point parallel shift 5 (23)
Sensitivities disclosed reflect the expected mechanical response to a movement
in rates and represent a prudent outcome. The sensitivities are indicative
only and should not be viewed as a forecast.
The key assumptions and limitations are outlined below:
the sensitivities are calculated based on a static balance sheet and it is
assumed there is no change to margins on reinvestment of maturing fixed rate
products;
there are no changes to basis spreads with the rate change passed on in full
to all interest rate bases;
administered rate products receive a full rate pass on in the rate fall
scenario, subject to internal product floor assumptions. In the rate rise
scenario administered products receive a rate pass on in line with
internal scenario specific pass on assumptions;
additional commercial pricing responses and management actions are not
included; and
while in practice hedging strategy would be reviewed in light of changing
market conditions, the sensitivities assume no changes over the 12-month
period.
Market risk linkage to the balance sheet
The following table shows the Group's principal market risks, linked to the
balance sheet assets and liabilities.
2022 2021 Interest rate Optionality Basis Credit Foreign
£m £m duration spread exchange
Assets
Financial assets at amortised cost
Loans and advances to customers 71,751 71,876 • • • •
Cash and balances with central banks 12,221 9,711 • •
Due from other banks 656 800 • • •
Financial assets at FVTPL
Loans and advances to customers 70 133 • • • •
Derivative financial instruments 342 140 • • •
Other financial assets 8 20 • •
Financial instruments at FVOCI 5,064 4,352 • • • •
Other assets 1,795 2,068 • •
Total assets 91,907 89,100
Liabilities
Financial liabilities at amortised cost
Customer deposits 65,434 66,971 • • • •
Debt securities in issue 8,509 7,678 • • •
Due to other banks 8,502 5,918 • • •
Financial liabilities at FVTPL
Derivative financial instruments 327 209 • • •
Other liabilities 2,795 2,851 • •
Total liabilities 85,567 83,627
Risk Management
Financial risk
Repricing periods of assets and liabilities by asset/liability category
The following table shows the repricing periods of the Group's assets and
liabilities as assessed by the Group. This repricing takes account of
behavioural assumptions where material and the Group's policy to hedge capital
in accordance with a benchmark term agreed by ALCO.
30 September 2022 Overnight 3 months 3 to 12 1 to 5 Over 5 Non-interest Total
£m or less months years years bearing £m
£m £m £m £m £m
Assets
Financial assets at amortised cost
Loans and advances to customers 7,293 8,796 13,234 41,514 1,699 (785) 71,751
Cash and balances with central banks 10,765 12 37 196 - 1,211 12,221
Due from other banks 656 - - - - - 656
Financial assets at FVTPL
Loans and advances to customers - 30 4 16 20 - 70
Derivative financial assets - - - - - 342 342
Financial assets at FVOCI 1,265 525 320 1,159 1,733 62 5,064
Other assets 40 38 113 604 - 1,008 1,803
Total assets 20,019 9,401 13,708 43,489 3,452 1,838 91,907
Liabilities
Financial liabilities at amortised cost
Customer deposits 7,026 18,725 13,449 26,077 - 157 65,434
Debt securities in issue 3,606 191 432 4,686 - (406) 8,509
Due to other banks 8,438 12 - - - 52 8,502
Financial liabilities at FVTPL
Derivative financial instruments - - - - - 327 327
Other liabilities 1,717 - - - - 1,078 2,795
Equity - 264 573 3,306 350 1,847 6,340
Total liabilities and equity 20,787 19,192 14,454 34,069 350 3,055 91,907
Notional value of derivatives managing interest rate sensitivity 16,448 (359) (239) (12,146) (3,704) - -
Total interest rate gap 15,680 (10,150) (985) (2,726) (602) (1,217) -
Cumulative interest rate gap 15,680 5,530 4,545 1,819 1,217 - -
Risk Management
Financial risk
30 September 2021 Overnight 3 months 3 to 12 1 to 5 Over 5 Non-interest Total
£m or less months years years bearing £m
£m £m £m £m £m
Assets
Financial assets at amortised cost
Loans and advances to customers 3,978 12,399 14,199 39,732 1,568 - 71,876
Cash and balances with central banks 8,182 12 37 196 - 1,284 9,711
Due from other banks 538 262 - - - - 800
Financial assets at FVTPL
Loans and advances to customers - 83 8 20 22 - 133
Derivative financial assets - - - - - 140 140
Financial assets at FVOCI 1,147 537 228 1,172 1,268 - 4,352
Other assets - 38 113 604 - 1,333 2,088
Total assets 13,845 13,331 14,585 41,724 2,858 2,757 89,100
Liabilities
Financial liabilities at amortised cost
Customer deposits 4,619 27,599 11,877 22,874 2 - 66,971
Debt securities in issue 2,329 272 198 4,879 - - 7,678
Due to other banks 5,918 - - - - - 5,918
Financial liabilities at FVTPL
Derivative financial instruments - - - - - 209 209
Other liabilities - - - - - 2,851 2,851
Equity 723 421 573 3,756 - - 5,473
Total liabilities and equity 13,589 28,292 12,648 31,509 2 3,060 89,100
Notional value of derivatives managing interest rate sensitivity 21,786 (1,891) (7,089) (10,415) (2,391) - -
Total interest rate gap 22,042 (16,852) (5,152) (200) 465 (303) -
Cumulative interest rate gap 22,042 5,190 38 (162) 303 - -
LIBOR replacement
The Group's LIBOR cessation programme successfully met the 2021 GBP regulatory
and industry milestones. Treasury proactively transitioned all external
transactions across issuance, hedging and liquid assets and over 90% of
Business Lending customer transactions also switched from LIBOR
to alternative reference rates (ARRs), with numbers continuing to reduce.
The Group engaged with the BoE's Working Group on Sterling Risk Free Reference
Rates and other industry forums in transitioning to SONIA/ARRs and ensured
the risks of being unable to offer products with suitable reference rates
are mitigated and that full consideration is given to the other risks,
including legal, conduct, financial and operational risks, that may arise.
As at 30 September 2022, all market-facing derivative flows are executed
against SONIA. The focus for 2023 is ongoing management of the small
business lending tough legacy and USD cohort. Processes have been implemented
to ensure continued effort to move customers off synthetic LIBOR to ARRs
throughout 2022.
Financial instruments that have yet to transition to alternative benchmark
rates are summarised below:
Risk Management
Financial risk
Amounts yet to be transitioned
30 September 2022 Non derivative Non derivative Derivatives -
financial assets - financial liabilities nominal
carrying value((1)(2)) - carrying value amount((1)(3))
£m £m £m
GBP LIBOR 94 - 67
Other((4)) 164 - -
Cross currency swaps
GBP LIBOR to USD LIBOR -
Total 258 - 67
30 September 2021 Non derivative Non derivative Derivatives -
financial assets - financial liabilities nominal
carrying value((1)(2)) - carrying value amount((1)(3))
£m £m £m
GBP LIBOR 2,037 - 4,754
Other((4)) 157 - -
Cross currency swaps
GBP LIBOR to USD LIBOR 95
Total 2,194 - 4,849
(1) Excludes exposures that are expected to expire or mature before the
Interbank Offered Rate (IBOR) ceases.
(2) Gross carrying amount excluding allowances for ECLs.
(3) The IBOR exposures for derivative nominal amounts include undrawn loan
commitments shown as GBP LIBOR. This is materially the case although some
facilities allow drawdowns in a number of different currencies.
(4) Comprises financial instruments referencing other IBOR rates yet to
transition to alternative benchmark rates (Euro, USD, AUD).
Pension risk
The Group operates a defined benefit pension scheme, the Yorkshire and
Clydesdale Bank Pension Scheme (the Scheme). The Bank is the Scheme's
principal employer and there are no other participating employers. The
Scheme was closed to future accrual on 1 August 2017 for most members. A
small number of members remain on a defined benefit accruals basis subject
to certain conditions.
Defined benefit pension schemes provide a promise to pay members a
pre-determined level of income at retirement which is independent of the
contributions, investments and returns (the scheme assets) used to fund
these benefit promises (the scheme liabilities). The operation of a defined
benefit pension scheme gives rise to several risks, for example, movements in
equity valuations, changes in bond yields, life expectancy of scheme members,
movements in interest and inflation rates and changes in legislation. The
Group also supports a defined contribution scheme, however the nature of this
type of scheme places the investment and liability risk on the member rather
than the Group.
Pension risk is the risk that, at any point in time, the value of the scheme
assets is not enough to meet the current or expected future value of the
scheme liabilities. This risk will continue to exist until the scheme is
formally wound up, either if all the liabilities are transferred to a third
party (for example an insurer) or once all individual member benefits have
been honoured.
Risk appetite
The Group's pension risk appetite is a component of the Group-wide RAS
framework for the management of balance sheet risks and is considered in the
context of potential capital impacts as a result of volatility in the
Scheme's valuations.
Assets
The Trustee governs investments according to a Statement of Investment
Principles. This is reviewed and agreed by the Trustee Board on a regular
basis, with the Bank consulted on any proposed changes. The Statement of
Investment Principles is drafted in accordance with the requirements of
Section 35 of the Pensions Act 1995 (as amended by the Pensions Act 2004
and regulations made under it). This sets out the Scheme objectives and the
journey plan to meet these objectives.
This results in an appropriate mix of return-seeking assets as well as
liability matching assets to better match future pension obligations. The
split of Scheme assets is shown within note 3.9 of the Group's consolidated
financial statements. The fair value of the assets was £3.2bn as at 30
September 2022 (2021: £4.6bn).
Risk Management
Financial risk
Liabilities
The retirement benefit obligations are a series of future cash outflows with
relatively long duration and are responsive to movements on many of the inputs
including interest rates. On an IAS 19 basis these cash flows are primarily
sensitive to changes in the expected long-term price inflation rates (Retail
Price Index (RPI)/Consumer Price Index (CPI)), the life expectancy of members
and the discount rate (linked to yields on AA corporate bonds):
· an increase in long-term expected inflation corresponds to an increase
in liabilities;
· an increase in life expectancy corresponds to an increase in
liabilities; and
· a decrease in the discount rate corresponds to an increase in
liabilities.
The actual outcome on Scheme valuations will also be affected by hedging and
investment decisions made by the Trustees and inflationary caps within the
terms of the Scheme.
Exposure
The Group's defined benefit pension scheme affects its regulatory capital in
two ways:
· CET1 capital - while an IAS 19 surplus will increase the Group's
balance sheet assets and reserves, any such amount is not recognised for the
purposes of determining CET1 capital. However, an IAS 19 deficit, which
increases balance sheet liabilities and reduces reserves, is recognised for
regulatory capital purposes, and so will decrease CET1 capital.
· Pillar 2A capital - the Group is also required to determine the level
of capital required to be held under Pillar 2A for pension obligation risk as
part of the annual ICAAP process. This requirement forms part of the Group's
regulatory Total Capital Requirement.
Within the Scheme itself, risk arises because the assets (e.g. equities,
bonds/gilts, property) are exposed to market valuation movements, within and
between asset classes, while the liabilities are more sensitive to interest
rate and inflation rate changes, and changes in other actuarial assumptions
which may not be borne out in experience, for example life expectancy.
Mitigation
The Trustee and Group have a common view of the Scheme's long-term strategic
aims, encapsulated by an agreed de-risking journey plan. Within the journey
plan, several core principles have been established, including a long-term
self-sufficiency funding target (i.e. the point in time when the Scheme
would no longer need to call on the Bank for additional funding) with
assumptions as to how this target is expected to be managed, monitored and
met. Potential actions to address deviations in the actual funding level
relative to the journey plan have also been considered.
Several other activities have been implemented by the Group and Trustee with
the specific aim of reducing risk in the Scheme, including increasing the
levels of inflation, interest rate hedging and several member benefit
reforms, culminating in closure to future accrual for most members.
The Group has signed a contingent security arrangement to provide the Trustee
with protection to partially mitigate the risk of adverse changes impacting
the Scheme's assets or liabilities. This arrangement also provided security
for the Group's obligations under a Recovery Plan, however all payments
subject to that Plan have now been made. Further information is shown within
note 3.9 to the Group's consolidated financial statements.
The Bank and the Trustee continue to explore other cost-effective options to
further reduce risk within the Scheme, for example, approaches for hedging
against longevity risk.
Monitoring
Information on the Scheme's current valuations, asset holdings and discount
and inflation rate assumptions are presented to ALCO. The impact of the Scheme
on the Group is also subject to risk oversight from the Risk function. In
addition, semi-annual pension risk updates are provided to the Board Risk
Committee.
Performance of the Scheme's asset portfolio against the various risk metrics
is independently monitored by the Scheme investment adviser, Willis Towers
Watson, and reported to the Investment Sub Committee, which includes Group
representation, and Trustee Board on a quarterly basis.
The Scheme's de-risking plan has delivered resilience to stress-testing and
continued improvements in Group and Trustee valuations.
Liability Driven Investment (LDI) portfolios are commonly used by pension
schemes to protect against adverse movements in interest rates and inflation.
In the case of interest rates, this protects against falls in rates which
increase the value of a scheme's liabilities. The general trend since LDI
strategies were introduced has been long-term interest rates falling, and LDI
has helped schemes to maintain more stable and improved funding positions.
However, when interest rates rise instead of fall, LDI derivatives require
collateral to be posted in order to maintain the same level of interest rate
and inflation protection. Therefore sufficient liquidity is needed to meet
such a collateral call.
Within the Scheme's matching assets there is an LDI portfolio, which consists
of both physical assets and derivatives. The Scheme uses a bespoke, segregated
strategy which reflects, as far as possible, the specifics of the Scheme's
liabilities in terms of exposure to movements in interest rates and inflation.
As at 30 September 2022, the LDI portfolio was valued at £968m.
Over the year to 30 September 2022, gilt yields have risen significantly. The
Scheme therefore posted additional collateral, resulting in there being net
£335m collateral posted by the Scheme as at 30 September 2022 (compared to
net £65m collateral posted by the counterparties as at 30 September 2021). As
at 30 September 2022, the Scheme is still estimated to have sufficient
collateral headroom available to meet further rises in interest rates of more
than 3%. The Scheme also has over £1bn of further assets which could be
liquidated within a week if needed to meet collateral calls.
Although increased collateral postings have been required, the Scheme's
funding position for IAS 19 purposes has improved over the year to 30
September 2022. The IAS 19 position continues to drive the Group's Pillar 2A
and regulatory stress testing processes.
The next Triennial Valuation is due to complete by end FY23 (effective date 30
September 2022). The Trustee funding position at 30 September 2022 is a
surplus, indicating no further contributions will be required.
Directors' responsibility statement in respect of the Annual Report &
Accounts
The responsibility statement below has been prepared in connection with the
Company's full Annual Report and Accounts for the year ending 30 September
2022. Certain parts thereof are not included within this announcement.
The Directors confirm that to the best of their knowledge:
− the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the Company and
the Group and the undertakings included in the consolidation taken as a whole;
and
− the Strategic report includes a fair review of the development
and performance of the business and the position of the Company and the Group,
together with a description of the principal risks and uncertainties that they
face.
The Directors consider the Annual Report and Accounts, taken as a whole, is
fair, balanced and understandable and provides the information necessary for
shareholders to assess the Company's and Group's position and performance,
business model and strategy.
David Duffy
Chief Executive Officer
20 November 2022
Group financial statements
Consolidated income statement
For the year ended 30 September Note 2022 2021
£m £m
Interest income 2,215 1,906
Other similar interest 2 4
Interest expense and similar charges (641) (553)
Net interest income 2.2 1,576 1,357
Gains less losses on financial instruments at fair value (17) (5)
Other operating income 157 137
Non-interest income 2.3 140 132
Total operating income 1,716 1,489
Operating and administrative expenses before impairment losses 2.4 (1,069) (1,203)
Operating profit before impairment losses 647 286
Impairment (losses)/credit on credit exposures 3.2 (52) 131
Profit on ordinary activities before tax 595 417
Tax (expense)/credit 2.5 (58) 57
Profit for the year 537 474
Attributable to:
Ordinary shareholders 467 395
Other equity holders 70 79
Profit for the year 537 474
Basic earnings per share (pence) 2.6 32.4 27.3
Diluted earnings per share (pence) 2.6 32.3 27.3
All material items dealt with in arriving at the profit before tax for the
above years relate to continuing activities.
The notes on pages 75 to 123 form an integral part of these financial
statements.
Group financial statements
Consolidated statement of comprehensive income
For the year ended 30 September Note 2022 2021
£m £m
Profit for the year 537 474
Items that may be reclassified to the income statement
Change in cash flow hedge reserve
Gains during the year 962 99
Transfers to the income statement (13) 24
Taxation thereon - deferred tax charge (260) (33)
4.1.5 689 90
Change in FVOCI reserve
Gains during the year 15 33
Transfers to the income statement (4) -
Taxation thereon - deferred tax charge (1) (11)
10 22
Total items that may be reclassified to the income statement 699 112
Items that will not be reclassified to the income statement
Change in defined benefit pension plan 3.9 122 54
Taxation thereon - deferred tax charge (50) (46)
Taxation thereon - current tax credit 6 21
Total items that will not be reclassified to the income statement 78 29
Other comprehensive income, net of tax 777 141
Total comprehensive income for the year, net of tax 1,314 615
Attributable to:
Ordinary shareholders 1,244 536
Other equity holders 70 79
Total comprehensive income for the year, net of tax 1,314 615
The notes on pages 75 to 123 form an integral part of these financial
statements.
Group financial statements
Consolidated balance sheet
As at 30 September Note 2022 2021
£m £m
Assets
Financial assets at amortised cost
Loans and advances to customers 3.1 71,751 71,876
Cash and balances with central banks 3.4 12,221 9,711
Due from other banks 656 800
Financial assets at FVTPL
Loans and advances to customers 3.5 70 133
Derivative financial instruments 3.6 342 140
Other financial assets 3.5 8 20
Financial assets at FVOCI 3.7 5,064 4,352
Property, plant and equipment 211 250
Intangible assets and goodwill 3.8 267 373
Current tax assets - 13
Deferred tax assets 2.5 146 377
Defined benefit pension assets 3.9 1,000 847
Other assets 171 208
Total assets 91,907 89,100
Liabilities
Financial liabilities at amortised cost
Customer deposits 3.10 65,434 66,971
Debt securities in issue 3.11 8,509 7,678
Due to other banks 3.12 8,502 5,918
Financial liabilities at FVTPL
Derivative financial instruments 3.6 327 209
Current tax liabilities 1 -
Deferred tax liabilities 2.5 350 296
Provisions for liabilities and charges 3.13 50 104
Other liabilities 3.14 2,394 2,451
Total liabilities 85,567 83,627
Equity
Share capital and share premium 4.1 148 149
Other equity instruments 4.1 666 915
Capital reorganisation reserve 4.1 (839) (839)
Merger reserve 4.1 2,128 2,128
Other reserves 4.1 766 71
Retained earnings 3,471 3,049
Total equity 6,340 5,473
Total liabilities and equity 91,907 89,100
The notes on pages 75 to 123 form an integral part of these financial
statements.
These financial statements were approved by the Board of Directors on 20
November 2022 and were signed on its behalf by:
David
Duffy
Clifford Abrahams
Chief Executive Officer Chief Financial Officer
Virgin Money UK PLC, Registered number: 09595911
Group financial statements
Consolidated statement of changes in equity
Note Share Capital Merger Other Other reserves Retained Total
capital reorg' reserve equity earnings equity
and reserve £m instruments £m £m
share £m 4.1.4 £m
premium 4.1.3 4.1.2
£m
4.1.1
Capital Deferred Equity FVOCI Cash
redemption shares based reserve flow
reserve reserve comp' £m hedge
£m £m reserve 4.1.5 reserve
4.1.5 4.1.5 £m £m
4.1.5 4.1.5
As at 1 October 2020 147 (839) 2,128 915 - 16 10 11 (80) 2,624 4,932
Profit for the year - - - - - - - - - 474 474
Other comprehensive income, net of tax - - - - - - - 22 90 29 141
Total comprehensive income for the year - - - - - - - 22 90 503 615
AT1 distributions paid - - - - - - - - - (79) (79)
Ordinary shares issued 2 - - - - - - - - - 2
Transfer from equity based compensation reserve - - - - - - (1) - - 1 -
Equity based compensation expensed - - - - - - 5 - - - 5
Settlement of Virgin Money Holdings (UK) Limited share awards - - - - - (2) - - - - (2)
As at 30 September 2021 149 (839) 2,128 915 - 14 14 33 10 3,049 5,473
Profit for the year - - - - - - - - - 537 537
Other comprehensive income, net of tax - - - - - - - 10 689 78 777
Total comprehensive income for the year - - - - - - - 10 689 615 1,314
AT1 distributions paid - - - - - - - - - (70) (70)
Dividends paid to ordinary shareholders - - - - - - - - - (50) (50)
Ordinary shares issued 2 - - - - - - - - - 2
Share buyback (3) - - - 3 - - - - (63) (63)
Transfer from equity based compensation reserve - - - - - - (9) - - 9 -
Equity based compensation expensed - - - - - - 5 - - - 5
Settlement of Virgin Money Holdings (UK) Limited share awards - - - - - (3) - - - 1 (2)
AT1 issuance - - - 346 - - - - - - 346
AT1 redemption - - - (595) - - - - - (20) (615)
As at 30 September 2022 148 (839) 2,128 666 3 11 10 43 699 3,471 6,340
The notes on pages 75 to 123 form an integral part of these financial
statements.
Group financial statements
Consolidated statement of cash flows
For the year ended 30 September Note 2022 2021
£m £m
Operating activities
Profit on ordinary activities before tax 595 417
Adjustments for:
Non-cash or non-operating items included in profit before tax 5.2 (1,326) (1,225)
Changes in operating assets 5.2 1,212 832
Changes in operating liabilities 5.2 (238) (1,026)
Payments for short-term and low value leases (2) (1)
Interest received 2,112 2,088
Interest paid (378) (461)
Tax paid (59) (27)
Net cash provided by operating activities 1,916 597
Cash flows from investing activities
Interest received 47 19
Proceeds from maturity of financial assets at FVOCI 479 1,079
Proceeds from sale of financial assets at FVOCI 194 -
Purchase of financial assets at FVOCI (2,019) (521)
Purchase of shares issued by UTM (4) (12)
Proceeds from sale of property, plant and equipment 1 6
Purchase of property, plant and equipment (13) (26)
Purchase and development of intangible assets 3.8 (53) (80)
Net cash (used in)/provided by investing activities (1,368) 465
Cash flows from financing activities
Interest paid (246) (161)
Repayment of principal portions of lease liabilities 3.16 (26) (28)
Redemption of AT1 securities (614) -
Proceeds from issuance of AT1 securities 347 -
Redemption and principal repayment on RMBS and covered bonds 3.11 (1,264) (1,543)
Redemption and principal repayment on medium-term notes/subordinated debt 3.11 - (30)
Issuance of RMBS and covered bonds 3.11 2,480 -
Issuance of medium-term notes/subordinated debt 3.11 - 732
Amounts drawn down under the TFSME 2,550 3,350
Amounts repaid under the TFS (1,244) (2,864)
Purchase of own shares (53) -
AT1 distributions 4.1.2 (70) (79)
Ordinary dividends paid (50) -
Net cash provided by/(used in) financing activities 1,810 (623)
Net increase in cash and cash equivalents 2,358 439
Cash and cash equivalents at the beginning of the year 10,253 9,814
Cash and cash equivalents at the end of the year 5.2 12,611 10,253
Group financial statements
Consolidated statement of cash flows
Movements in liabilities arising from financing activities
Note Term Restated Lease Restated
funding debt liabilities total
schemes((1)) securities £m £m
£m in issue 3.16
3.12 £m
3.11
At 1 October 2020 5,397 8,758 175 14,330
Cash flows:
Issuances - 732 - 732
Drawdowns 3,350 - - 3,350
Redemptions - (1,573) - (1,573)
Repayment (2,864) - (28) (2,892)
Non-cash flows:
Fair value and other associated adjustments((2)) 12 (183) - (171)
Additions to right-of-use asset in exchange for increased lease liabilities - - 4 4
Remeasurement - - 1 1
Movement in accrued interest 1 7 2 10
Unrealised foreign exchange movements((2)) - (69) - (69)
Unamortised costs - 6 - 6
At 1 October 2021 5,896 7,678 154 13,728
Cash flows:
Issuances - 2,480 - 2,480
Drawdowns 2,550 - - 2,550
Redemptions - (1,264) - (1,264)
Repayment (1,244) - (26) (1,270)
Non-cash flows:
Fair value and other associated adjustments - (400) - (400)
Additions to right-of-use asset in exchange for increased lease liabilities - - 4 4
Remeasurement - - (4) (4)
Movement in accrued interest 28 8 4 40
Unrealised foreign exchange movements - 5 - 5
Unamortised costs - 2 - 2
At 30 September 2022 7,230 8,509 132 15,871
(1) This includes amounts drawn under the TFS and TFSME.
(2) The accumulated amount of the fair value adjustments on the debt
securities in issue has been restated in the comparative year in line with the
current year presentation. The restatement had no impact on the debt
securities in issue balance, however fair value and other adjustments have
increased in the comparative period by £59m from £124m to £183m and
unrealised foreign exchange movements has decreased by £59m from £128m to
£69m.
The notes on pages 75 to 123 form an integral part of these financial
statements.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation
Overview
This section sets out the Group's accounting policies that relate to the
consolidated financial statements as a whole. Where an accounting policy is
specific to one note, the policy is described in the note to which it relates.
This section also highlights newly adopted accounting standards, amendments
and interpretations which are relevant to the Group. Where relevant,
we explain how these changes are expected to impact the financial position
and performance of the Group.
The Group has adopted the UK Finance Code for Financial Reporting Disclosure
and has prepared the 2022 Annual Report and Accounts in compliance with the
Code.
1.1 General information
The Company is a public company limited by shares, incorporated in the United
Kingdom under the Companies Act and registered in England and Wales.
The consolidated financial statements comprise those of the Company and its
controlled entities, together the 'Group'.
1.2 Basis of accounting
On 1 October 2021, the Group transitioned to preparing consolidated financial
statements under UK adopted International Accounting Standards (IAS) which
is a change in accounting framework. This had no impact on the recognition,
measurement or disclosure of financial information presented in the year.
The consolidated financial statements have been prepared in accordance with UK
adopted IASs. The comparative year financial statements were prepared and
presented in accordance with IASs in conformity with the Companies Act 2006
and IFRSs adopted pursuant to regulation (EC) No. 1606/2002 as it applied in
the European Union. This also included the early adoption of 'Amendments to
IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform -
Phase 2', which had been endorsed by the EU and UK in January 2021 and
included in UK adopted IAS.
The financial information has been prepared under the historical cost
convention, as modified by the revaluation of certain financial assets and
liabilities at fair value through profit or loss and other comprehensive
income. Fair value is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
1.3 Presentation of risk, offsetting and maturity disclosures
Certain disclosures required under IFRS 7 'Financial instruments: disclosures'
and IAS 1 'Presentation of financial statements' have been included within the
Risk management section of this results announcement.
1.4 Going concern
The Group's business activities, together with the factors likely to affect
its future development, performance and position, are set out in the Strategic
report contained in the Group's Annual Report & Accounts. In addition, the
full Risk report contained in the Group's Annual Report & Accounts
includes the Group's risk management objectives and the objectives, policies
and processes for managing its capital.
In assessing the Group's going concern position as at 30 September 2022, the
Directors have considered a number of factors, including the current balance
sheet position (which reflected the Group's consideration of the potential
impact of climate-related risks), the Group's strategic and financial plan,
taking account of possible changes in trading performance and funding
retention, and stress testing and scenario analysis. The assessment concluded
that the Group has sufficient capital and liquidity for at least the next 12
months. The Group's capital ratios and its total capital resources are
comfortably in excess of PRA requirements and internal stress testing
indicates the Group can withstand severe economic and competitive stresses.
As a result of the assessment, the Directors have a reasonable expectation
that the Company and the Group have adequate resources to continue in
operational existence for the foreseeable future and that the Group is well
placed to manage its business risks successfully. Accordingly, they continue
to adopt the going concern basis in preparing the consolidated financial
statements.
The Directors' report contained in the Group's Annual Report & Accounts
provides further detail on the Group's going concern and viability assessment.
1.5 Basis of consolidation
Controlled entities are all entities (including structured entities) to which
the Company is exposed, or has rights, to variable returns from its
involvement with the entity and has the ability to affect those returns
through its power over the entity. An assessment of control is performed on
an ongoing basis.
Controlled entities are consolidated from the date on which control is
established by the Group until the date that control ceases. The acquisition
method of accounting is used to account for business combinations other than
those under common control. A non‑controlling interest is recognised by
the Group in respect of any portion of the total assets less total liabilities
of an acquired entity or entities that is not owned by the Group. Balances and
transactions between entities within the Group and any unrealised gains and
losses arising from those transactions are eliminated in full upon
consolidation.
The Group's interests in JV entities are accounted for using the equity method
and then assessed for impairment in the relevant holding companies' financial
statements.
The consolidated financial statements have been prepared using uniform
accounting policies.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation
1.6 Foreign currency
Functional and presentation currency
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates, the 'functional currency'. The consolidated financial
statements are presented in pounds sterling (GBP), which is also the Group's
presentation currency, rounded to the nearest million pounds sterling (£m)
unless otherwise stated.
Transactions and balances
The Group records an asset, liability, expense or revenue arising from a
transaction using the closing exchange rate between the functional and foreign
currency on the transaction date. At each subsequent reporting date, the
Group translates foreign currency monetary items at the closing rate.
Foreign exchange differences arising on translation or settlement of monetary
items are recognised in the income statement during the year in which the
gains or losses arise.
Foreign currency non-monetary items measured at historical cost are translated
at the date of the transaction, with those measured at fair value
translated at the date when the fair value is determined. Foreign exchange
differences are recognised directly in equity for non-monetary items where
any component of associated gains or losses is recognised directly in equity.
Foreign exchange differences arising from non-monetary items, whereby the
associated gains or losses are recognised in the income statement, are also
recognised in the income statement.
1.7 Financial instruments
Recognition and derecognition
Financial instruments are recognised when the Group becomes party to the
contractual provisions of the instrument. Purchases and sales of financial
assets classified within FVTPL or FVOCI are recognised on trade date.
The Group derecognises a financial asset when the contractual cash flows from
the asset expire or it transfers the right to receive contractual cash flows
on the financial asset in a transaction in which substantially all the risks
and rewards of ownership are transferred. Financial liabilities
are derecognised when the Group has discharged its obligation to the
contract, or the contract is cancelled or expires.
Classification and measurement
The Group measures a financial asset or liability on initial recognition at
its fair value, plus or minus transaction costs that are directly attributable
to the acquisition or issue of the financial asset or the financial liability
(with the exception of financial assets or liabilities at FVTPL, where
transaction costs are recognised directly in the income statement as they are
incurred).
Financial assets
Subsequent accounting for a financial asset is determined by the
classification of the asset depending on the underlying business model and
contractual cash flow characteristics. This results in classification within
one of the following categories: i) amortised cost; ii) FVTPL; or iii) FVOCI.
A financial asset is measured at amortised cost when: (1) the asset is held
within a business model whose objective is achieved by collecting contractual
cash flows; and (2) the contractual terms give rise to cash flows on specified
dates which are solely payments of principal and interest on the principal
amount outstanding. The amortised cost classification applies to the Group's
loans and advances to customers (note 3.1), cash and balances from central
banks (note 3.4) and balances due from other banks. Financial assets
classified at amortised cost are subject to ECL requirements as detailed in
note 3.2.
Specific accounting policies for financial assets at FVTPL and FVOCI can be
found in notes 3.5 and 3.7 respectively.
Financial liabilities
All financial liabilities are measured at amortised cost, except for financial
liabilities at FVTPL. Such liabilities include derivative contracts, other
than those which are financial guarantee contracts or designated and effective
hedging instruments.
Repurchase agreements
Securities sold subject to repos are retained in their respective balance
sheet categories. The associated liabilities are included in amounts due to
other banks based upon the counterparties to the transactions. The difference
between the sale and repurchase price of repos is treated as interest and
accrued over the life of the agreements using the effective interest method.
Offsetting
This can only occur, and the net amount be presented on the balance sheet,
when the Group currently has a legally enforceable right to offset the
recognised amounts and intends either to settle on a net basis, or to
realise the asset and settle the liability simultaneously.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation
1.8 Property, plant and equipment
The Group's property, plant and equipment is carried at cost, less accumulated
depreciation and impairment losses. Cost includes expenditure that is directly
attributable to acquisition of the asset. Impairment is assessed whenever
events or changes in circumstances indicate that the carrying amount may not
be recoverable.
All items of property, plant and equipment are depreciated or amortised using
the straight line method, at rates appropriate to their estimated useful life
to the Group. The annual rates of depreciation or amortisation are:
·
Buildings
50 years
· Leases (leasehold improvements) the lower of the expected lease term or
the asset's remaining useful life
· Fixtures and equipment 3-10 years
Residual values and useful lives of assets are reviewed at each reporting
date. Depreciation is recognised within operating expenses in the income
statement. The policy for lessee accounting is provided in note 3.16.
1.9 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 amount of
contingent liabilities. Actual results may differ from those on which
management's estimates are based. Estimates and assumptions are continually
evaluated and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable. The Group
considers the most significant use of accounting estimates and judgements
relate to the following areas:
Area Estimates Judgements Further detail
Impairment provisions on credit exposures Asset lifetimes SICR Credit risk section of Risk management and note 3.2
Economic scenarios Definition of default
PMAs
EIR Product life Standard variable rate Note 2.2
Post promotion attrition and yield Macroeconomic factors
Model risk reserve (MRR)
Deferred tax Period for the recoverability of deferred tax assets Note 2.5
Retirement benefit obligations Discount rate Note 3.9
Inflation assumptions
Mortality assumptions
Critical accounting estimates and judgements related to climate change
In addition, management has also considered and reflected on the potential
impact of climate‑related risks on the Group's financial position and
performance.
This involved undertaking an assessment over the Group's assets (both
financial and non-financial) and evaluating whether the observable effects of
physical and transition risk of climate change would have a material impact on
the Group's financial position and performance in the current year. It is
widely understood and appreciated that the effects of climate change will not
be significant in the short term and that the inherent risks and
uncertainties in quantifying the effect of climate change in the financial
statements are considerable and more likely to impact in the medium to longer
term.
The Group's customer lending is the most significant financial asset exposed
to the potential impact of climate-related risks, primarily the ECL
implications and the ability of the customer to meet their contractual
payments. As a UK-based bank with no significant lending outside of the UK,
the Group considers the potential for material ECLs to emerge as a result of
climate change in the short term to be negligible.
Other non-financial assets that may be impacted include the Group's deferred
tax asset and the pension assets held by the Group's defined benefit pension
scheme. The Group assesses the recoverability of deferred tax assets over a
six-year corporate planning time horizon which incorporates all aspects of the
Group's future performance and expectations. The Trustee of the defined
benefit pension scheme is responsible for all investment decisions, and these
are made in accordance with a Statement of Investment Principles which
incorporates climate change considerations. In addition, by necessity, the
investment decisions made by the Trustees are normally medium to long term in
nature.
Overall, while the effects of climate change represent a source of significant
uncertainty, the Group does not consider there to be a material impact on its
estimates and judgements from physical and transition risks of climate change
in these financial statements.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation
1.10 New accounting standards and interpretations
The Group has adopted the following International Accounting Standards Board
(IASB) pronouncement in the current financial year:
Amendment to IFRS 16 and COVID-19 related rent concessions beyond June 2021
was issued in March 2021 and endorsed for use in the UK in May 2021. The
original amendment (issued in May 2020 and effective for annual reporting
periods beginning on or after 1 June 2020) introduced the optional practical
expedient for lessees from assessing whether a rent concession related to
COVID-19 is a lease modification. The IASB subsequently extended the period of
application of the practical expedient to 30 June 2022, effective for annual
reporting periods beginning on or after 1 April 2021. These pronouncements had
no material impact on the Group's consolidated financial statements as it
does not receive rent concessions.
The Group also acknowledges the decision by the IFRS Interpretations Committee
(IFRIC) in April 2022, which concluded that certain demand deposits with
restrictions should be presented as part of the cash and cash equivalents
balance. The IFRIC agenda decision was considered but there are no impacts
that would require a change in accounting policy for demand deposits.
New accounting standards and interpretations not yet adopted
The IASB has issued a number of other minor amendments to IFRSs that are not
mandatory for the current reporting year and have not been early adopted by
the Group. These amendments are not expected to have a material impact for the
Group.
1.11 Other changes in the year
The following changes took place during the year:
Hedge accounting
The Group has changed the presentation of certain items in the derivative
financial instruments note to the financial statements (note 3.6), with the
relevant sections of the note restated. These are presentational changes only
and have no impact on the Group's primary financial statements or net asset
position.
The restatement was necessary to correct the historic presentation of the
foreign exchange component of the fair value hedge adjustment, with the
following restatements made:
Derivative financial instruments - hedge accounting (note 3.6)
The spot foreign exchange element was previously excluded from the
disclosures. This has been corrected and impacts both the hedging instrument
and the hedged item. The impact of the restatement on the previous year
disclosure is as follows:
Hedging instrument Change in fair value of hedging
instrument in the year used for
ineffectiveness measurement
Original Restated
£m £m
Fair value hedges
Foreign exchange and interest rate risk
Cross currency swaps (12) (86)
Total derivatives designated as fair value hedges 488 414
Hedged item Accumulated hedge Change in fair value of hedged
adjustment on the hedged item items in the year used for
ineffectiveness measurement
Original Restated Original Restated
£m £m £m £m
Fair value hedges
Fixed rate currency issuances (13) 72 17 91
Total (273) (188) (498) (424)
Expected credit losses
During the year, the Group made refinements to the operation of the SICR
criteria within the Business portfolio. Further detail can be found in the
credit risk section within the Risk report, pages 21 and 35. These refinements
do not require any change to the prior period reported position.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.1 Segment information
The Group's operating segments are operating units engaged in providing
different products or services and whose operating results and overall
performance are regularly reviewed by the Group's Chief Operating Decision
Maker, the Executive Leadership Team.
The Group operates under four commercial lines: Mortgages, Unsecured,
Business, and Deposits, which are reported through the Chief Commercial
Officer. At this point in time, the business continues to be reported to the
Group's Chief Operating Decision Maker as a single segment and decisions
made on the performance of the Group on that basis. Segmental information will
therefore continue to be presented on this single segment basis.
Summary income statement
2022 2021
£m £m
Net interest income 1,576 1,357
Non-interest income 140 132
Total operating income 1,716 1,489
Operating and administrative expenses (1,069) (1,203)
Impairment (losses)/credit on credit exposures (52) 131
Segment profit before tax 595 417
Average interest earning assets 86,275 86,947
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.
2.2 Net interest income
Accounting policy
Interest income is recognised in the income statement using the effective
interest method which discounts the estimated future cash payments or
receipts, at the effective interest rate, over the expected life of the
financial instrument to the gross carrying amount of the non-credit impaired
financial asset. Interest expense is recognised in the income statement using
the same effective interest method on the amortised cost of the financial
liability.
When calculating the EIR, cash flows are estimated considering all contractual
terms of the financial instrument (e.g. prepayment, call and similar options)
excluding future credit losses. The calculation includes all amounts paid or
received that are an integral part of the EIR such as transaction costs and
all other premiums or discounts. Where it is not possible to reliably estimate
the cash flows or the expected life of a financial instrument (or group of
financial instruments), the contractual cash flows over the full contractual
term of the financial instrument (or group of financial instruments) are used.
Loan origination and commitment fees are recognised within the EIR
calculation. Fees in relation to the non-utilisation of a commitment are
recognised as revenue upon expiry of the agreed commitment period. Loan
related administration and service fees are recognised as revenue over the
period of service.
Interest income on financial assets in impairment Stages 1 and 2 is recognised
on the gross carrying value of the financial asset using the original EIR.
Once a financial asset or group of similar financial assets has been
categorised as credit-impaired (Stage 3), interest income is recognised on the
net carrying value (after deducting the ECL allowance from the gross lending)
using the asset's original EIR. The interest income for POCI financial assets
is calculated using the credit-adjusted EIR applied to the amortised cost of
the financial asset from initial recognition. The Group recognises and
presents the reversal of ECLs following the curing of a credit impaired
financial asset as a reversal of impairment losses. The Group's policy on ECLs
can be found in note 3.2.
Interest income and interest expense on hedged assets and liabilities and
financial assets and liabilities designated as FVTPL are also recognised as
part of NII.
Interest income and expense on derivatives economically hedging interest
bearing financial assets or liabilities (but not designated as hedging
instruments) and other financial assets and liabilities held at FVTPL
(either mandatory or by election) are presented within other
similar interest.
Included in interest income is finance lease income which is recognised at a
constant periodic rate of return on the net investment.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.2 Net interest income continued
Critical accounting estimates and judgements
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.
The Group considers that significant judgement is exercised over the mortgage
and credit card portfolios. Due to the inherent judgement and estimation
uncertainty that exists in determining the EIR adjustment, a MRR is held to
mitigate this uncertainty.
Mortgages
For mortgage products the main accounting estimates and judgements when
assessing the cash flows are 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 2022, a total EIR
adjustment of £201m (2021: £210m) has been recognised for mortgages. This
represented 0.3% (2021: 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 year represented
(0.7)% of gross customer interest income for mortgages (2021: 1.4%).
Product life
This primarily involves assumptions of customer behaviour when a fixed rate
product comes to an end and reverts to the Group's SVR. The Group currently
assumes that 85% (2021: 85%) of customers will have fully repaid or switched
to a new product within two months of reverting to SVR.
SVR
Changes to the BoE base rate have an impact on the SVR charged to customers
and consequently on the Group's interest income. The Group historically passes
base rate changes through to the SVR in full but, on occasion, may choose not
to do so.
The significant accounting estimates above are monitored on an ongoing basis
to ensure they remain appropriate based on recent, observable customer
behaviour, market data (such as market derived base rate forecasts) and take
account of the competitive environment in which the Group operates. The Group
also considers potential changes to future customer behaviour as a result of
macroeconomic factors. There continues to be increased uncertainty in purchase
and switching activity as a result of actual and anticipated bate rate rises.
The Group has taken this into account when determining the EIR model
assumptions.
Sensitivity analysis
As noted above, the calculation of the Group's EIR adjustment is sensitive to
changes in product life and SVR assumptions. There are inter-dependencies
between the assumptions which add to the complexity of the judgements the
Group has to make. This means that no single factor is likely to move
independently of others, however, the sensitivities disclosed below assume
all other assumptions remain unchanged.
Sensitivity impact on the mortgage EIR adjustment 2022 2021
(£m) (£m)
+/- 1 month change to the timing of customer repayments, redemptions 16/(13) 12/(10)
and product transfers
50bps increase to the BoE base rate not passed through to the Group's SVR (46) (43)
Credit cards
An EIR adjustment arises on credit card products that have a low introductory
rate, followed by a higher reversionary rate in future years when the
promotional period expires. However, receipt of such interest income depends
on the customer staying with the Group beyond promotional expiry and therefore
significant judgement is involved in forecasting customer behaviour and
estimating the future cash flows. Key behavioural assumptions include an
estimation of the utilisation of available credit, transaction and repayment
activity and the retention of the customer balance after the end of a
promotional period. As at 30 September 2022, a total EIR adjustment of £285m
(2021: £273m) has been recognised for credit cards. This represented 5.5%
(2021: 6.4%) 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 in the year represented 3.3% of gross
customer interest income for credit cards (2021: 24.3%).
Expected cash flows are estimated based on historical experience of similar
products and are consistent with those used in product pricing models. The
Group reviews and adjusts assumptions where necessary on an ongoing basis,
using the most recent observable customer behaviour and market data. The Group
also considers potential future changes to customer behaviour as a result of
macroeconomic factors.
Post-promotional yield
The yield on a credit card following the post-promotional period is a
significant estimate within the EIR assumptions. Yield is a function of the
Interest Bearing Balance (IBB) and the APR charged to customers. IBB is
impacted by customer behaviour and while there is evidence to support the
expected IBB following the post-promotional period, there is inherent risk
that this data may differ in the future. If the IBB differs to the Group's
estimate it can have a material impact on the revised future cash flows. Based
on recent experience, the Group has applied an average IBB of 55% (2021:
55%) following the end of the promotional period.
Credit cards
An EIR adjustment arises on credit card products that have a low introductory
rate, followed by a higher reversionary rate in future years when the
promotional period expires. However, receipt of such interest income depends
on the customer staying with the Group beyond promotional expiry and therefore
significant judgement is involved in forecasting customer behaviour and
estimating the future cash flows. Key behavioural assumptions include an
estimation of the utilisation of available credit, transaction and repayment
activity and the retention of the customer balance after the end of a
promotional period. As at 30 September 2022, a total EIR adjustment of £285m
(2021: £273m) has been recognised for credit cards. This represented 5.5%
(2021: 6.4%) 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 in the year represented 3.3% of gross
customer interest income for credit cards (2021: 24.3%).
Expected cash flows are estimated based on historical experience of similar
products and are consistent with those used in product pricing models. The
Group reviews and adjusts assumptions where necessary on an ongoing basis,
using the most recent observable customer behaviour and market data. The Group
also considers potential future changes to customer behaviour as a result of
macroeconomic factors.
Post-promotional yield
The yield on a credit card following the post-promotional period is a
significant estimate within the EIR assumptions. Yield is a function of the
Interest Bearing Balance (IBB) and the APR charged to customers. IBB is
impacted by customer behaviour and while there is evidence to support the
expected IBB following the post-promotional period, there is inherent risk
that this data may differ in the future. If the IBB differs to the Group's
estimate it can have a material impact on the revised future cash flows. Based
on recent experience, the Group has applied an average IBB of 55% (2021:
55%) following the end of the promotional period.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.2 Net interest income continued
Post-promotional attrition
The level of repayment in the post-promotional period is a key sensitivity
within the EIR assumptions. There is evidence to support the expected
behaviour of customers after the end of promotional periods, however there is
inherent risk that this data may not be indicative of actual future behaviour.
If the proportion of customers who repay their balance post-promotion differs
to the Group's estimate it can have a material impact on the revised future
cash flows. Based on recent experience, the Group has applied a long run
average attrition rate of 1.5% per month (2021: 1.5% per month) following
the end of the promotional period.
Macroeconomic factors
When determining assumptions, the Group has considered the impact to customers
of inflationary pressures including high energy and utility costs and the
recent and anticipated future base rate rises. As a result, temporary
adjustments have been made to assumptions. Post promotional IBB has been
decreased to 50% for 12 months and balance attrition has been increased to
reflect a reduction in retail and balance transfer transaction activity for 12
months. If, however, the stress period was to increase to 24 months, the Group
estimates it would result in a negative present value adjustment of
approximately £35m, which would be recognised in the income statement.
Sensitivity analysis
As noted above, the calculation of the Group's EIR adjustment for credit cards
is sensitive to changes in post-promotional yield and post-promotional
attrition. There are inter-dependencies between the key assumptions which add
to the complexity of the judgements the Group has to make. This means that
no single factor is likely to move independently of others, however,
the sensitivities disclosed below assume all other assumptions remain
unchanged.
Sensitivity impact on the credit card EIR adjustment 2022 2021
(£m) (£m)
+/- 5 ppts change to post-promotional IBB assumption((1)) (9.1% relative 34/(28) 31/(31)
increase/decrease)
+/- 0.5 ppts change to post-promotional monthly balance attrition rate (33% (20)/23 (23)/27
relative increase/decrease)
MRR
The complicated nature of EIR models means the Group exercises prudence on the
modelled outcome and therefore chooses to hold a MRR in relation to both
mortgages and credit cards to mitigate the risk of estimation uncertainty.
In arriving at the level of MRR, the Group assesses the judgements made within
the EIR modelling and applies severe downside stress scenarios to quantify
emerging or potential risks. This allows the Group to hold an appropriate
level of MRR across both asset classes. The MRR is reviewed quarterly based
on the conditions prevalent at the time and adjusted where necessary.
(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.
MRR
The complicated nature of EIR models means the Group exercises prudence on the
modelled outcome and therefore chooses to hold a MRR in relation to both
mortgages and credit cards to mitigate the risk of estimation uncertainty.
In arriving at the level of MRR, the Group assesses the judgements made within
the EIR modelling and applies severe downside stress scenarios to quantify
emerging or potential risks. This allows the Group to hold an appropriate
level of MRR across both asset classes. The MRR is reviewed quarterly based
on the conditions prevalent at the time and adjusted where necessary.
(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.
2022 2021
£m £m
Interest income
Loans and advances to customers 2,095 1,880
Loans and advances to other banks 70 8
Financial assets at FVOCI 50 18
Total interest income 2,215 1,906
Other similar interest
Financial assets at FVTPL 5 9
Derivatives economically hedging interest bearing assets (3) (5)
Total other similar interest 2 4
Less: interest expense and similar charges
Customer deposits (342) (361)
Debt securities in issue (227) (168)
Due to other banks (70) (20)
Other interest expense (2) (4)
Total interest expense and similar charges (641) (553)
Net interest income 1,576 1,357
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.3 Non-interest income
Accounting policy
Gains less losses on financial instruments at fair value
This includes fair value gains and losses from three distinct activities:
· Derivatives classified as held for trading - the full change in fair
value of trading derivatives is recognised inclusive of interest income and
expense arising on those derivatives except when economically hedging other
assets and liabilities at fair value as outlined in note 2.2.
· Other financial assets designated at FVTPL - these relate principally
to the Group's fixed interest rate loan portfolio (note 3.5), which were
designated at inception as FVTPL. The fair value of these loans is derived
from the future loan cash flows using appropriate discount rates and includes
adjustments for credit risk and credit losses. The valuation technique
used is reflective of current market practice.
· Hedged assets, liabilities and derivatives designated in hedge
relationships - fair value movements are recognised on both the hedged item
and hedging derivative in a fair value hedge relationship, the net of which
represents hedge ineffectiveness, and hedge ineffectiveness on cash flow hedge
relationships (note 3.6).
Fees and commissions
Fees and commissions receivable which are not an integral part of the EIR are
recognised as income as the Group fulfils its performance obligations. The
Group's principal performance obligations arising from contracts with
customers are in respect of current accounts, debit cards and credit cards.
The Group provides the service and consequently generates the fee and
commission income monthly, with amounts recognised in income on this basis.
Costs incurred to generate fee and commission income are charged to fees and
commissions expense as they are incurred.
2022 2021
£m £m
Gains less losses on financial instruments at fair value
Held for trading derivatives 6 6
Financial assets at fair value((1)) (19) 4
Ineffectiveness arising from fair value hedges (note 3.6) 46 (10)
Amounts recycled to profit and loss from cash flow hedges((2)) (note 3.6) (4) (5)
Ineffectiveness arising from cash flow hedges (note 3.6) (46) -
(17) (5)
Other operating income
Net fee and commission income 134 124
Margin on foreign exchange derivative brokerage 19 16
Gains on sale of financial assets at FVOCI 4 -
Share of JV loss after tax (4) (5)
Other income 4 2
157 137
Total non-interest income 140 132
(1) Included within financial assets at fair value is a credit risk gain
on loans and advances at fair value of £1m (2021: £1m gain), and a fair
value gain on equity investments of £2m (2021: £15m gain).
(2) In respect of terminated hedges.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.3 Non-interest income continued
The Group's unrecognised share of losses of JVs for the year was £8m (2021:
£1m). For entities making losses, subsequent profits earned are not
recognised until previously unrecognised losses are extinguished. The Group's
unrecognised share of losses net of unrecognised profits on a cumulative basis
of JVs is £9m (2021: £1m).
Non-interest income includes the following fee and commission income
disaggregated by income type:
2022 2021
£m £m
Current account and debit card fees 102 90
Credit cards 52 38
Insurance, protection and investments 8 10
Other fees((1)) 26 29
Total fee and commission income 188 167
Total fee and commission expense (54) (43)
Net fee and commission income 134 124
(1) Other fees include mortgages, invoice and asset finance and ATM fees.
2.4 Operating and administrative expenses before impairment losses
Accounting policy
Staff costs primarily consist of wages and salaries, accrued bonus and social
security costs arising from services rendered by employees during the
financial year.
The Group recognises bonus costs where it has a present obligation that can be
reliably measured. Bonus costs are recognised over the relevant service period
required to entitle the employee to the reward.
The Group's accounting policies on pension expenses and equity based
compensation are included in notes 3.9 and 4.2 respectively.
2022 2021
£m £m
Staff costs 435 426
Property and infrastructure 38 89
Technology and communications 119 121
Corporate and professional services 135 160
Depreciation, amortisation and impairment 179 191
Other expenses 163 216
Total operating and administrative expenses 1,069 1,203
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.4 Operating and administrative expenses before impairment losses continued
Staff costs comprise the following items:
2022 2021
£m £m
Salaries and wages 254 248
Social security costs 30 30
Defined contribution pension expense 50 49
Defined benefit pension credit (24) (8)
Compensation costs 310 319
Equity based compensation((1)) 4 8
Bonus awards 27 22
Performance costs 31 30
Redundancy and restructuring 3 29
Temporary staff costs 13 13
Other((2)) 78 35
Other staff costs 94 77
Total staff costs 435 426
(1) Includes National Insurance on equity based compensation.
(2) Includes a one-off cost of living allowance of £7m (2021: £Nil).
The defined benefit pension credit in the current period includes a credit of
£10m (2021: £5m) arising from the ongoing Pension Increase Exchange (PIE)
exercise which will complete in calendar year 2023 (note 3.9). A PIE gives
members the option to exchange future increases on their pensions for a
one-off uplift to their current pension.
The average number of FTE employees of the Group during the year was made up
as follows:
2022 2021
Number Number
Managers((1)) 2,574 2,691
Clerical staff 4,292 4,724
6,866 7,415
(1) Includes a combination of managers with and without staff
responsibilities.
The average monthly number of employees was 7,829 (2021: 8,613). All staff are
contracted employees of the Group and its subsidiary undertakings. The average
figures above do not include contractors.
Auditor's remuneration included within other operating and administrative
expenses:
2022 2021
£'000 £'000
Fees payable to the Company's auditor for the audit of the Company's financial 24 23
statements
Fees payable to the Company's auditor for the audit of the Company's 4,564 4,272
subsidiaries((1))
Total audit fees 4,588 4,295
Audit related assurance services 262 255
Other assurance services 1,877 330
Total non-audit fees 2,139 585
Fees payable to the Company's auditor in respect of associated pension schemes 107 79
Total fees payable to the Company's auditor 6,834 4,959
(1) Includes the audit of the Group's structured entities.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.4 Operating and administrative expenses before impairment losses continued
Non-audit fees of £2.1m (2021: £0.6m) were paid to the auditor during the
year for services including the skilled person reporting as required by the
PRA, the review of the Interim Financial Report, PRA Written Auditor
Reporting, comfort letters for the global medium-term note and covered bond
programmes, TFSME assurance, client money reviews and profit attestations.
Out of pocket expenses of £13k (2021: £Nil) were borne by the Group during
the year.
2.5 Taxation
Accounting policy
Income tax on the profit or loss for the year comprises current and deferred
tax.
Income tax is recognised in the income statement except to the extent that it
is related to items recognised directly in equity, in which case the tax is
also recognised in equity (excluding AT1 distributions where the tax impact is
recognised in the income statement).
Current tax is the expected tax payable or receivable on the taxable profit or
loss for the year, using tax rates enacted or substantively enacted at the
balance sheet date, and any adjustment to tax payable in respect of previous
years.
Deferred tax assets and liabilities are recognised on temporary differences
arising between the tax bases of assets and liabilities and their carrying
amounts in the financial statements. Deferred tax is determined using tax
rates and laws that have been enacted or substantively enacted by the balance
sheet date and are expected to apply when the related deferred tax asset is
realised, or the deferred tax liability is settled.
A deferred tax asset is recognised for unused tax losses and unused tax
credits only if it is probable that future taxable amounts will arise
against which those temporary differences and losses may be utilised.
Critical accounting estimates and judgements
In arriving at the Group's deferred tax asset balance of £146m (2021:
£377m), significant judgement is exercised on the component of deferred tax
assets that relate to tax losses carried forward of £302m (2021: £255m).
The Group has assessed the potential for the recovery of these tax losses
carried forward for this component of deferred tax assets at 30 September
2022 and considers it probable that sufficient future taxable profits will
be available against which the underlying deductible temporary differences can
be utilised over the corporate planning horizon. Deferred tax assets are
recognised to the extent that they are expected to be utilised over six years
from the balance sheet date. If instead of six years the period were five
years or seven years, the recognised deferred tax asset would be £115m or
would remain at £146m respectively. If Group profit forecasts were 10% lower
than anticipated, the deferred tax asset would be £140m. This is only £6m
lower than the reported position as there is excess plan profit capacity for
losses to be recognised; all historic tax losses are now recognised on the
balance sheet. All tax assets arising will be used within the UK.
2022 2021
£m £m
Current tax
Current year 81 62
Adjustment in respect of prior years 4 -
85 62
Deferred tax
Current year (21) (124)
Adjustment in respect of prior years (6) 5
(27) (119)
Tax expense/(credit) for the year 58 (57)
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.5 Taxation continued
The tax assessed for the year differs from that arising from applying the
standard rate of corporation tax in the UK of 19%. A reconciliation from the
expense implied by the standard rate to the actual tax expense/(credit) is
as follows:
2022 2021
£m £m
Profit on ordinary activities before tax 595 417
Tax expense based on the standard rate of corporation tax in the UK of 19% 113 79
(2021: 19%)
Effects of:
Disallowable expenses 4 13
Bank levy - 1
Conduct indemnity adjustment (12) 58
Deferred tax assets recognised (83) (126)
Impact of rate changes 23 (92)
AT1 distribution (13) (15)
Banking surcharge 28 20
Adjustments in respect of prior years (2) 5
Tax expense/(credit) for the year 58 (57)
In February 2022 legislation was enacted to reduce the banking surcharge from
8% to 3%, and to increase the threshold below which it is not chargeable to
£100m (previously £25m). The changes are effective for current tax from 1
April 2023 but, in accordance with accounting standards, have effect for
deferred tax in the current year. The impact is a reduction in the value of
deferred tax assets, reflected within the £23m charge to the income statement
above.
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 (liability)/asset
Acquisition Cash flow Gains on financial Tax losses Capital Pension Other Total deferred Defined benefit Total deferred
accounting hedge reserve instruments at carried allowances spreading temporary tax assets pension scheme tax liabilities
adjustments £m FVOCI forward £m £m differences £m surplus £m
£m £m £m £m £m
At 1 October 2020 (10) 23 (4) 151 113 9 23 305 (253) (253)
Income statement (charge)/credit - 1 - 104 11 - 6 122 (3) (3)
Other comprehensive income charge - (33) (11) - - (4) (2) (50) (40) (40)
At 30 September 2021 (10) (9) (15) 255 124 5 27 377 (296) (296)
Income statement credit/(charge) 2 2 - 47 (13) - (2) 36 (9) (9)
Other comprehensive income charge - (260) (1) - - (5) (1) (267) (45) (45)
At 30 September 2022 (8) (267) (16) 302 111 - 24 146 (350) (350)
Other temporary differences include the IFRS 9 transitional adjustment of
£11m and equity based compensation of £6m (2021: £15m and £9m
respectively).
The Group has deferred tax assets of £146m (2021: £377m), the principal
components of which are tax losses of £302m (2021: £255m) and capital
allowances of £111m (2021: £124m) offset by the cash flow hedge reserve
deferred tax liability of £267m (2021: £9m). The Group also has deferred tax
liabilities of £350m (2021: £296m) in relation to the defined benefit
pension surplus.
The deferred tax assets and liabilities detailed above arise primarily in
Clydesdale Bank PLC which has a right to offset current tax assets against
current tax liabilities and is party to a Group Payment Arrangement for
payments of tax to HMRC. Therefore, in accordance with IAS 12, deferred tax
assets and deferred tax liabilities have also been offset in this year where
they relate to payments of income tax to this tax authority.
Historic trade tax losses are now fully recognised (2021: unrecognised
deferred tax asset of £112m representing trading losses with a gross value of
£449m). The Group also has historic non-trading losses of £6m gross, tax
value £1m; a deferred tax asset has not been recognised in respect of these
losses as their use cannot be foreseen.
On 17 October 2022, the Chancellor of the Exchequer confirmed that the UK
corporation tax rate will increase to 25% from 1 April 2023. On 17 November
2022 it was confirmed that the previously enacted reduction in Banking
Surcharge to 3%, with an allowance of £100m, would proceed, also from 1 April
2023. In line with the requirements of IAS 12, these enacted tax rates have
been used to determine the deferred tax balances at 30 September 2022.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.6 Earnings per share
Accounting policy
Basic EPS
Basic EPS is calculated by taking the profit attributable to ordinary
shareholders of the parent company and then dividing this by the weighted
average number of ordinary shares outstanding during the year after deducting
the weighted average of the Group's holdings of its own shares.
Diluted EPS
This requires the weighted-average number of ordinary shares in issue to be
adjusted to assume conversion of all dilutive potential ordinary shares. These
arise from awards made under equity based compensation schemes. Share awards
with performance conditions attaching to them are not considered to be
dilutive unless these conditions have been met at the reporting date.
The Group presents basic and diluted loss per share data in relation to the
ordinary shares of Virgin Money UK PLC.
2022 2021
£m £m
Profit attributable to ordinary equity holders for the purposes of basic 467 395
and diluted EPS
2022 2021
Weighted-average number of ordinary shares in issue (millions)
- Basic 1,441 1,442
Adjustment for share awards made under equity based compensation schemes 3 1
- Diluted 1,444 1,443
Basic earnings per share (pence) 32.4 27.3
Diluted earnings per share (pence) 32.3 27.3
Basic earnings per share has been calculated after deducting 0.3m (2021: 0.1m)
ordinary shares representing the weighted-average of the Group's holdings of
its own shares.
Note 4.1 provides details of the share buyback programme including buybacks
intended for beyond 30 September 2022.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.1 Loans and advances to customers
Accounting policy
Loans and advances to customers arise when the Group provides money directly
to a customer and includes mortgages, term lending, overdrafts, credit card
lending, lease finance and invoice financing. They are recognised initially at
fair value and are subsequently measured at amortised cost, using the
effective interest method, adjusted for ECLs (note 3.2). They are derecognised
when the rights to receive cash flows have expired or the Group has
transferred substantially all the risks and rewards of ownership.
Leases entered into by the Group as lessor, where the Group transfers
substantially all the risks and rewards of ownership to the lessee, are
classified as finance leases. The leased asset is not held on the Group
balance sheet; instead, a finance lease is recognised representing the minimum
lease payments receivable under the terms of the lease, discounted at the rate
of interest implicit in the lease. Interest income is recognised in interest
receivable, allocated to accounting years to reflect a constant periodic rate
of return.
2022 2021
£m £m
Gross loans and advances to customers 73,146 72,551
Impairment provisions on credit exposures((1)) (note 3.2) (454) (496)
Fair value hedge adjustment (941) (179)
71,751 71,876
(1) ECLs on off-balance sheet exposures of £3m (2021: £8m) are presented
as part of the provisions for liabilities and charges balance (note 3.13).
The Group has a portfolio of fair valued business loans of £70m (2021:
£133m) which are classified separately as financial assets at FVTPL on the
balance sheet (note 3.5). Combined with the above, this is equivalent to total
loans and advances of £71,821m (2021: £72,009m).
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 (note 3.3).
Lease finance
The Group leases a variety of assets to third parties under finance lease
arrangements, including vehicles and general plant and machinery. The cost of
assets acquired by the Group during the year for the purpose of letting under
finance leases and hire purchase contracts amounted to £46m (2021: £9m) and
£405m (2021: £301m) respectively.
Finance lease receivables are presented in the statement of financial position
within loans and advances to customers. The maturity analysis of lease
receivables, including the undiscounted lease payments to be received, are as
follows:
Gross investment in finance lease and hire purchase receivables
2022 2021
£m £m
Less than 1 year 269 257
1-2 years 170 156
2-3 years 117 99
3-4 years 66 50
4-5 years 46 26
More than 5 years 24 26
692 614
Unearned finance income (45) (30)
Net investment in finance lease and hire purchase receivables 647 584
Finance income recognised on the net investment in the lease was £21m (2021:
£19m) and is included in interest income in the income statement (note
2.2).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.2 Impairment provisions on credit exposures
Accounting policy
At each reporting date, the Group assesses financial assets measured at
amortised cost, as well as loan commitments and financial guarantees not
measured at FVTPL, for impairment. The impairment loss allowance is calculated
using an ECL methodology and reflects: (i) an unbiased and probability
weighted amount; (ii) the time value of money which discounts the impairment
loss; and (iii) reasonable and supportable information that is available
without undue cost or effort at the reporting date about past events, current
conditions and forecasts of future economic conditions.
ECL methodology is based upon the combination of PD, LGD and EAD estimates
that consider a range of factors that impact on credit risk and consequently
the level of impairment loss provisioning. The Group uses reasonable and
supportable forecasts of future economic conditions in estimating the ECL
allowance. The methodology and assumptions used in the ECL calculation are
reviewed regularly and updated as necessary.
SICR assessment and staging
The ECL is calculated as either a 12-month (Stage 1) or lifetime ECL depending
on whether the financial asset has suffered a SICR since origination (Stage 2)
or has otherwise become credit impaired (Stage 3) as at the reporting date.
The Group uses a PD threshold curve (distinct for each portfolio) to assess
for a SICR in addition to the 30 DPD and 90 DPD backstops for recognising
Stage 2 and Stage 3 provisions respectively.
Financial assets can move between stages when the relevant staging criteria
are no longer satisfied subject to certain restrictions for forborne assets.
If the level of impairment loss reduces in a subsequent year, the previously
recognised impairment loss allowance is reversed and recognised in the income
statement.
POCI financial assets are those which are assessed as being credit impaired
upon initial recognition. Once a financial asset is classified as POCI, it
remains there until derecognition irrespective of its credit quality at each
reporting date. POCI financial assets are disclosed separately from those
financial assets in Stage 3. The Group regards the date of acquisition
as the origination date for purchased portfolios.
The Group has not made use of the low credit risk option under IFRS 9 for
loans and advances at amortised cost. Further detail on the low credit risk
option can be found in note 3.7.
The ECL assessment is performed on either a collective or individual basis:
Collective: these assets are assessed and provided for on a group or a pooled
basis due to the existence of shared risk characteristics for as long as they
retain those similar characteristics. Financial assets are considered to have
shared risk characteristics when, at a given point in time, they will tend
to display a similar PD and credit risk profile and can be allocated to Stages
1, 2 or 3.
Individual: these assets are assessed and provided for at the financial
instrument level, with the assessment (which is governed by the Group's Credit
Policy) taking into consideration a range of likely potential outcomes
relating to each customer and their associated financial assets. These will be
allocated to Stage 3.
Regardless of the calculation basis, the Group generates a modelled ECL
allowance at the individual financial instrument level. The modelled ECL
output can be supplemented by management judgements in the form of PMAs where
appropriate.
Write-offs and recoveries
When there is no reasonable expectation of recovery for a loan, it is written
off against the related provision. Such loans are written off after all the
necessary procedures have been completed and the amount of the loss has been
determined. Subsequent recoveries of amounts previously written off decrease
the amount of the impairment charge in the income statement.
The Group's impairment policy for debt instruments at FVOCI is included in
note 3.7. The impact of the ECL methodology on the Group's cash and balances
with central banks and due from other banks balances held at amortised cost is
immaterial. ECLs relating to loan commitments and financial guarantees can be
found in note 3.13.
Critical accounting estimates and judgements
ECL methodology requires the Group to apply estimates and exercise judgement
when calculating an impairment allowance for credit exposures.
Further information on the chosen scenarios, macroeconomic assumptions, and
scenario weightings used in the ECL calculation, including management's use of
PMAs together with sensitivity analysis, is contained in the credit risk
section of Risk management on pages 39 to 45.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.2 Impairment provisions on credit exposures continued
Movement in impairment provisions on credit exposures
2022 2021
£m £m
Opening balance 496 735
Charge/(credit) for the year((1)) 57 (132)
Amounts written off (129) (126)
Recoveries of amounts written off in previous years 30 26
Transfer of off-balance sheet ECLs to provisions (note 3.13) - (7)
Closing balance 454 496
(1) The £52m charge (2021: £131m credit) for impairment losses on credit
exposures shown in the income statement also includes a £5m credit (2021:
£1m charge) in respect of off-balance sheet ECLs (note 3.13).
Off-balance sheet ECLs are presented as part of the provisions for liabilities
and charges balance (note 3.13).
3.3 Securitisation and covered bond programmes
Accounting policy
The Group sponsors the formation of structured entities, primarily for the
purpose of facilitation of asset securitisation and covered bond transactions,
the full details of which can be found in note 6.2 to the Company financial
statements. The Group has no shareholding in these entities, but is exposed,
or has rights, to variable returns and has the ability to affect those
returns. The entities are consolidated in the Group's financial statements
in accordance with note 1.5.
Securitisation
The Group has securitised a portion of its retail mortgage loan portfolio
under both master trust (Lanark and Lannraig) and standalone (Gosforth)
securitisation programmes. The securitised mortgage loans have been assigned
at principal value to bankruptcy remote structured entities. The securitised
debt holders have no recourse to the Group other than the principal and
interest (including fees) generated from the securitised mortgage loan
portfolio.
The externally held securitised notes in issue are included within debt
securities in issue (note 3.11). There are a number of notes held internally
by the Group which are used as collateral for repurchases and similar
transactions or for credit enhancement purposes.
Covered bond
A subset of the Group's retail mortgage loan portfolio has been ring-fenced
and assigned to a bankruptcy remote limited liability partnership, Eagle
Place Covered Bonds LLP, to provide a guarantee for the obligations payable
on the covered bonds issued by the Group.
The covered bond partnership is consolidated with the mortgage loans retained
on the Group balance sheet and the covered bonds issued included within debt
securities in issue (note 3.11). The covered bond holders have dual
recourse: firstly, to the bond issuer on an unsecured basis; and secondly,
to the LLP under the Covered Bond Guarantee secured against the mortgage
loans.
Under both the securitisation and covered bond programmes, the mortgage loans
do not qualify for derecognition because the Group remains exposed to the
majority of the risks and rewards of the mortgage loan portfolio, principally
the associated credit risk. The Group continues to service the mortgage loans
in return for an administration fee and is also entitled to any residual
income after all payment obligations due under the terms of the programmes
and senior programme expenses have been met. A deemed loan liability is
recognised in the programme sponsor for the proceeds of the funding
transaction.
Significant restrictions
Where the Group uses its financial assets to raise finance through
securitisation and the sale of securities subject to repurchase agreements,
the assets become encumbered and are not available for transfer around the
Group.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.3 Securitisation and covered bond programmes continued
The assets and liabilities in relation to securitisation and covered bonds in
issue at 30 September are as follows:
2022 2021
Loans and Notes Loans and Notes
advances in issue advances in issue
securitised £m securitised £m
£m £m
Securitisation programmes
Lanark 3,776 2,768 4,383 3,396
Lannraig 768 622 921 693
Gosforth 2017-1 - - 712 591
Gosforth 2018-1 872 745 1,107 887
5,416 4,135 7,123 5,567
Less held by the Group (2,260) (3,181)
1,875 2,386
Covered bond programmes
Clydesdale Bank PLC - - 999 742
Clydesdale Bank PLC 6,739 3,450 3,960 1,100
(formerly Virgin Money PLC)
6,739 3,450 4,959 1,842
During the year the Clydesdale Bank PLC Global Covered Bond Programme ceased
activity and the Series 2012-2 Covered Bonds transferred to the Clydesdale
Bank PLC (formerly Virgin Money PLC) Global Covered Bond Programme. There was
no financial impact to the Group in relation to this transfer.
The fair values of financial assets and associated liabilities relating to the
securitisation programmes were £5,235m and £1,878m respectively (2021:
£7,171m and £2,406m) where the counterparty to the liabilities has recourse
only to the financial assets.
There were no events during the year that resulted in any Group transferred
financial assets being derecognised.
The Group has contractual and non-contractual arrangements which may require
it to provide financial support as follows:
Securitisation programmes
The Group provides credit support to the structured entities via reserve
funds, which are partly funded through subordinated debt arrangements and by
holding junior notes. Exposures are shown in the table below:
2022 2021
£m £m
Beneficial interest held 1,239 1,521
Subordinated loans 42 1
Junior notes held 978 1,206
2,259 2,728
Looking forward through future reporting years there are a number of
date-based options on the notes issued by the structured entities which could
be actioned by them as issuer. These could require the Group, as sponsor, to
provide additional liquidity support.
Covered bond programmes
The nominal level of over-collateralisation was £3,127m (2021: £2,827m) in
the Clydesdale Bank PLC (formerly Virgin Money PLC) programme. In the prior
year there was also £541m over‑collateralisation in the Clydesdale Bank PLC
programme. From time to time the obligations of the Group to provide
over‑collateralisation may increase due to the formal requirements
of the programme.
Under all programmes, the Group has an obligation to repurchase mortgage
exposures if certain mortgage loans no longer meet the programme criteria.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.4 Cash and balances with central banks
Accounting policy
Cash and balances with central banks are measured at amortised cost, using the
effective interest method, and are derecognised when the rights to receive
cash flows have expired or the Group has transferred substantially all the
risks and rewards of ownership. These balances form part of the Group's
treasury-related activities and are mostly short term in nature and repayable
on demand or within a short timescale, generally three months.
2022 2021
£m £m
Cash assets 1,206 1,374
Balances with central banks (including EU payment systems) 11,015 8,337
12,221 9,711
Less mandatory deposits with central banks((1)) (266) (258)
Included in cash and cash equivalents (note 5.2) 11,955 9,453
(1) Mandatory deposits are not available for use in the Group's day-to-day
business and are non-interest bearing.
3.5 Financial assets at fair value through profit or loss
Accounting policy
A financial asset is measured at FVTPL if it: (i) does not fall into one of
the business models for amortised cost (note 1.7) or FVOCI (note 3.7); (ii) is
specifically designated as FVTPL on initial recognition in order to eliminate
or significantly reduce a measurement mismatch; or (iii) is classified as held
for trading.
A financial instrument is classified as held for trading if it is acquired
principally for the purpose of selling in the near term, forms part of a
portfolio of financial instruments that are managed together and for which
there is evidence of short-term profit taking, or it is a derivative not
in a qualifying hedge relationship.
Associated gains and losses are recognised in the income statement as they
arise (note 2.3).
Loans and advances
Included in financial assets at FVTPL is a historical portfolio of loans
(sales ceased in 2012). 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 £70m (2021: £133m). The cumulative loss in the fair value of the
loans attributable to changes in credit risk amounts to £1m (2021: £2m); the
change for the current year is a decrease of £1m (2021: decrease of £1m), of
which £1m (2021: £1m) has been recognised in the income statement.
Other financial assets
Included in other financial assets are £7m (2021: £19m) of unlisted
securities and £1m (2021: £1m) of debt instruments.
Note 3.15 contains further information on the valuation methodology applied to
financial assets held at FVTPL and their classification within the fair value
hierarchy. Details of the credit quality of financial assets is provided in
the Risk management section of this results announcement.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments
Accounting policy
The Group uses derivative financial instruments to manage exposure to interest
rate, contractually specified inflation and foreign currency risk. Interest
rate risk arises primarily due to the mismatch, or duration, between repricing
dates of interest-bearing assets and liabilities, or basis risk from assets
and liabilities repricing to different reference rates. Contractually
specified inflation risk arises from financial instruments whose cash flows
are linked to an inflation index. Currency risk arises when assets and
liabilities are not denominated in the functional currency of the entity.
Derivatives are recognised on the balance sheet at fair value on trade date
and are measured at fair value throughout the life of the contract.
Derivatives are carried as assets when the fair value is positive and as
liabilities when the fair value is negative. The notional amount of a
derivative contract is not recorded on the balance sheet but is disclosed as
part of this note.
Netting
Derivative assets and liabilities are offset against collateral received and
paid respectively, and the net amount reported in the balance sheet only when
there is a legally enforceable right to offset the recognised amounts, and
there is an intention to settle on a net basis. Amounts offset on the balance
sheet represent the Group's centrally cleared derivative financial instruments
and collateral paid to/from central clearing houses, which meet the criteria
for offsetting under IAS 32.
Hedge accounting
The Group elects to apply hedge accounting for the majority of its risk
management activity that uses derivatives. This results in greater alignment
in the timing of recognition of gains and losses on hedged items and hedging
instruments and therefore reduces income statement volatility. The Group does
not have a trading book, however derivatives that do not meet the hedging
criteria, or for which hedge accounting is not applied, are classified as held
for trading.
The Group has elected, as a policy choice permitted under IFRS 9, to continue
to apply hedge accounting in accordance with IAS 39. The method of recognising
the fair value gain or loss on a derivative depends on whether it is
designated as a hedging instrument and the nature of the item being hedged.
Certain derivatives are designated as either hedges of highly probable future
cash flows attributable to a recognised asset or liability, or a highly
probable forecast transaction (a cash flow hedge); or hedges of the fair value
of recognised assets or liabilities or firm commitments (a fair value
hedge).
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are
designated and qualify as cash flow hedges is recognised in equity.
Specifically, the separate component of equity (note 4.1) is adjusted to the
lesser of the cumulative gain or loss on the hedging instrument and the
cumulative change in fair value of the expected future cash flows on the
hedged item from the inception of the hedge. Any remaining gain or loss on the
hedging instrument is recognised in the income statement. The carrying value
of the hedged item is not adjusted. Amounts accumulated in equity are
transferred to the income statement in the period in which the hedged item
affects profit or loss.
When a hedging instrument expires or is sold, or when a hedge is discontinued
or no longer meets the criteria for hedge accounting, any cumulative gain or
loss remains in equity and is recognised when the forecast transaction is
ultimately recognised in the income statement. When a forecast transaction is
no longer expected to occur, the cumulative gain or loss that was reported
in equity is immediately transferred to the income statement.
Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as
fair value hedges are recorded in the income statement, together with any
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk. This movement in the fair value of the hedged
item is made as an adjustment to the carrying value of the hedged asset or
liability.
Where the hedged item is derecognised from the balance sheet, the adjustment
to the carrying amount of the asset or liability is immediately transferred to
the income statement. When a hedging instrument expires or is sold, or when a
hedge no longer meets the criteria for hedge accounting, the adjustment to the
carrying amount of a hedged item is amortised to the income statement over the
remaining life of the asset or liability.
Derivatives held for trading
Changes in value of held for trading derivatives are immediately recognised in
the income statement (note 2.3).
The tables below analyse derivatives between those designated as hedging
instruments and those classified as held for trading:
2022 2021
£m £m
Fair value of derivative financial assets
Designated as hedging instruments 277 94
Designated as held for trading 65 46
342 140
Fair value of derivative financial liabilities
Designated as hedging instruments 201 143
Designated as held for trading 126 66
327 209
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
Cash collateral totalling £241m (2021: £18m) has been pledged and £38m has
been received (2021: £76m) 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 £149m (2021: collateral placed of £82m) 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.
Total derivative contracts
2022 2021
Notional Fair value Fair value Notional Fair value Fair value
contract of assets of liabilities contract of assets of liabilities
amount £m £m amount £m £m
£m £m
Derivatives designated as hedging instruments
Cash flow hedges
Interest rate swaps (gross) 35,753 1,988 930 24,886 71 90
Less: net settled interest rate swaps((1)) (33,188) (1,803) (900) (21,500) (64) (79)
Interest rate swaps (net)((2)) 2,565 185 30 3,386 7 11
Fair value hedges
Interest rate swaps (gross) 16,600 1,201 636 30,707 295 447
Less: net settled interest rate swaps((1)) (14,611) (1,144) (570) (25,260) (209) (390)
Interest rate swaps (net)((2)) 1,989 57 66 5,447 86 57
Cross currency swaps((2)) 2,113 35 105 1,880 1 75
4,102 92 171 7,327 87 132
Total derivatives designated as hedging instruments 6,667 277 201 10,713 94 143
Derivatives designated as held for trading
Foreign exchange rate related contracts
Spot and forward foreign exchange((2)) 599 26 20 805 13 12
Cross currency swaps((2)) - - - 490 - 3
Options((2)) 1 - - 1 - -
600 26 20 1,296 13 15
Interest rate related contracts
Interest rate swaps (gross) 1,411 52 66 734 14 31
Less: net settled interest rate swaps((1)) (665) (50) - - - -
Interest rate swaps (net)((2)) 746 2 66 734 14 31
Swaptions((2)) 10 - 2 10 - 1
Options((2)) 501 16 17 495 1 2
1,257 18 85 1,239 15 34
Commodity related contracts 199 21 21 97 17 17
Equity related contracts - - - 1 1 -
Total derivatives designated as held for trading 2,056 65 126 2,633 46 66
(1) Presented within other assets and other liabilities.
(2) Presented within derivative financial instruments.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
Hedge accounting
The hedging strategy of the Group is divided into micro hedges, where the
hedged item is a distinctly identifiable asset or liability, and portfolio
hedges, where the hedged item is a homogenous portfolio of assets or
liabilities.
In some hedge accounting relationships, the Group designates risk components
of hedged items as follows:
· benchmark interest rate risk as a component of interest rate risk, such
as the SONIA component;
· exchange rate risk for foreign currency financial assets and financial
liabilities;
· inflation risk where it is a contractually specified component of a
debt instrument; and
· components of cash flows of hedged items, for example certain interest
payments for part of the life of an instrument.
Other risks such as credit risk and liquidity risk are managed by the Group
but are not included in the hedge accounting relationship. Changes in the
designated risk component usually account for the largest portion of the
overall change in fair value or cash flows of the hedged item.
Portfolio cash flow hedges
The Group applies macro cash flow hedge accounting to a portion of its
floating rate financial assets and liabilities. The hedged cash flows are a
group of forecast transactions that result in cash flow variability from
resetting of interest rates, reinvestment of financial assets, or refinancing
and rollovers of financial liabilities. This cash flow variability can arise
on recognised assets or liabilities or highly probable forecast transactions.
The hedged items are designated as the gross asset or liability positions
allocated to time buckets based on projected repricing and interest profiles.
The Group aims to maintain a position where the principal amount of the hedged
items is greater than or equal to the notional amount of the corresponding
interest rate swaps used as the hedging instruments. The hedge accounting
relationship is reassessed on a monthly basis with the composition of hedging
instruments and hedged items changing frequently in line with the underlying
risk exposures. If necessary, the hedge relationships are de-designated and
redesignated based on the effectiveness test results.
Micro cash flow hedges
Floating rate issuances that are denominated in currencies other than the
functional currency of the Group are designated in cash flow hedges with
cross currency swaps. There are no active micro cash flow hedges at the
Group's balance sheet date.
Portfolio fair value hedges
The Group applies macro fair value hedging to a portion of its fixed rate
mortgages. The Group determines hedged items by identifying portfolios of
homogeneous loans based on their contractual maturity and other risk
characteristics. Loans within the identified portfolios are allocated to
repricing time buckets based on expected, rather than contractual, repricing
dates. The hedging instruments are designated to those repricing time buckets.
Hedge effectiveness is measured on a monthly basis, by comparing fair value
movements of the designated proportion of the bucketed loans due to the hedged
risk against the fair value movements of the derivatives.
The aggregated fair value changes in the hedged loans are recognised on the
Group's balance sheet as an asset. At the end of every month, in order to
minimise the ineffectiveness from early repayments and accommodate new
exposures, the Group voluntarily de-designates the hedge relationships and
redesignates them as new hedges. Fair value hedging of fixed rate deposits
was discontinued in 2020, and the hedge adjustment recognised on the Group's
balance sheet is amortised to profit and loss over the life of the hedged
item.
Micro fair value hedges
The Group uses this hedging strategy on GBP, inflation or foreign currency
denominated fixed rate assets held at FVOCI and GBP and foreign currency
denominated fixed rate debt issuances by the Group. Where assets and
liabilities are exposed to multiple risk components, for example interest rate
and foreign currency risk, these components are simultaneously designated as
hedged risks within the same hedge relationship.
Hedge ineffectiveness
Hedge ineffectiveness can arise from:
· mismatches between the contractual terms of the hedged item and hedging
instrument, including basis differences;
· differences in timing of cash flows of hedged items and hedging
instruments;
· changes in expected timings and amounts of forecast future cash flows;
and
· derivatives used as hedging instruments having a non-zero fair value at
the time of designation.
Additionally, for portfolio fair value hedges of the Group's fixed rate
mortgage portfolio, ineffectiveness also arises from the difference between
forecast and actual repayments (e.g. prepayment risk).
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. Further detail on the Group's
approach to managing the risk of LIBOR replacement, including derivatives
designated as held for trading that have not yet transitioned, is provided on
page 65.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
Summary of hedging instruments in designated hedge relationships
In the table below, the Group sets out the accumulated adjustments arising
from the corresponding continuing hedge relationships, irrespective of whether
or not there has been a change in hedge designation during the year:
2022 2021
Notional Change in fair Notional Carrying amount Change in fair
contract value of hedging contract value of hedging
amount instrument in the amount instrument in the
£m Carrying amount year used for £m year used for
ineffectiveness ineffectiveness
measurement((2)) measurement((2)(3))
£m £m
Assets Liabilities Assets Liabilities
£m £m £m £m
Cash flow hedges
Interest rate risk
Interest rate swaps((1)) 35,753 1,988 930 916 24,886 71 90 127
Foreign exchange risk
Cross currency swaps - - - - - - - (28)
Total derivatives designated as cash flow hedges 35,753 1,988 930 916 24,886 71 90 99
Fair value hedges
Interest rate risk
Interest rate swaps((1)) 16,150 1,059 361 1,052 30,707 295 447 500
Inflation and interest rate risk
Inflation linked interest rate swaps((1)) 450 142 275 96 - - - -
Foreign exchange and interest rate risk
Cross currency swaps 2,113 35 105 6 1,880 1 75 (86)
Total derivatives designated as fair value hedges 18,713 1,236 741 1,154 32,587 296 522 414
(1) As shown in the total derivatives contracts table on page 94, for
centrally cleared derivatives, where the IAS 32 'Financial Instruments:
Presentation' netting criteria is met, the derivative balances are offset
within other assets.
For all other derivatives, the derivative balances are presented within
derivative financial instruments.
(2) Changes in fair value of cash flow hedging instruments are recognised
in other comprehensive income. Changes in fair value of fair value hedging
instruments are recognised in the income statement in non-interest income.
(3) The change in fair value of the hedging instrument used for
ineffectiveness measurement has been restated in the comparative year in line
with the current year presentation, as detailed in note 1.11.
Summary of hedged items in designated hedge relationships
In the table below, the Group sets out the accumulated adjustments arising
from the corresponding continuing hedge relationships, irrespective of whether
or not there has been a change in hedge designation during the year.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
2022 2021
Change in fair Change in fair Cash flow hedge reserve
value of Cash flow hedge reserve value of
hedged hedged
item in the item in the
year used for year used for
ineffectiveness ineffectiveness
measurement measurement
£m £m
Continuing Discontinued Continuing Discontinued
hedges hedges hedges hedges
£m £m £m £m
Cash flow hedges
Interest rate risk
Gross floating rate assets and gross floating rate liabilities((1)) (962) 979 (14) (127) 2 13
Foreign exchange risk
Floating rate currency issuances((2)) - - - 29 - -
Total (962) 979 (14) (98) 2 13
2022 2021
Accumulated Change in fair Carrying amount of hedged items Accumulated C
h
Carrying amount of hedged items hedge adjustment value of hedged hedge adjustment a
n
on the hedged items in the on the hedged g
e
item year used for ineffectiveness item((3)) i
n
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Assets Liabilities Assets Liabilities
£m £m £m £m
Fair value hedges
Interest rate risk
Fixed rate mortgages((4)) 9,520 - (941) (779) 24,265 - (179) (420)
Fixed rate customer deposits((5)) - - (2) - - - (5) -
Fixed rate FVOCI debt instruments((6)) 2,443 - (613) (629) 3,010 - (115) (197)
Fixed rate issuances((2)) - (2,392) 350 388 - (2,779) 39 107
Inflation and interest rate risk
Fixed rate FVOCI debt instruments((6)) 589 - (105) (96) - - - -
Foreign exchange and interest rate risk
Fixed rate currency FVOCI debt instruments((6)) 76 - (3) (3) 78 - - (5)
Fixed rate currency issuances((2)) - (1,954) 83 11 - (1,730) 72 91
Total 12,628 (4,346) (1,231) (1,108) 27,353 (4,509) (188) (424)
(1) Highly probable future cash flows arising from loans and advances to
customers, due to customers and debt securities in issue.
(2) Hedged item is recorded in debt securities in issue.
(3) The accumulated hedge adjustment on the hedged item and the change in
fair value of the hedged items used for ineffectiveness measurement have been
restated in the comparative year in line with the current year presentation,
as detailed in note 1.11.
(4) Hedged item and the cumulative fair value changes, are recorded in
loans and advances to customers.
(5) Hedge relationship was discontinued in 2020. The fair value adjustment
taken will be amortised over the remaining life of the hedged items, and is
recorded in customer deposits.
(6) Hedged item is recorded in financial assets at FVOCI.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
2022 2021
Hedge Effective Hedge Effective Reclassified into income
statement as
ineffectiveness portion Reclassified into income ineffectiveness portion
statement as
recognised recognised recognised recognised
in income in other in income in other
statement((1)) comprehensive statement((1)) comprehensive
£m income £m income
£m £m
Net interest Non-interest Net interest Non-interest
income income income income
£m £m £m £m
Cash flow hedges
Interest rate risk
Gross floating rate assets and gross floating rate liabilities (46) 962 17 (4) - 127 10 (5)
Foreign exchange risk
Floating rate currency issuances - - - - - (28) - -
Total gains/(losses) on cash flow hedges (46) 962 17 (4) - 99 10 (5)
Hedge ineffectiveness
recognised in income
2022 2021
£m £m
Fair value hedges
Interest rate risk
Fixed rate mortgages 33 (10)
Fixed rate FVOCI debt instruments (2) 1
Fixed rate issuances 1 (1)
Inflation and interest rate risk
Fixed rate FVOCI debt instruments - -
Foreign exchange and interest rate risk
Fixed rate currency FVOCI debt instruments (1) -
Fixed rate currency issuances 15 -
Total losses on fair value hedges((1)) 46 (10)
(1) Recognised in gains less losses on financial assets at fair value.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.7 Financial assets at fair value through other comprehensive income
Accounting policy
A financial asset is measured at FVOCI when: (i) the asset is held within a
business model whose objective is achieved by both collecting contractual cash
flows and selling financial assets; and (ii) the contractual terms give rise
to cash flows on specified dates which are solely payments of principal and
interest on the principal amount outstanding unless the financial asset is
designated at FVTPL on initial recognition. An option for equity investments
that are not held for trading can be taken to classify them at FVOCI where an
irrevocable election is made at initial recognition. This option is available
for each separate investment. The Group has not exercised this option for any
equity investments.
Interest income and impairment gains and losses on FVOCI assets are measured
in the same manner as for assets measured at amortised cost and are recognised
in the income statement, with all other gains or losses recognised in other
comprehensive income as a separate component of equity in the year in which
they arise. Gains and losses arising from changes in fair value are included
as a separate component of equity until sale when the cumulative gain
or loss is transferred to the income statement. For all FVOCI assets, the
gain or loss is calculated with reference to the gross carrying amount.
Debt instruments at FVOCI are subject to the same impairment criteria as
amortised cost financial assets (note 3.2), with the ECL element recognised
directly in the income statement. As the financial asset is fair valued
through other comprehensive income, the change in its value includes the ECL
element, with the remaining fair value change recognised in other
comprehensive income. Any reversal of the ECL is recorded in the income
statement up to the value recognised previously.
A low credit risk option is available which allows entities not to assess
whether there has been a significant increase in credit risk since initial
recognition where the financial asset is deemed as being of low credit risk at
the reporting date. The result of exercising the low credit risk exemption is
that the financial assets are classed under Stage 1 with a 12-month ECL
calculation applied.
The Group exercises the low credit risk option for debt instruments classified
as FVOCI, recognising the high credit quality of the instruments. No material
ECL provision is held for these financial assets.
Financial assets at FVOCI consists of £5,064m of listed securities (2021:
£4,352m).
Note 3.15 contains further information on the valuation methodology applied to
financial instruments at FVOCI at 30 September 2022 and their classification
within the fair value hierarchy. Details of the credit quality of financial
assets is provided in the Risk management section of this results
announcement.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.8 Intangible assets and goodwill
Accounting policy
Capitalised software is stated at cost, less amortisation and any provision
for impairment.
Identifiable and directly associated external and internal costs of acquiring
and developing software are capitalised where the software is controlled by
the Group, and where it is probable that future economic benefits that exceed
its cost will flow from its use over more than one year. Costs associated
with maintaining software are recognised as an expense as incurred.
Capitalised software costs are amortised on a straight-line basis over their
expected useful lives, usually between three and ten years. Impairment losses
are recognised in the income statement as incurred.
Goodwill arises on the acquisition of an entity and represents the excess of
the fair value of the purchase consideration and direct costs of making
the acquisition over the fair value of the Group's share of the net assets
at the date of the acquisition. Goodwill is not subject to amortisation and
is tested for impairment on an annual basis.
Assets that are subject to amortisation are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not
be recoverable, which typically arises when the benefits associated with the
software were substantially reduced from what had originally been
anticipated or the asset has been superseded by a subsequent investment. In
such situations, an impairment loss is recognised for the amount by which the
carrying amount of an asset exceeds its recoverable amount. The recoverable
amount of an asset is the higher of its fair value less costs of disposal or
its value-in-use.
Intangible assets which are fully amortised are reviewed annually to consider
whether the assets remain in use.
Capitalised Goodwill Core deposit Total
software £m intangible £m
£m £m
Cost
At 1 October 2020 1,028 11 6 1,045
Additions 80 - - 80
Write-off (65) - - (65)
At 30 September 2021 1,043 11 6 1,060
Additions 53 - - 53
Write-off (28) - - (28)
Disposal (8) - - (8)
At 30 September 2022 1,060 11 6 1,077
Accumulated amortisation and impairment
At 1 October 2020 552 - 2 554
Charge for the year 123 - 1 124
Impairment 9 - - 9
At 30 September 2021 684 - 3 687
Charge for the year 81 - 3 84
Impairment 47 - - 47
Disposal (8) - - (8)
At 30 September 2022 804 - 6 810
Net book value
At 30 September 2022 256 11 - 267
At 30 September 2021 359 11 3 373
All (2021: all) of the software additions form part of internally generated
software projects.
A £62m charge (2021: £68m) (comprising write-offs of £17m (2021: £65m) and
impairments of £45m (2021: £3m)) was recognised in the year following a
reassessment of the Group's accounting practices on the capitalisation of
internally generated software against the backdrop of the move to an Agile
project delivery.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.9 Retirement benefit obligations
Accounting policy
The Group makes contributions to both defined benefit and defined contribution
pension schemes which entitle employees to benefits on retirement or
disability.
Defined contribution pension scheme
The Group recognises its obligation to make contributions to the scheme as an
expense in the income statement as incurred. Prepaid contributions are
recognised as an asset to the extent that a cash refund or a reduction in
future payments is available.
Defined benefit pension scheme
A liability or asset is recognised on the balance sheet in respect of the
defined benefit scheme and is measured as the difference between the present
value of the defined benefit obligation less the fair value of the defined
benefit scheme assets at the reporting date. The present value of the defined
benefit obligation for the scheme is discounted by high-quality corporate bond
rates that have maturity dates approximating to the terms of the defined
benefit obligation. Surpluses are only recognised to the extent that they are
recoverable through reduced contributions in the future or through refunds
from the scheme. In assessing whether a surplus is recoverable, the Group
considers its current right to obtain a refund or a reduction in future
contributions and does not anticipate any future acts by other parties that
could change the amount of the surplus that may ultimately be recovered.
Pension expense attributable to the Group's defined benefit scheme comprises
current service cost, past service cost resulting from a scheme amendment or
curtailment, net interest on the net defined benefit obligation/asset, gains
or losses on settlement and administrative costs incurred. Where actuarial
remeasurements arise, the Group recognises such amounts directly in equity
through the statement of comprehensive income in the year in which they occur.
Actuarial remeasurements arise from experience adjustments (the effects of
differences between previous actuarial assumptions and what has actually
occurred) and changes in actuarial assumptions.
The Group's principal trading subsidiary, Clydesdale Bank PLC, is the
sponsoring employer of the Yorkshire and Clydesdale Bank Pension Scheme, a
defined benefit pension scheme, which was closed to future benefit accrual for
the majority of current employees on 1 August 2017.
The following table summarises the present value of the defined benefit
obligation and fair value of plan assets for the Scheme as at 30 September:
2022 2021
£m £m
Active members' defined benefit obligation (9) (16)
Deferred members' defined benefit obligation (987) (1,973)
Pensioner and dependant members' defined benefit obligations (1,220) (1,800)
Total defined benefit obligation (2,216) (3,789)
Fair value of Scheme assets 3,216 4,636
Net defined benefit pension asset 1,000 847
Post-retirement medical benefits obligations((1)) (2) (2)
(1) Post-retirement medical benefits obligations are included within other
liabilities (note 3.14).
The Group's pension arrangements
The current version of the Scheme was established under trust on 30 September
2009 with the assets held in a Trustee administered fund. The Trustee is
responsible for the operation and governance of the Scheme, including making
decisions regarding the Scheme's funding and investment strategy.
The Scheme is subject to the funding legislation outlined in the Pensions Act
2004 which came into force on 30 December 2005. This, together with
documents issued by the Pensions Regulator, sets out the framework for funding
defined benefit occupational pension plans in the UK.
The Group has implemented several reforms to the Scheme to manage the
obligation. It closed the Scheme to new members in 2004 and since April 2006
has provided benefits accruing on a career average revalued earnings basis.
On 1 August 2017, the Scheme was closed to future benefit accrual for the
majority of current employees, with both affected and new employees' future
pension benefits being provided through the Group's existing defined
contribution scheme, 'My Retirement'. The income statement charge for this is
separately disclosed in note 2.4.
The Group also provides post-retirement healthcare under a defined benefit
scheme for some pensioners and their dependant relatives for which provision
has been made on a basis consistent with the methodology applied to the
defined benefit pension scheme. This is a closed scheme and the provision
will be utilised over the life of the remaining scheme members. The obligation
in respect of this scheme was £2m at 30 September 2022 (2021: £2m) and is
included within other liabilities in note 3.14.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.9 Retirement benefit obligations continued
Scheme valuations
There are a number of means of measuring liabilities in the defined benefit
schemes, with the ultimate aim of the Trustee being that the Scheme is 100%
funded on an agreed self-sufficiency basis (which is where the Scheme is
essentially self-funded and does not need to call on the Group for any
additional funding). The two bases used by the Group to value its obligations
are: (i) an IAS 19 accounting basis; and (ii) a Trustee's Technical
Provision basis.
(i) IAS 19 accounting basis
The valuations of the Scheme assets and obligations are calculated on an
accounting basis in accordance with the applicable accounting standard IAS
19 which provides the basis for the accounting framework and methodology for
entries in the income statement, balance sheet and capital reporting. The
principal purpose of this valuation is to allow comparison of pension
obligations between companies. The obligation under an accounting valuation
can be higher or lower than those under a Trustee's Technical Provision
valuation.
The rate used to discount the obligation on an IAS 19 basis is a key driver of
any potential volatility and is based on yields on AA rated high-quality
corporate bonds, regardless of how the Trustee of the Scheme invests the
assets. The accounting valuation under IAS 19 can therefore move adversely
because of low rates and narrowing credit spreads which are not fully matched
by the Scheme assets. Inflation is another key source of volatility and
arises as a result of member benefits having an element of index linking,
which causes the obligation to increase in line with rises in long-term
inflation assumptions. In practice however, over the long term, the
relationship between interest and inflation rates tends to be negatively
correlated resulting in a degree of risk offset.
(ii) Trustee's Technical Provision basis
This valuation basis reflects how much money the Trustee considers is required
now in order to provide for the promised benefits as they come up for
payment in the future. The Trustee is responsible for ensuring that the
calculation is conducted prudently on an actuarial basis, considering factors
including the Scheme's investment strategy and the relative financial strength
of the sponsoring employer.
A key aspect of this valuation is the investment strategy the Trustee proposes
to follow as part of the policy for meeting the Scheme's obligations.
Because there are no guarantees about investment returns over long periods,
legislation requires the Trustee to consider carefully how much of their
expected future investment returns it would be prudent for them to account for
in advance.
During 2020 the Trustee concluded the latest triennial valuation for the
Scheme, which was conducted in accordance with Scheme data and market
conditions as at 30 September 2019. The valuation resulted in an improvement
in the Scheme's funding position, with a reported surplus of £144m
(previously a deficit of £290m) and a technical provisions funding level of
103% (previously 94%). As the 2019 valuation outcome was a funding surplus,
the future payments to the Scheme were limited solely to those relating to a
payment holiday agreed between the Group and Scheme Trustee in respect of
contributions due under the prior 2016 valuation. These totalled £52m and
were paid in full by the end of September 2021.
The next triennial valuation is due to be conducted in 2023 with Scheme data
and market conditions as at 30 September 2022.
Scheme assets are not subject to the same valuation differences as Scheme
obligations and are consistently valued at current market value.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.9 Retirement benefit obligations continued
IAS 19 position
The Scheme movements in the year are as follows:
2022 2021
Present value Fair value Total Cumulative Present value Fair value Total Cumulative
of obligation of plan assets £m impact in other of obligation of plan assets £m impact in other
£m £m comprehensive £m £m comprehensive
income income
£m £m
Balance sheet surplus at 1 October (3,789) 4,636 847 (3,958) 4,681 723
(248) (302)
Total expense
Past service credit 9 - 9 3 - 3
Interest (expense)/income (84) 104 20 (61) 73 12
Administrative costs - (5) (5) - (6) (6)
Total (expense)/income recognised in the consolidated income statement (75) 99 24 (58) 67 9
Remeasurements
Return on Scheme assets greater than discount rate - (1,393) (1,393) (1,393) - (19) (19) (19)
Actuarial:
Loss - experience adjustments (16) - (16) (16) (15) - (15) (15)
Gain - demographic assumptions 36 - 36 36 2 - 2 2
Gain - financial assumptions 1,495 - 1,495 1,495 86 - 86 86
Remeasurement gains/(losses) recognised in other comprehensive income 1,515 (1,393) 122 122 73 (19) 54 54
Contributions and payments
Employer contributions - 7 7 - 61 61
Benefit payments 105 (105) - 99 (99) -
Transfer payments 28 (28) - 55 (55) -
133 (126) 7 154 (93) 61
Balance sheet surplus at 30 September (2,216) 3,216 1,000 (3,789) 4,636 847
(126) (248)
In July 2021, the Trustees communicated a Pension Increase Exchange (PIE)
exercise to members. A PIE gives members the option to exchange future
increases on their pensions for a one-off uplift to their current pension. The
exercise is being undertaken in three phases and is due to complete in
calendar year 2023. A past service credit of £10m has been recognised in the
year to 30 September 2022 (2021: £5m) in line with member acceptance of the
PIE offer by the balance sheet date; the balance of the credit will be
recognised next calendar year as the exercise concludes.
The expected contributions and benefit payments for the year ending 30
September 2023 are £10m (2022: £7m) and £118m (2022: £115m)
respectively.
The Group and Trustee have entered into a contingent security arrangement (the
'Security Arrangement') (note 5.3).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.9 Retirement benefit obligations continued
Maturity of Scheme liabilities
The estimated maturity period of Scheme obligations on an IAS 19 accounting
basis is as follows:
The discounted mean term of the defined benefit obligation at 30 September
2022 is 14 years (2021: 18.5 years).
Scheme assets
In order to meet the obligations of the Scheme, the Trustee invests in a
diverse portfolio of assets, with the level and volatility of asset returns
being a key factor in the overall investment strategy. The investment
portfolio is subject also to a range of risks typical of the types of assets
held, such as: equity risk; credit risk on bonds; currency risk; interest rate
and inflation risk; and exposure to the property market. The Trustee's
investment strategy (including physical assets and derivatives) seeks to
reduce the Scheme's exposure to these risks. In managing interest rate and
inflation risks, the investment strategy seeks to hold portfolios of matching
assets (including derivatives) that enable the Scheme's assets to better match
movements in the value of liabilities due to changes in interest rates and
inflation.
As at 30 September 2022, the interest rate and inflation rate hedge ratios
were 97% and 95% respectively (2021: 95% and 95%) of the obligation when
measured on a self-sufficiency basis. This strategy reflects the Scheme's
obligation profile and the Trustee's and the Group's attitude to risk. The
Trustee monitors the investment objectives and asset allocation policy on a
regular basis.
The Trustee's investment strategy involves two main categories of investments:
Matching assets - a range of investments that provide a match to changes in
obligation values.
Return seeking assets - a range of investments designed to provide specific,
planned and consistent returns.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.9 Retirement benefit obligations continued
The major categories of plan assets for the Scheme, stated at fair value, are
as follows:
2022 2021
Quoted Unquoted Total % Quoted Unquoted Total %
£m £m £m £m £m £m
Bonds
Fixed government 350 - 350 894 - 894
Index-linked government 1,314 - 1,314 1,815 - 1,815
Global sovereign 90 2 92 117 4 121
Corporate and other 781 37 818 1,011 47 1,058
2,535 39 2,574 80% 3,837 51 3,888 84%
Equities((1))
Global equities - 137 137 - 150 150
Emerging market equities - 14 14 - 16 16
UK equities - 7 7 - 8 8
- 158 158 5% - 174 174 4%
Other
Secured income alternatives - 229 229 - 197 197
Derivatives((2)) - (83) (83) - 6 6
Repurchase agreements - (803) (803) - (719) (719)
Property - 59 59 - 122 122
Alternative credit - 645 645 - 597 597
Infrastructure - 194 194 - 161 161
Cash - 243 243 - 209 209
Equity options - - - 1 - 1
- 484 484 15% 1 573 574 12%
Total Scheme assets 2,535 681 3,216 100% 3,838 798 4,636 100%
(1) Equity investments are classified as unquoted reflecting the nature of
the funds in which the Scheme invests directly. The underlying investments
within those funds are, however, mostly quoted.
(2) Derivative financial instruments are used to modify the profile of the
assets of the Scheme to better match the Scheme liabilities. Derivative
holdings may lead to increased or decreased exposures to the physical asset
categories disclosed above.
At 30 September 2022, the Scheme had employer-related investments within the
meaning of Section 40 (2) of the Pensions Act 1995 totalling £2m (2021:
£2m).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.9 Retirement benefit obligations continued
Actuarial assumptions
The following assumptions were used in arriving at the IAS 19 defined benefit
obligation:
2022 2021
% p.a. % p.a.
Financial assumptions
Discount rate 5.45 2.08
Inflation (RPI) 3.58 3.40
Inflation (CPI) 2.94 2.77
Career average revalued earnings revaluations:
Pre 31 March 2012 benefits (RPI) 3.58 3.40
Post 31 March 2012 benefits (CPI capped at 5% per annum) 2.90 2.73
Pension increases (capped at 2.5% per annum) 2.21 2.16
Pension increases (capped at 5% per annum) 3.37 3.23
Rate of increase for pensions in deferment 2.91 2.73
Demographic assumptions
2022 2021
Years Years
Post-retirement mortality:
Current pensioners at 60 - male 27.0 27.2
Current pensioners at 60 - female 29.3 29.4
Future pensioners at 60 - male 28.0 28.3
Future pensioners at 60 - female 30.4 30.5
Critical accounting estimates and judgements
The value of the Group's defined benefit pension scheme requires management to
make several assumptions. The key areas of estimation uncertainty are:
discount rate applied: this is set with reference to market yields at the end
of the reporting year on high-quality corporate bonds in the currency and with
a term consistent with the Scheme's obligations. The average duration of the
Scheme's obligations is approximately 20 years. The market for bonds with a
similar duration is illiquid and, as a result, significant management
judgement is required to determine an appropriate yield curve on which to base
the discount rate;
inflation assumptions: this is set with reference to market expectations of
the RPI measure of inflation for a term consistent with the Scheme's
obligations, based on data published by the BoE. Other measures of inflation
(such as CPI, or inflation measures subject to an annual cap) are derived from
this assumption; and
mortality assumptions: the cost of the benefits payable by the Scheme will
also depend upon the life expectancy of the members. The assumptions for
mortality rates are based on standard mortality tables (as adjusted to reflect
the characteristics of Scheme members) which allow for future improvements
in life expectancies.
The table below sets out the sensitivity and impact on the balance sheet
surplus position of the Scheme, the defined benefit obligation and pension
cost to changes in the key actuarial assumptions:
Assumption change Balance sheet Obligation Pension cost
surplus £m £m
£m
Discount rate +0.25% (63) (70) (7)
−0.25% 64 74 6
Inflation +0.25% 36 43 2
−0.25% (34) (43) (2)
Life expectancy +1 year (67) 67 4
−1 year 67 (67) (4)
The above sensitivity analyses are based on a change in an assumption while
holding all other assumptions constant. In practice, changes in some of the
assumptions may be correlated.
The above sensitivity analyses are based on a change in an assumption while
holding all other assumptions constant. In practice, changes in some of the
assumptions may be correlated.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.10 Customer deposits
2022 2021
£m £m
Interest bearing demand deposits 46,457 46,839
Term deposits 13,951 15,097
Non-interest bearing demand deposits 4,952 4,936
65,360 66,872
Accrued interest payable 74 99
65,434 66,971
3.11 Debt securities in issue
Accounting policy
Debt securities comprise short and long-term debt issued by the Group
including commercial paper, medium-term notes, covered bonds and RMBS notes.
Debt securities are initially recognised at fair value, being the issue
proceeds, net of transaction costs incurred. These instruments are
subsequently measured at amortised cost using the effective interest method
resulting in premiums, discounts and associated issue costs being recognised
in the income statement over the life of the instrument.
Where relevant fair value hedge adjustments have been applied.
The breakdown of debt securities in issue is shown below:
Medium-term Subordinated Securitisation Covered Total
notes debt £m bonds £m
£m £m £m
2022
Debt securities 2,236 899 1,875 3,450 8,460
Accrued interest payable 13 14 5 17 49
2,249 913 1,880 3,467 8,509
2021
Debt securities 2,409 1,001 2,386 1,842 7,638
Accrued interest payable 13 14 3 10 40
2,422 1,015 2,389 1,852 7,678
Key movements in the year are shown in the table below((1)).
2022 2021
Issuances Redemptions Issuances Re
de
mp
ti
on
s
Denomination £m Denomination £m Denomination £m Denomination £m
Medium-term notes - - - - EUR 432 - -
Subordinated debt - - - - GBP 300 GBP 30
Securitisation GBP 700 USD, GBP 1,264 - - USD, EUR, 1,543
GBP
Covered bonds EUR, GBP 1,780 - - - - - -
2,480 1,264 732 1,573
(1) Other movements relate to foreign exchange, hedging adjustments and
the capitalisation and amortisation of issuance costs.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.11 Debt securities in issue continued
The following tables provide a breakdown of the medium-term notes and
subordinated debt by instrument as at 30 September:
Medium-term notes (excluding accrued interest)
2022 2021
£m £m
VM UK 3.125% fixed-to-floating rate callable senior notes due 2025 299 299
VM UK 4% fixed rate reset callable senior notes due 2026 444 509
VM UK 3.375% fixed rate reset callable senior notes due 2026 317 359
VM UK 4% fixed rate reset callable senior notes due 2027 331 390
VM UK 2.875% fixed rate reset callable senior notes due 2025 413 424
VM UK 0.375% fixed rate reset callable senior notes due 2024 432 428
2,236 2,409
Subordinated debt (excluding accrued interest)
2022 2021
£m £m
VM UK 7.875% fixed rate reset callable subordinated notes due 2028 249 248
VM UK 5.125% fixed rate reset callable subordinated notes due 2030 400 458
VM UK 2.625% fixed rate reset callable subordinated notes due 2031 250 295
899 1,001
Details of securitisation and covered bond issuances are included in note 3.3.
Full details of all notes in issue can be found at
https://www.virginmoneyukplc.com/investor
(https://www.virginmoneyukplc.com/investor-relations/debt-investors) ‑
(https://www.virginmoneyukplc.com/investor-relations/debt-investors)
relations/debt-investors/
(https://www.virginmoneyukplc.com/investor-relations/debt-investors) .
3.12 Due to other banks
2022 2021
£m £m
Secured loans 7,230 5,896
Securities sold under agreements to repurchase((1)) 1,205 -
Transaction balances with other banks 17 -
Deposits from other banks 50 22
8,502 5,918
(1) The underlying securities sold under agreements to repurchase have a
carrying value of £1,873m (2021: £Nil).
Secured loans comprise amounts drawn under the TFSME scheme (including accrued
interest). In 2021, secured loans included both TFS and TFSME scheme
drawings (including accrued interest).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.13 Provisions for liabilities and charges
Accounting policy
Provisions for liabilities and charges are recognised when a legal or
constructive obligation exists as a result of past events, it is probable that
an outflow of economic benefits will be necessary to settle the obligation,
and the obligation can be reliably estimated. Provisions for liabilities and
charges are not discounted to the present value of their expected net future
cash flows except where the time value of money is considered material.
Employee related Customer related Property Off-balance sheet Total
costs provision provision provision ECL provisions((1))
£m £m £m £m
As at 1 October 2020 16 130 26 - 172
Transfer of ECL from impairment provisions - - - 7 7
Charge to the income statement 31 78 39 1 149
Utilised (25) (189) (10) - (224)
As at 30 September 2021 22 19 55 8 104
Charge to the income statement 2 8 - - 10
Utilised (17) (14) (28) (5) (64)
As at 30 September 2022 7 13 27 3 50
(1) The Group's ECL accounting policy can be found in (note 3.2).
During the year, the Group has refined its methodology for categorising
provisions for liabilities and charges to align with current business
operations. There has been no change to the total provisions in the prior year
and comparatives have been amended to conform with the current year's
presentation.
The change took the original provision categories and analysed this further to
align with business operations. The revised prior year categories of PPI
redress provision (£1m), customer redress and other provisions (£28m) and
property closure and redundancy provision (£67m) is now allocated to employee
related costs provision (£22m), customer related provision (£19m) and
property provision (£55m). PPI redress provision of £1m has been reallocated
to customer related provision, £10m of customer redress and other provisions
has been reallocated in part £3m to employee related costs provision and £7m
to property provision, and restructuring provisions of £19m which were
previously included within property closure and redundancy provision has been
reallocated to employee related costs provision.
Employee related costs provision
This includes provision for staff redundancies and for NIC on equity based
compensation. During the year, provisions of £2m (2021: £31m) were raised
relating to staff redundancy costs.
Customer related provision
This relates to customer matters, legal proceedings, claims arising in the
ordinary course of the Group's business and other matters. A number of these
matters are now reaching a conclusion and the risk that the final amount
required to settle the Group's potential liabilities in these matters being
materially more than the remaining provision is now considered to be low.
Property provision
This includes costs for stores and office closures. During the year,
provisions of £Nil (2021: £39m) were raised relating to store and office
closures.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.14 Other liabilities
Accounting policy
Deferred grants
Deferred grants are recognised when there is reasonable assurance that the
grant will be received and that any conditions attached to the grant will be
complied with. Where the grant relates to costs, it is released to the income
statement on a systematic basis in line with the incurring of the related
costs. Where the grant relates to the cost of an asset, it is released
and recognised directly against the cost of the asset when incurred.
2022 2021
£m £m
Notes in circulation 1,822 2,104
Accruals and deferred income 74 76
Deferred grant - 20
Other 498 251
2,394 2,451
In 2021, the Group received £9m from the Capability and Innovation Fund (as
part of the RBS alternative remedies package), which has been utilised under
the terms of the grant application during the year. As part of the grant the
Group is subject to delivering a number of public commitments. These
commitments can be found on Banking Competition Remedies (BCR's) (the awarding
body) website. As at 30 September 2022 the Group is currently on track with
the delivery of these commitments.
The movement in the deferred grant is shown below:
2022 2021
£m £m
Opening balance 20 35
Grants received - 9
Utilised against income statement spend in the year (20) (24)
Closing balance - 20
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.15 Fair value of financial instruments
Accounting policy
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the valuation date.
When available, the Group measures the fair value of a financial instrument
using quoted prices in an active market for that instrument. Where no such
active market exists for the particular asset or liability, the Group uses a
valuation technique to arrive at the fair value, including the use of
transaction prices obtained in recent arm's length transactions where
possible, discounted cash flow analysis, option pricing models and other
valuation techniques commonly used by market participants. In doing so, fair
value is estimated using a valuation technique that makes maximum possible
use of market inputs and that places minimal possible reliance upon
entity-specific inputs.
The best evidence of the fair value of a financial instrument at initial
recognition is the transaction price, which represents the fair value of the
consideration paid or received, unless the fair value of that instrument is
evidenced by comparison with other observable current market transactions in
the same instrument (i.e. without modification or repackaging) or based on a
valuation technique whose variables include only data from observable markets.
When such evidence exists, the Group recognises profits or losses on the
transaction date.
In certain limited circumstances, the Group applies the fair value measurement
option to financial assets including loans and advances where the inherent
market risks (principally interest rate and option risk) are individually
hedged using appropriate interest rate derivatives. The loan is designated as
being carried at FVTPL to offset the movements in the fair value of the
derivative within the income statement and therefore avoid an accounting
mismatch. When a loan is held at fair value, a statistical-based calculation
is used to estimate credit losses attributable to adverse movements in
credit risk on the assets held. This adjustment to the credit quality of the
asset is then applied to the carrying amount of the loan to arrive at fair
value and recognised in the income statement.
Analysis of the fair value disclosures uses a hierarchy that reflects the
significance of inputs used in measuring fair value. The level in the fair
value hierarchy within which a fair value measurement is categorised is
determined on the basis of the lowest level input that is significant to the
fair value measurement in its entirety. The fair value hierarchy is as
follows:
· Level 1 fair value measurements - quoted prices (unadjusted) in active
markets for an identical financial asset or liability.
· Level 2 fair value measurements - inputs other than quoted prices
within Level 1 that are observable for the financial asset or liability,
either directly (as prices) or indirectly (derived from prices).
· Level 3 fair value measurements - inputs for the financial asset or
liability that are not based on observable market data (unobservable
inputs).
For the purpose of reporting movements between levels of the fair value
hierarchy, transfers are recognised at the beginning of the reporting year
in which they occur.
(a) Fair value of financial instruments recognised on the balance sheet at
amortised cost
The tables show a comparison of the carrying amounts of financial assets and
liabilities measured at amortised cost, as reported on the balance sheet, and
their fair values where these are not approximately equal.
There are various limitations inherent in this fair value disclosure,
particularly where prices are derived from unobservable inputs due to some
financial instruments not being traded in an active market. The methodologies
and assumptions used in the fair value estimates are therefore described in
the notes to the tables. The difference between carrying value and fair value
is relevant in a trading environment but is not relevant to assets such as
loans and advances.
2022 2021
Carrying value Fair value Carrying value Fair value
£m £m £m £m
Financial assets
Loans and advances to customers((1)) 71,751 69,277 71,876 72,229
Financial liabilities
Customer deposits((2)) 65,434 65,069 66,971 67,012
Debt securities in issue((3)) 8,509 8,515 7,678 8,050
Due to other banks((2)) 8,502 8,485 5,918 5,918
(1) Loans and advances to customers are categorised as Level 3 in the fair
value hierarchy with the exception of £1,098m (2021: £1,057m) of
overdrafts which are categorised as Level 2.
(2) Categorised as Level 2 in the fair value hierarchy.
(3) Categorised as Level 2 in the fair value hierarchy with the exception
of £3,156m of listed debt (2021: £3,704m) which is categorised as Level
1.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.15 Fair value of financial instruments continued
The Group's fair values disclosed for financial instruments at amortised cost
are based on the following methodologies and assumptions:
(a) Loans and advances to customers - The fair values of loans and
advances are determined by firstly segregating them into portfolios which
have similar characteristics. Contractual cash flows are then adjusted for
ECLs and expectations of customer behaviour based on observed historic data.
The cash flows are then discounted at a weighted average cost of capital
(appropriate to the portfolio) to arrive at an estimate of their fair value.
(b) Customer deposits - The fair value of deposits is determined using a
replacement cost method which assumes alternative funding is raised in the
most advantageous market. The contractual cash flows have been discounted
using a funding curve with credit spreads reflecting the tenor of each
deposit.
(c) Debt securities in issue - The fair value is taken directly from
quoted market prices where available or determined from a discounted cash flow
model using current market rates for instruments of similar terms and
maturity.
(d) Due to other banks - The fair value is determined from a discounted
cash flow model using current market rates for instruments of similar terms
and maturity.
(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 subsequent to initial recognition at fair value, using the fair
value hierarchy described above:
Fair value measurement 2022 Fair value measurement 2021
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
£m £m £m £m £m £m £m £m
Financial assets
Financial assets at FVOCI 5,064 - - 5,064 4,352 - - 4,352
Loans and advances at FVTPL - 70 - 70 - 133 - 133
Other financial assets at FVTPL - 4 4 8 - 14 6 20
Derivative financial assets - 342 - 342 - 139 1 140
Total financial assets at fair value 5,064 416 4 5,484 4,352 286 7 4,645
Financial liabilities
Derivative financial liabilities - 327 - 327 - 209 - 209
Total financial liabilities at fair value - 327 - 327 - 209 - 209
There were no transfers between Level 1 and 2 in the current or prior year.
The Group's valuations for financial instruments that are measured subsequent
to initial recognition at fair value are based on the following methodologies
and assumptions:
(a) FVOCI - The fair values of listed investments are based on quoted
closing market prices.
(b) Loans and advances to customers (Level 2) - The fair value is derived
from data or valuation techniques based upon observable market data and
non-observable inputs as appropriate to the nature and type of the
underlying instrument.
(c) Other financial assets at FVTPL (Level 2) - Represents £4m of Visa
Inc. Series A preferred stock received following a conversion event in July
2022. The fair value of the preference shares has been calculated by taking
the year end New York Stock Exchange share price for Visa inc. The prior year
amount represented £14m of an unlisted equity investment that was valued
based on an offer of purchase by an independent third party, with the sale
concluded in January 2022.
(d) Other financial assets at FVTPL (Level 3) - Partly represents £1m
(2021: £4m) of Visa Inc. Series B preferred stock received as partial
consideration for the sale of the Group's share in Visa Europe. The
preferred stock is convertible into Visa Inc. common stock or its equivalent
at a future date, subject to potential reduction for certain litigation losses
that may be incurred by Visa Europe. The fair value of the preference shares
has been calculated by taking the year end New York Stock Exchange share price
for Visa Inc. and discounting for illiquidity and clawback related to
contingent litigation. For other unlisted equity investments, the Group's
share of the net asset value or the transaction price respectively is
considered the best representation of the exit price and is the Group's best
estimate of fair value.
(e) Derivative financial assets and liabilities (Level 2) - The fair
values of derivatives, including foreign exchange contracts, interest rate
swaps, interest rate and currency option contracts, and currency swaps, are
obtained from discounted cash flow models or option pricing models as
appropriate.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.15 Fair value of financial instruments continued
Level 3 movement analysis:
2022 2022 2021 2021
Derivative Financial assets Financial assets Derivative
financial assets at FVTPL at FVTPL financial assets
£m £m £m £m
Balance at the beginning of the year 1 6 5 -
Fair value gains recognised((1))
In profit or loss - unrealised (1) - 1 1
Settlements - (2) - -
Balance at the end of the year - 4 6 1
(1) Net gains or losses were recorded in non-interest income.
Sensitivity of Level 3 fair value measurements to reasonably possible
alternative assumptions
The Group has limited exposure to Level 3 fair value measurements. If all
risks inherent in the valuations were to crystallise in their entirety, total
assets would reduce by £4m which would be recognised directly in the income
statement.
3.16 Lessee accounting
Accounting policy
The Group as lessee
The Group leases offices, stores and other premises, and sub-leases certain
premises which are no longer occupied by the Group. The Group applies a
single lessee accounting model to all lease arrangements it enters into from
the date on which the leased asset is available for use, with the exception of
low value leases and short-term leases (less than 12 months) in respect
of which the associated lease payments are expensed in the income statement
on a straight line basis over the lease term.
Under the single lessee accounting model, the Group recognises a right-of-use
asset and a lease liability at the commencement date of the lease. The
right-of-use asset is initially measured at cost, comprising the initial
amount of the lease liability plus any initial direct costs incurred and any
lease payments made at or before the lease commencement date, less any lease
incentives received. The right-of-use asset is subsequently depreciated using
the straight line method from the commencement date to the earlier of the end
of the useful life of the asset or the end of the lease term, subject to
review for impairment. The lease liability is initially measured at the
present value of the lease payments, discounted using the interest rate
implicit in the lease, or if that rate cannot readily be determined (as is the
case in the majority of the leasing activities of the Group), the incremental
borrowing rate. The liability is remeasured when there is a change in future
lease payments arising from a change in an index or a rate or a change in the
Group's assessment of whether it will exercise an extension or termination
option. When the lease liability is remeasured, a corresponding adjustment is
made to the right-of-use asset or is recorded in the income statement if the
carrying amount of the right‑of‑use asset has been reduced to zero.
Termination options are included in several leases across the Group with a
small number of leases having extension options. These terms are used to
maximise operational flexibility in terms of managing contracts. In
determining judgements on the lease term, management considers all facts and
circumstances that create an economic incentive to exercise an extension
option, or not exercise a termination option. Periods covered by termination
options are only included in the lease term if it is reasonably certain that
the lease will not be terminated. The assessment of the lease term is reviewed
if a significant event or a significant change in circumstances occurs that is
within the control of the Group.
The Group as sub-lessor
Sub-leases are classified as finance leases if substantially all the risks and
rewards incidental to ownership of the underlying asset are transferred,
otherwise they are classified as operating leases. Finance sub-leases are
recognised in other assets representing the minimum lease payments receivable
under the terms of the lease, discounted at the rate of interest implicit
in the lease. Interest income is recognised reflecting a constant periodic
rate of return. Operating sub-lease income is recognised in the income
statement on a straight line basis over the lease term.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.16 Lessee accounting continued
a) Amounts recognised in the income statement
The income statement includes the following amounts related to leases:
2022 2021
£m £m
Interest expense and similar charges
Interest expense (2) (3)
Other operating income
Income from operating sub-leases where the Group is a lessor 1 1
Operating and administrative expenses
Depreciation and impairment of right-of-use assets (26) (28)
Expense relating to short-term leases (1) (1)
Expense relating to leases of low-value assets that are not short-term leases (1) (1)
Amounts recognised in the income statement (29) (32)
Total leasing cash outflow in the year was £28m (2021: £29m).
b) Amounts recognised on the balance sheet
Right-of-use assets
2022 2021
£m £m
As at 1 October 135 161
Additions 4 4
Remeasurements 1 1
Disposals (1) (2)
Depreciation and impairment (26) (29)
As at 30 September 113 135
All right-of-use assets relate to leases of land and buildings and are
presented within property, plant and equipment on the balance sheet.
The Group reviewed its existing surplus estate population for impairment.
Where it is expected the Group can sub-lease the property, the recoverable
amount was determined based on expected sub-lease income. Where the Group does
not expect to be able to generate any cash inflows beyond the closure date,
the value-in-use was determined to be £Nil. It was concluded that 19
properties (2021: 22) should be impaired following a reduction in
value-in-use, resulting in an impairment charge of £4m (2021: £1m). In
addition, an impairment of £5m was recognised in the current year in relation
to right-of-use assets for office estate where no further economic benefit
was expected following exit. In the prior year the Group announced the closure
of 30 stores leased by the Group and to relocate four stores to more prime
locations in existing towns. The right-of-use assets were assessed following
the above methodology resulting in an impairment charge of £5m.
Sub-leases
Future undiscounted minimum payments receivable in respect of sub-leased
assets at 30 September were as follows:
2022 2021
£m £m
Operating leases 1 1
Finance leases 3 5
4 6
Lease liabilities
2022 2021
£m £m
Lease liabilities((1)) 132 154
(1) Lease liabilities are presented within other liabilities on the
balance sheet.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.16 Lessee accounting continued
Future undiscounted minimum payments under lease liabilities at 30 September
are as follows:
Amounts falling due 2022 2021
£m £m
Within 1 year 22 26
Between 1 and 5 years 60 73
Over 5 years 66 78
148 177
c) Lease commitments not recognised on the balance sheet
In addition to the lease liabilities recognised on the balance sheet, the
Group also has lease commitments relating to leases which have not yet
commenced at the balance sheet date. Future undiscounted minimum payments on
leases which are yet to commence were as follows:
Amounts falling due 2022 2021
£m £m
Within 1 year 4 -
Between 1 and 5 years 22 21
Over 5 years 99 104
125 125
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital
4.1 Equity
Accounting policy
Equity
The financial instruments issued by the Company are treated as equity (i.e.
forming part of shareholders' funds) only to the extent that they meet the
following two conditions:
(a) They impose no contractual obligations upon the Company to deliver cash or
other financial assets or to exchange financial assets or financial
liabilities with another party under conditions that are potentially
unfavourable to the Group.
(b) Where the instrument will or may be settled in the Company's own equity
instruments, it is either a non-derivative that includes no obligation to
deliver a variable number of the Company's own equity instruments or is a
derivative that will be settled by the Company exchanging a fixed amount of
cash or other financial assets for a fixed number of its own equity
instruments.
To the extent that this definition is not met, the proceeds of issue are
classified as a financial liability.
Incremental costs directly attributable to the issue of new shares or options
or to the acquisition of a business are shown in equity as a deduction, net of
tax, from the proceeds.
Dividends
Final dividends on ordinary shares are recognised as a liability and deducted
from equity when they are approved by the Company's shareholders. Interim
dividends are deducted from equity when they are no longer at the discretion
of the Company.
4.1.1 Share capital and share premium
2022 2021
£m £m
Share capital 141 144
Share premium 7 5
Share capital and share premium 148 149
2022 2021 2022 2021
Number of shares Number of shares £m £m
Ordinary shares of £0.10 each -
allotted, called up and fully paid
Opening ordinary share capital 1,439,993,431 1,438,574,687 144 144
Issued under employee share schemes 2,982,745 1,418,744 - -
Share buyback programme (34,445,188) - (3) -
Closing ordinary share capital 1,408,530,988 1,439,993,431 141 144
The holders of ordinary shares are entitled to dividends as declared from time
to time and are entitled to one vote per share at meetings of the shareholders
of the Company. All shares in issue at 30 September 2022 rank equally with
regard to the Company's residual assets.
A final dividend in respect of the year ended 30 September 2021 of 1p per
ordinary share in the Company, amounting to £14m, was paid in March 2022.
An interim dividend in respect of the year ended 30 September 2022 of 2.5p per
ordinary share in the Company, amounting to £36m, was paid in June 2022.
The Directors have recommended a final dividend in respect of the year ended
30 September 2022 of 7.5p per ordinary share in the Company to be paid in
March 2023. The payment of the final dividend is subject to approval of the
shareholders at the 2023 AGM. These financial statements do not reflect the
recommended dividend.
On 30 June 2022 the Company announced a share buyback programme, with an
initial repurchase of up to £75m in aggregate between its ordinary shares of
£0.10 each listed on the LSE and CDIs, each representing one share, listed on
the ASX. Subject to trading liquidity, the Company intends to repurchase
shares and CDIs in approximately equal proportions. The buyback commenced on
30 June 2022 and will end no later than 17 December 2022. 34m shares, with a
nominal value of £3m, were repurchased in the year ended 30 September 2022
for a total consideration of £50m (2021: £Nil). All shares repurchased were
cancelled and the nominal value of the share cancellation transferred to the
capital redemption reserve with the premium paid deducted from retained
earnings.
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital
4.1 Equity continued
On 21 November 2022 the Company announced an extension to the share buyback
programme with an intent to repurchase a further £50m in aggregate of shares
and CDIs. Subject to trading liquidity, the Company again intends to
repurchase shares and CDIs in approximately equal proportions. The buyback
extension will commence on 21 November 2022 and will end no later than 2 May
2023.
Share premium represents the aggregate of all amounts that have ever been paid
above par value to the Company when it has issued ordinary shares.
A description of the other equity categories included within the consolidated
statement of changes in equity, and significant movements during the year, is
provided below:
4.1.2 Other equity instruments
Other equity instruments comprises AT1 capital which consists of the following
Perpetual Contingent Convertible Notes:
· Perpetual securities (fixed 8% up to the first reset date) issued on 8
February 2016 with a nominal value of £73m and optional redemption on 8
December 2022. On 17 June 2022, securities totalling £377m (representing
83.86% of the original £450m principal amount) were redeemed. On 10 October
2022 it was announced that the remaining securities would be redeemed on the
optional redemption date.
· Perpetual securities (fixed 9.25% up to the first reset date) issued on
13 March 2019
with a nominal value of £250m and optional redemption on 8 June 2024.
· Perpetual securities (fixed 8.25% up to the first reset date) issued on
17 June 2022
with a nominal value of £350m and optional redemption on 17 June 2027.
On 10 November 2021, perpetual securities with a nominal value of £230m were
redeemed in full.
The issues are treated as equity instruments in accordance with IAS 32
'Financial Instruments: Presentation' with the proceeds included in equity,
net of transaction costs of £7m (2021: £15m). AT1 distributions of £70m
were paid in the year (2021: £79m).
4.1.3 Capital reorganisation reserve
The capital reorganisation reserve of £839m was recognised on the issuance of
the Company's ordinary shares in February 2016 in exchange for the acquisition
of the entire share capital of the Group's previous parent company, CYB
Investments Limited (CYBI). The reserve reflects the difference between the
consideration for the issuance of the Company's shares and CYBI's share
capital and share premium.
4.1.4 Merger reserve
A merger reserve of £633m was recognised on the issuance of the Company's
ordinary shares in February 2016 in exchange for the acquisition of the
entire share capital of CYBI. An additional £1,495m was recognised on the
issuance of the Company's ordinary shares in October 2018 in exchange for the
acquisition of the entire share capital of Virgin Money Holdings (UK) Limited.
The merger reserve reflects the difference between the consideration for the
issuance of the Company's shares and the nominal value of the shares issued.
4.1.5 Other reserves
Own shares held and treasury shares
Virgin Money Holdings (UK) Limited established an EBT in 2011 in connection
with the operation of its share plans. On the date of acquisition by the
Company, the shares held in the EBT were converted to the Company's shares at
a ratio of 1.2125 Company shares for each Virgin Money Holdings (UK) Limited
share. The investment in own shares as at 30 September 2022 is £0.6m (2021:
£0.2m). The market value of the shares held in the EBT at 30 September 2022
was £0.4m (2021: £0.2m).
As part of the buyback programme, the Company has entered a non-discretionary
arrangement with Citigroup Global Markets Limited to purchase shares as
riskless principal and to make trading decisions independently of the Company.
Any purchase of shares pursuant to this engagement will be carried out on
the LSE or other recognised investment exchange. This arrangement results in
the recognition of a liability (included within due to other banks)
and a deduction from retained earnings of £11m at 30 September 2022
(2021: £Nil). The liability will reduce as shares are repurchased and
cancelled with the impact on share capital and capital redemption reserve as
described elsewhere within this note.
Capital redemption reserve
Under UK companies legislation, when shares are redeemed or purchased wholly
or partly out of the company's profits, the amount by which the company's
issued share capital is diminished must be transferred to the capital
redemption reserve. The capital maintenance provisions of UK companies
legislation apply to the capital redemption reserve as if it were part of the
company's paid up share capital. The nominal value of the shares repurchased
and cancelled under the buyback programme during 2022 has been transferred to
the capital redemption reserve.
Deferred shares reserve
The deferred shares reserve comprises shares to be issued in the future
relating to employee share plans in regard to the settlement of outstanding
Virgin Money Holdings (UK) Limited share awards, which will be settled through
the issuance of the Company's shares at a future date in line with the vesting
profile of the underlying plans.
Equity based compensation reserve
The Group's equity based compensation reserve records the value of equity
settled share based payment benefits provided to the Group's employees as part
of their remuneration that has been charged through the income statement and
adjusted for deferred tax.
FVOCI reserve
The FVOCI reserve records the unrealised gains and losses arising from changes
in the fair value of financial assets at FVOCI. The movements in this
reserve are detailed in the consolidated statement of comprehensive income.
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital
4.1 Equity continued
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.
2022 2021
£m £m
At 1 October 10 (80)
Amounts recognised in other comprehensive income:
Cash flow hedge - interest rate risk
Effective portion of changes in fair value of interest rate swaps 962 127
Amounts transferred to the income statement (13) (5)
Taxation (260) (33)
Cash flow hedge - foreign exchange risk
Effective portion of changes in fair value of cross currency swaps - (28)
Amounts transferred to the income statement - 29
At 30 September 699 10
4.2 Equity based compensation
Accounting policy
The Group operates a number of equity settled share based compensation plans
in respect of services received from certain of its employees. The fair
value of the services received is recognised as an expense. The total amount
to be expensed is measured by reference to the fair value of the Company's
shares, performance options or performance rights granted, including, where
relevant, any market performance conditions and any non-vesting conditions.
The impacts of any service and non-market performance vesting conditions are
not included in the fair value and instead are included in estimating the
number of awards or options that are expected to vest.
The total expense is recognised over the vesting period, which is the period
over which all of the specified vesting conditions are to be satisfied. A
corresponding credit is recognised in the equity based compensation reserve,
adjusted for deferred tax. In some circumstances, employees may provide
services in advance of the grant date and therefore the grant date
fair value is estimated for the purposes of recognising the expense during
the period between the start of the service period and the grant date.
At the end of each reporting year, the Group revises its estimates of the
number of shares, performance options and performance rights that are expected
to vest based on the non-market and service vesting conditions. The impact of
the revision to original estimates, if any, is recognised in the income
statement, with a corresponding adjustment to the equity based compensation
reserve.
The equity settled share based payment charge for the year is £5m (2021:
£5m).
Virgin Money UK PLC awards
The Group issues awards to employees under the following share plans:
Plan Eligible employees Nature of award Vesting conditions((1)) Grant dates((2))
DEP((3)) Selected Conditional rights to shares Continuing employment or leaving in certain limited circumstances 2017, 2018, 2019, 2020 and 2021
employees
LTIP Selected senior employees Conditional rights to shares Continuing employment or leaving in certain limited circumstances and 2017, 2018, 2019, 2020 and 2021
achievement of delivery of
the Group's strategic goals
and growth in shareholder value
SIP All employees Non-conditional share award Continuing employment 2016, 2017 and 2019
(1) All awards are subject to vesting conditions and therefore may or may
not vest.
(2) The year in which grants have been made under the relevant plan.
(3) Grants made under the DEP are made the year following the financial
year to which they relate.
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital
4.2 Equity based compensation continued
Further detail on each plan is provided below:
DEP
Under the plan, employees are awarded conditional rights to Virgin Money UK
PLC shares. The shares are subject to forfeiture conditions including
forfeiture as a result of resignation, termination by the Group or failure to
meet compliance requirements. Awards include:
· the upfront and deferred elements of bonus awards where required to
comply with the PRA Remuneration Code or the Group's deferral policy; and
· buyout of equity from previous employment.
LTIP
Under the plan, employees are awarded conditional rights to Virgin Money UK
PLC shares. The shares are subject to forfeiture conditions including
forfeiture as a result of resignation, termination by the Group or failure to
meet compliance requirements.
The performance conditions of the plan must be
met over a three-year performance period. The measures reflect a balanced
approach between financial and non-financial performance and are aligned to
the Group's strategic goals. Measures, relative weightings and the quantum for
assessing performance are outlined in the Directors' remuneration report
contained in the Group's Annual Report & Accounts.
SIP
At the date of the awards, eligible employees are awarded Group shares which
are held in the SIP Trust. Awards are not subject to performance conditions
and participants are the beneficial owners of the shares granted to them, but
not the registered owners. Voting rights over the shares are normally
exercised by the registered owner at the direction of the participants.
Awards/rights made during the year
Plan Number Number Number Number Number Average fair
outstanding at awarded forfeited released outstanding at value of awards
1 October 2021 30 September at grant
2022 pence
DEP
2016 Commencement 2,620 - - (1,310) 1,310 266.03
2017 Bonus 49,909 - - (47,789) 2,120 313.20
2018 Bonus 170,649 - - (34,129) 136,520 192.35
2019 Bonus 85,544 - - (6,384) 79,160 174.50
2019 Commencement 19,843 - - (11,797) 8,046 174.50
2020 Commencement 19,570 - - (9,970) 9,600 135.40
2021 Bonus - 590,513 (10,536) (579,977) - 172.65
2021 Commencement - 107,747 - - 107,747 142.70
LTIP
2017 LTIP 380,924 - - (111,295) 269,629 313.20
2018 LTIP 4,751,736 - (1,906,079) (845,346) 2,000,311 190.47
2019 LTIP 7,680,636 - (739,329) - 6,941,307 174.50
2020 LTIP 10,379,519 - (2,019,760) - 8,359,759 135.40
2021 LTIP - 6,761,290 (273,467) - 6,487,823 172.65
SIP((1))
2015 Demerger 629,169 - - (629,169) - 194.67
2017 Free Share 564,118 - - (564,118) - 313.20
2019 Free Share 1,684,854 - (58,794) (1,626,060) - 202.53
(1) Shares awarded under the SIP do not have a release date but become
available to award holders without restriction following the completion of
relevant service conditions. The service conditions applicable to each of the
awards in the table above has now been completed and, since no ongoing charge
is taken in respect of these awards, the values in the table reflect that all
awards have now fully vested and are available to award holders without
restriction, with no awards still to vest as at 30 September 2022.
Determination of grant date fair values
The grant date fair value of the awards has been taken as the market value of
the Company's ordinary shares at the grant date. Where awards are subject to
non-market performance conditions, an estimate is made of the number of awards
expected to vest in order to determine the overall share based payment charge
to be recognised over the vesting period. Awards were granted under the LTIP
and DEP on 9 December 2021, based on the middle market share price on the
day immediately preceding the grant (172.65p).
The Group has not issued awards under any plan with market performance
conditions.
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes
5.1 Contingent liabilities and commitments
Accounting policy
Financial guarantees
The Group provides guarantees in the normal course of business on behalf of
its customers. Guarantees written are conditional commitments issued by the
Group to guarantee the performance of a customer to a third party and are
primarily issued to support direct financial obligations such as commercial
bills or other debt instruments issued by a counterparty. The rating of the
Group as a guarantee provider enhances the marketability of the paper
issued by the counterparty in these circumstances.
The ECL requirements as described in note 3.2 apply to loan commitments and
financial guarantee contracts, with the ECL allowance held as part of the
provision for liabilities and charges balance (note 3.13).
Contingent liabilities
Contingent liabilities are possible obligations whose existence will be
confirmed only by uncertain future events or present obligations where the
transfer of economic benefit is uncertain or cannot be reliably measured.
Contingent liabilities are not recognised on the balance sheet but are
disclosed unless they are remote.
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.
Financial guarantees
2022 2021
£m £m
Guarantees and assets pledged as collateral security:
Due in less than 3 months 33 20
Due between 3 months and 1 year 23 21
Due between 1 year and 3 years 9 13
Due between 3 years and 5 years 3 2
Due after 5 years 44 45
112 101
Other credit commitments
Undrawn formal standby facilities, credit lines and other commitments 19,247 17,020
to lend at call
Capital commitments
The Group committed to providing additional funding of up to £5.5m over an
eight-month period from June 2021 to enable the JV UTM to support the business
transformation and to meet its regulatory capital and liquidity requirements,
of which £Nil was the remaining commitment as at 30 September 2022 (2021:
£4m). Further detail on UTM can be found in the JVs and associates section of
note 5.3.
The Group had future capital expenditure which had been contracted for, but
not provided for, at 30 September 2022 of £0.4m (2021: £0.2m).
Other contingent liabilities
Conduct risk related matters
There continues to be uncertainty with judgement required in determining the
quantum of conduct risk related liabilities, with note 3.13 reflecting the
Group's current position where a provision can be reliably estimated. Until
all matters are resolved the final amount required to settle the Group's
potential liabilities for conduct related matters remains uncertain.
The Group will continue to reassess the adequacy of provisions for these
matters and the assumptions underlying the calculations at each reporting date
based upon experience and other relevant factors at that time.
Legal claims
The Group is named in and is defending a number of legal claims arising in the
ordinary course of business. No material adverse impact on the financial
position of the Group is expected to arise from the ultimate resolution of
these legal actions.
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes
5.2 Notes to the statement of cash flows
2022 2021
£m £m
Adjustments included in the profit before tax
Interest receivable (2,217) (1,910)
Interest payable 641 553
Depreciation, amortisation and impairment (note 2.4) 179 191
Derivative financial instruments fair value movements 17 5
Impairment losses/(credit) on credit exposures (note 3.2) 52 (131)
Equity based compensation (note 4.2) 4 5
Gain on disposal of FVOCI assets (note 2.3) (4) -
Other non-cash movements 2 62
(1,326) (1,225)
Changes in operating assets
Net (increase)/decrease in:
Balances with supervisory central banks (3) (38)
Derivative financial instruments 1,847 269
Financial assets at FVTPL 57 30
Loans and advances to customers (713) 491
Defined benefit pension assets (7) (61)
Other assets 31 141
1,212 832
Changes in operating liabilities
Net increase/(decrease) in:
Due to other banks 1,235 (50)
Derivative financial instruments 119 (41)
Customer deposits (1,510) (644)
Provisions for liabilities and charges (50) (72)
Other liabilities (32) (219)
(238) (1,026)
For the purposes of the statement of cash flows, cash and cash equivalents
comprise the following balances with less than three months maturity from the
date of acquisition. This includes cash and liquid assets and amounts due to
other banks (to the extent less than 90 days).
2022 2021
£m £m
Cash and balances with central banks (less mandatory deposits) 11,955 9,453
Due from other banks (less than three months) 656 800
12,611 10,253
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes
5.3 Related party transactions
The Group undertakes activity with the following entities which are considered
to be related party transactions:
Yorkshire and Clydesdale Bank Pension Scheme
The Group provides banking services to the Scheme, with customer deposits of
£12m (2021: £40m). Pension contributions of £7m were made to the Scheme in
the year (2021: £61m).
The Group and the Trustee to the Scheme (note 3.9) have entered into a
contingent Security Arrangement which provides additional support to the
Scheme by underpinning recovery plan contributions and some additional
investment risk. The security is in the form of a pre-agreed maximum level of
assets that are set aside for the benefit of the Pension Scheme in certain
trigger events. These assets are held by Red Grey Square Funding LLP, an
insolvency remote consolidated structured entity.
Joint ventures and associates
The Group holds investments in JVs of £10m (2021: £10m). The total share of
loss for the year was £4m (2021: £5m). In addition, the Group had the
following transactions with JV entities during the period:
· Salary Finance - the Group provides Salary Finance with a revolving
credit facility funding line, of which the current gross lending balance was
£318m (2021: £223m) and the undrawn facility was £32m (2021: £37m). The
facility is held under Stage 2 for credit risk purposes (2021: Stage 1),
with an ECL allowance of £19m (2021: £Nil) held against the lending;
further detail on the ECL allowance is provided in the credit risk section
within this results announcement. Additionally, the Group received £10m
(2021: £6m) of interest income from Salary Finance in the year. Board
approval is in place for this facility up until March 2023 with £400m being
the approved limit.
· UTM - the Group provides banking services to UTM which has resulted in
amounts due of £4m (2021: £3m). Additionally, the Group received £7m of
recharge income in the year (2021: £7m) from UTM in accordance with a Service
Level Agreement in respect of resourcing, infrastructure and marketing. During
the year, the Group provided £4m of additional funding to UTM
(2021: £12m).
Other related party transactions with Virgin Group
The Group has related party transactions with other Virgin Group
companies((1)):
· Licence fees due to Virgin Enterprises Limited for the use of the
Virgin Money brand trademark resulted in an amount payable of £5m (2021:
£4m), with expenses incurred in the year of £15m (2021: £14m).
· The Group incurs credit card commissions and air mile charges with
Virgin Atlantic Airways Limited (VAA) in respect of an agreement between the
two parties. Amounts payable to VAA totalled £1m (2021: £2m) and expenses of
£16m were incurred in the year (2021: £12m).
· The Group incurs charges and receives commissions concerning the
cashback incentive scheme with Virgin Red Limited in relation to the credit
card and PCA portfolio. Amounts receivable from Virgin Red totalled £0.1m
(2021: £Nil), amounts payable totalled £1m (2021: £Nil) and during the year
this resulted in expenses of £3m (2021: £0.8m) along with income of £0.5m
(2021: £Nil).
· 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
year this resulted in expenses of £0.5m (2021: £0.1m).
· The Group paid £7m (2021: £Nil) of ordinary dividends to Virgin Group
Holdings Limited.
(1) All companies were incorporated in England and Wales with the exception
of Virgin Group Holdings Limited, which was incorporated in the British Virgin
Islands.
Charities
The Group provides banking services to The Virgin Money Foundation which has
resulted in customer deposits of £1m (2021: £1m). The Group has made
donations of £1m in the year (2021: £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 year was £0.4m (2021: £0.4m).
Compensation of key management personnel (KMP)
KMP comprises Directors of the Company and members of the Executive Leadership
Team.
2022 2021
£m £m
Salaries and short-term benefits 9 9
Equity based compensation((1)) 3 3
12 12
(1) The expense recognised in the year is in accordance with IFRS 2
'Equity based compensations', including associated employers' NIC.
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes
5.3 Related party transactions continued
The following information regarding Directors' remuneration is presented in
accordance with the Companies Act 2006.
2022 2021
£m £m
Aggregate remuneration((1)) 5 3
(1) Aggregate remuneration includes amounts paid for the 2022 year and
amounts paid under the LTIPs in relation to the 2018 LTIP award. LTIP figures
in the single figure table for Executive Directors' 2022 remuneration in the
Remuneration report contained in the Group's Annual Report & Accounts
relate to the 2019 LTIP award in respect of the 2020-2022 LTIP performance
period cycle.
None of the Directors were members of the Group's defined contribution or
defined benefit pension schemes during 2022 (2021: none).
None of the Directors hold share options and none were exercised during the
year (2021: none).
Transactions with KMP
KMP, their close family members, and any entities controlled or significantly
influenced by the KMP have undertaken the following transactions with the
Group in the normal course of business. The transactions were made on the same
terms and conditions as applicable to other Group employees, or on normal
commercial terms:
2022 2021
£m £m
Loans and advances 1 3
Deposits 1 2
No provisions have been recognised in respect of loans provided to the KMP
(2021: £Nil). There were no debts written off or forgiven during the year to
30 September 2022 (2021: £Nil). Included in the above are five (2021: six)
loans totalling £0.3m (2021: £0.3m) made to Directors. In addition to the
above, there are guarantees of £Nil (2021: £Nil) made to Directors and their
related parties.
5.4 Pillar 3 disclosures
UK Capital Requirements Regulation
Pillar 3 disclosure requirements are set out within the Disclosure (CRR) part
of the PRA rulebook. The disclosures required under the PRA framework are
substantially equivalent to those required by Part Eight of the EU CRR. The
consolidated disclosures of the Group, for the 2022 financial year, will be
issued concurrently with the Annual Report and Accounts and can be found at
www.virginmoneyukplc.com/investor-relations/results-and-reporting/annual-reports/
(http://www.virginmoneyukplc.com/investor-relations/results-and-reporting/annual-reports/)
.
5.5 Post balance sheet events
On 21 November 2022 the Company announced an extension to the share buyback
programme with an intent to repurchase a further £50m in aggregate of shares
and CDIs. Subject to trading liquidity, the Company again intends to
repurchase shares and CDIs in approximately equal proportions. The buyback
extension will commence on 21 November 2022 and will end no later than 2 May
2023.
Additional information
Measuring the Group's performance
As highlighted within the Strategic report, Financial results, Directors'
remuneration report, and Risk report, all contained in the Group's Annual
Report & Accounts, a range of metrics are considered that measure and
track the Group's performance. Some of these metrics will be the Group's
KPIs, which are a set of quantifiable measurements used to gauge the Group's
overall long-term performance. Others are not referred to as KPIs,
but are still useful metrics for the Group to reflect on and are
disclosed to aid comparisons with peers.
These metrics fall into two main categories:
· Financial - which are further split into:
o IFRS based - meaning the basis of the calculation is derived from a
measure that can be found and is directly required under generally accepted
accounting principles (GAAP); and
o Non-IFRS based - these are also referred to as APMs and can be derived
from non-GAAP measures.
· Non-Financial - being those that are not directly linked to the Group's
financial performance, but more in relation to other external factors.
Non-IFRS based financial performance metrics can be calculated on either a
statutory or an 'underlying' basis; with further detail on how the underlying
measure is arrived at, along with management's reasoning for excluding the
impact of certain items from the Group's current underlying performance
rationale, can be found on page 134, directly following this section.
Financial performance metrics
Profitability:
Metric KPI LTIP LTIP Year Basis Definition/formula Why it matters?
Gross annualised cost savings Yes No N/a Non-IFRS Annualised gross cost savings benefits driven from the Group's efficiency It provides an annualised progress indicator for the Group's accelerated
programmes. digital strategy and stated target of delivering approximately £175m of
additional cost savings by FY24, enabled by £275m of restructuring
investment.
Statutory return on tangible equity (RoTE) Yes Yes 2022 Non-IFRS Statutory profit after tax attributable to ordinary equity holders as a It's an indicator of the Group's profitability and gives the return generated
percentage of average tangible equity (average total equity less intangible for shareholders as a percentage of the Group's tangible equity.
2021 assets and AT1) for a given year.
2022 2021 2020
2020 Statutory profit after tax attributable to ordinary equity holders (a) £467m £395m £(220)m
Average tangible equity (b) £4,539m £3,875m £3,554m
2019 Statutory RoTE (a)/(b) 10.3% 10.2% (6.2)%
Underlying cost:ratio (CIR) Yes Yes 2021 Non-IFRS Underlying operating and administrative expenses as a percentage of underlying It's a measure of efficiency in terms of how total operating expenses compare
total operating income for a given year. to total operating income on an underlying basis.
2020
2022 2021 2020
Underlying operating and administrative expenses (a) £914m £902m £917m
2019 Underlying total operating income (b) £1,755m £1,572m £1,542m
Underlying CIR (a)/(b) 52.1% 57.4% 59.5%
Net interest margin (NIM) No No N/a Non-IFRS Underlying NII as a percentage of average interest earning assets (which is It's an indicator of the Group's profitability by showing the difference
adjusted to exclude short-term repos used for liquidity management purposes) between how much the Group is earning in interest on its loans compared to how
for a given year. much it is paying out in interest on deposits.
2022 2021 2020
Underlying NII (a) £1,592m £1,412m £1,351m
Average interest earning assets (b) £86,275m £86,947m £86,826m
Short-term repos used for liquidity management (c) £12m £16m £16m
NIM (a)/((b)-(c)) 1.85% 1.62% 1.56%
It's an indicator of the Group's profitability and gives the return generated
for shareholders as a percentage of the Group's tangible equity.
Underlying cost:ratio (CIR)
Yes
Yes
2021
2020
2019
Non-IFRS
Underlying operating and administrative expenses as a percentage of underlying
total operating income for a given year.
2022 2021 2020
Underlying operating and administrative expenses (a) £914m £902m £917m
Underlying total operating income (b) £1,755m £1,572m £1,542m
Underlying CIR (a)/(b) 52.1% 57.4% 59.5%
It's a measure of efficiency in terms of how total operating expenses compare
to total operating income on an underlying basis.
Net interest margin (NIM)
No
No
N/a
Non-IFRS
Underlying NII as a percentage of average interest earning assets (which is
adjusted to exclude short-term repos used for liquidity management purposes)
for a given year.
2022 2021 2020
Underlying NII (a) £1,592m £1,412m £1,351m
Average interest earning assets (b) £86,275m £86,947m £86,826m
Short-term repos used for liquidity management (c) £12m £16m £16m
NIM (a)/((b)-(c)) 1.85% 1.62% 1.56%
It's an indicator of the Group's profitability by showing the difference
between how much the Group is earning in interest on its loans compared to how
much it is paying out in interest on deposits.
Additional information
Measuring the Group's performance
Financial performance metrics continued
Profitability continued:
Metric KPI LTIP LTIP Year Basis Definition/formula Why it matters?
Statutory basic earnings per share (EPS) No No N/a IFRS Statutory profit after tax attributable to ordinary equity shareholders, It's an indicator of the Group's profitability on a statutory basis.
divided by the weighted average number of ordinary shares in issue for a given
year (which includes deferred shares and excludes own shares held or
contingently returnable shares).
2022 2021 2020
Statutory profit/(loss) after tax attributable to ordinary equity shareholders £467m £395m £(220)m
(a)
Weighted average number of ordinary shares in issue (b) 1,441m 1,442m 1,440m
Statutory basic earnings/(loss) per share (a)/(b) 32.4p 27.3p (15.3)p
Statutory CIR No No N/a Non-IFRS Statutory operating and administrative expenses as a percentage of statutory It's a measure of efficiency in terms of how total operating expenses compare
total operating income for a given year. to total operating income on a statutory basis.
2022 2021 2020
Statutory operating and administrative expenses (a) £1,069m £1,203m £1,104m
Statutory total operating income (b) £1,716m £1,489m £1,443m
Statutory CIR (a)/(b) 62.3% 80.8% 76.5%
Statutory return on assets No No N/a Non-IFRS Statutory profit after tax as a percentage of average total assets for a given It's an indicator of the Group's profitability on a statutory basis.
year.
2022 2021 2020 Underlying return on assets is no longer considered to be a performance
Statutory profit/(loss) after tax (a) £537m £474m £(141)m measure, with the focus being on the statutory measure.
Average total assets (b) £89,504m £90,537m £90,522m
Statutory return on assets (a)/(b) 0.60% 0.52% (0.16)%
Underlying basic EPS No No N/a Non-IFRS Underlying profit after tax attributable to ordinary equity shareholders, It's an indicator of the Group's profitability on an underlying basis.
divided by the weighted average number of ordinary shares in issue for a given
year (which includes deferred shares and excludes own shares held or
contingently returnable shares).
2022 2021 2020
Underlying profit after tax attributable to ordinary equity shareholders (a) £612m £691m £20m
Weighted average number of ordinary shares in issue (b) 1,441m 1,442m 1,440m
Underlying basic earnings per share (a)/(b) 42.4p 47.9p 1.4p
It's an indicator of the Group's profitability on a statutory basis.
Statutory CIR
No
No
N/a
Non-IFRS
Statutory operating and administrative expenses as a percentage of statutory
total operating income for a given year.
2022 2021 2020
Statutory operating and administrative expenses (a) £1,069m £1,203m £1,104m
Statutory total operating income (b) £1,716m £1,489m £1,443m
Statutory CIR (a)/(b) 62.3% 80.8% 76.5%
It's a measure of efficiency in terms of how total operating expenses compare
to total operating income on a statutory basis.
Statutory return on assets
No
No
N/a
Non-IFRS
Statutory profit after tax as a percentage of average total assets for a given
year.
2022 2021 2020
Statutory profit/(loss) after tax (a) £537m £474m £(141)m
Average total assets (b) £89,504m £90,537m £90,522m
Statutory return on assets (a)/(b) 0.60% 0.52% (0.16)%
It's an indicator of the Group's profitability on a statutory basis.
Underlying return on assets is no longer considered to be a performance
measure, with the focus being on the statutory measure.
Underlying basic EPS
No
No
N/a
Non-IFRS
Underlying profit after tax attributable to ordinary equity shareholders,
divided by the weighted average number of ordinary shares in issue for a given
year (which includes deferred shares and excludes own shares held or
contingently returnable shares).
2022 2021 2020
Underlying profit after tax attributable to ordinary equity shareholders (a) £612m £691m £20m
Weighted average number of ordinary shares in issue (b) 1,441m 1,442m 1,440m
Underlying basic earnings per share (a)/(b) 42.4p 47.9p 1.4p
It's an indicator of the Group's profitability on an underlying basis.
Additional information
Measuring the Group's performance
Financial performance metrics continued
Profitability continued:
Metric KPI LTIP LTIP Year Basis Definition/formula Why it matters?
Underlying profit before tax No No N/a Non-IFRS Statutory profit before tax plus total underlying adjustments to the statutory It's an indicator of the Group's profitability on an underlying basis.
view of performance.
2022 2021 2020
Statutory profit/(loss) before tax (a) £595m £417m £(168)m
Restructuring charges (b) £82m £146m £139m
Acquisition accounting unwinds (c) £35m £88m £113m
Legacy conduct (d) £8m £76m £26m
Other (e) £69m £74m £14m
Underlying profit before tax (a) + (b) + (c) + (d) + (e) £789m £801m £124m
Underlying profit after tax attributable to ordinary equity shareholders No No N/a Non-IFRS Underlying profit before tax less underlying tax charge, less AT1 It's an indicator of the Group's profitability on an underlying basis.
distributions. The underlying tax charge (or credit) is the difference
between the statutory tax charge (or credit) and the tax attributable to
exceptional items.
2022 2021 2020
Underlying profit before tax (a) £789m £801m £124m
Underlying tax charge (b) £107m £31m £25m
AT1 distributions (c) £70m £79m £79m
Underlying profit after tax attributable to ordinary equity shareholders (a) £612m £691m £20m
-(b) - (c)
Underlying RoTE No No N/a Non-IFRS Underlying profit after tax attributable to ordinary equity holders as a It's an indicator of the Group's profitability on an underlying basis and
percentage of average tangible equity (average total equity less intangible gives the return generated for shareholders as a percentage of the Group's
assets and AT1) for a given year. tangible equity.
2022 2021 2020
Underlying profit after tax attributable to ordinary equity holders (a) £612m £691m £20m
Average tangible equity (b) £4,539m £3,875m £3,554m
Underlying RoTE (a)/(b) 13.5% 17.8% 0.6%
It's an indicator of the Group's profitability on an underlying basis.
Underlying profit after tax attributable to ordinary equity shareholders
No
No
N/a
Non-IFRS
Underlying profit before tax less underlying tax charge, less AT1
distributions. The underlying tax charge (or credit) is the difference
between the statutory tax charge (or credit) and the tax attributable to
exceptional items.
2022 2021 2020
Underlying profit before tax (a) £789m £801m £124m
Underlying tax charge (b) £107m £31m £25m
AT1 distributions (c) £70m £79m £79m
Underlying profit after tax attributable to ordinary equity shareholders (a) £612m £691m £20m
- (b) - (c)
It's an indicator of the Group's profitability on an underlying basis.
Underlying RoTE
No
No
N/a
Non-IFRS
Underlying profit after tax attributable to ordinary equity holders as a
percentage of average tangible equity (average total equity less intangible
assets and AT1) for a given year.
2022 2021 2020
Underlying profit after tax attributable to ordinary equity holders (a) £612m £691m £20m
Average tangible equity (b) £4,539m £3,875m £3,554m
Underlying RoTE (a)/(b) 13.5% 17.8% 0.6%
It's an indicator of the Group's profitability on an underlying basis and
gives the return generated for shareholders as a percentage of the Group's
tangible equity.
Additional information
Measuring the Group's performance
Lending (Basis - non-IFRS):
Metric KPI LTIP LTIP Year Definition and formula (where applicable) Why it matters?
Target lending segment asset growth Yes No N/a Target lending segment asset growth over the year. Target lending is defined It's an indicator of how well the Group is performing against its 'pioneering
as Unsecured and BAU Business lending (excluding Government lending schemes growth' strategic priority.
noting these are closed and in run off.
2022 2021 2020
Total lending - current year (a) £13,448m £12,573m £13,006m
Total lending - prior year (b) £12,573 £13,006m £12,900m
Target lending growth ((a)-(b))/(b) 7.0% (3.3)% 0.8%
Relationship deposits growth No Yes 2021 Relationship deposit growth over the year. It's an indicator of how well the Group is performing against its 'pioneering
2022 2021 2020 growth' strategic priority.
2020 Total relationship deposits - current year (a) £34,649m £30,596m £25,675m
Total relationship deposits - prior year (b) £30,596m £25,675m £21,347m
Relationship deposit growth ((a)-(b))/(b) 13.2% 19.2% 20.3%
It's an indicator of how well the Group is performing against its 'pioneering
growth' strategic priority.
Relationship deposits growth
No
Yes
2021
2020
Relationship deposit growth over the year.
2022 2021 2020
Total relationship deposits - current year (a) £34,649m £30,596m £25,675m
Total relationship deposits - prior year (b) £30,596m £25,675m £21,347m
Relationship deposit growth ((a)-(b))/(b) 13.2% 19.2% 20.3%
It's an indicator of how well the Group is performing against its 'pioneering
growth' strategic priority.
Additional information
Measuring the Group's performance
Asset quality (Basis - non-IFRS):
Metric KPI LTIP LTIP Year Definition/formula Why it matters?
Impairment charge to average customer loans No No N/a Impairment losses on credit exposures as a percentage of average customer It's an indicator of the asset quality of the Group's lending portfolio.
(cost of risk) loans (defined as loans and advances to customers, other financial assets at
fair value and due from customers on acceptances).
2022 2021 2020
Impairment charge/(credit) (a) £52m £(131)m £501m
Average customer loans (b) £71,989m £72,447m £73,403m
Cost of risk (a)/(b) 0.07% (0.18)% 0.68%
% of loans in Stage 2 No No N/a Stage 2 loans as a percentage of gross loans and advances. It allows period on period comparison of
2022 2021 2020
stage 2 loans as a percentage of overall gross loans and advances and
Stage 2 loans (a) £5,736m £10,178m £12,844m therefore provides insight into the asset quality of the Group's lending
Gross loans and advances (b) £73,146m £72,551m £72,925m portfolio over time.
%of loans in stage 2 (a)/(b) 7.8% 14.1% 17.7%
% of loans in Stage 3 No No N/a Stage 3 loans as a percentage of gross loans and advances. It allows period on period comparison of
2022 2021 2020
stage 3 loans as a percentage of overall gross loans and advances and
Stage 3 loans (a) £1,038m £957m £862m therefore provides insight into the asset quality of the Group's lending
Gross loans and advances (b) £73,146m £72,551m £72,925m portfolio over time.
%of loans in stage 3 (a)/(b) 1.4% 1.3% 1.2%
Total book coverage No No N/a Total impairment provisions on credit exposures as a percentage of total It provides a measure of the level of provision the Group holds for the total
customer loans. lending portfolio.
2022 2021 2020
Impairment provisions on credit exposures (a) £457m £504m £735m
Gross loans and advances (b) £73,146m £72,551m £72,925m
Total book coverage (a)/(b) 0.62% 0.70% 1.03%
Stage 2 coverage No No N/a Stage 2 impairment provisions as a percentage of stage 2 gross loans and It provides a measure of the level of provision the Group holds for the
advances. lifetime of the Stage 2 lending portfolio.
2022 2021 2020
Stage 2 impairment provisions on credit exposures (a) £268m £302m £465m
Stage 2 gross loans and advances (b) £5,736m £10,178m £12,844m
Total stage 2 book coverage (a)/(b) 4.72% 3.02% 3.66%
It's an indicator of the asset quality of the Group's lending portfolio.
% of loans in Stage 2
No
No
N/a
Stage 2 loans as a percentage of gross loans and advances.
2022 2021 2020
Stage 2 loans (a) £5,736m £10,178m £12,844m
Gross loans and advances (b) £73,146m £72,551m £72,925m
% of loans in stage 2 (a)/(b) 7.8% 14.1% 17.7%
It allows period on period comparison of
stage 2 loans as a percentage of overall gross loans and advances and
therefore provides insight into the asset quality of the Group's lending
portfolio over time.
% of loans in Stage 3
No
No
N/a
Stage 3 loans as a percentage of gross loans and advances.
2022 2021 2020
Stage 3 loans (a) £1,038m £957m £862m
Gross loans and advances (b) £73,146m £72,551m £72,925m
% of loans in stage 3 (a)/(b) 1.4% 1.3% 1.2%
It allows period on period comparison of
stage 3 loans as a percentage of overall gross loans and advances and
therefore provides insight into the asset quality of the Group's lending
portfolio over time.
Total book coverage
No
No
N/a
Total impairment provisions on credit exposures as a percentage of total
customer loans.
2022 2021 2020
Impairment provisions on credit exposures (a) £457m £504m £735m
Gross loans and advances (b) £73,146m £72,551m £72,925m
Total book coverage (a)/(b) 0.62% 0.70% 1.03%
It provides a measure of the level of provision the Group holds for the total
lending portfolio.
Stage 2 coverage
No
No
N/a
Stage 2 impairment provisions as a percentage of stage 2 gross loans and
advances.
2022 2021 2020
Stage 2 impairment provisions on credit exposures (a) £268m £302m £465m
Stage 2 gross loans and advances (b) £5,736m £10,178m £12,844m
Total stage 2 book coverage (a)/(b) 4.72% 3.02% 3.66%
It provides a measure of the level of provision the Group holds for the
lifetime of the Stage 2 lending portfolio.
Additional information
Measuring the Group's performance
Asset quality continued (Basis - non-IFRS):
Metric KPI LTIP LTIP Year Definition/formula Why it matters?
Stage 3 coverage No No N/a Stage 3 impairment provisions as a percentage of stage 3 gross loans and It provides a measure of the level of provision the Group holds for the
advances. lifetime of the Stage 3 lending portfolio.
2022 2021 2020
Stage 3 impairment provisions on credit exposures (a) £104m £91m £134m
Stage 3 gross loans and advances (b) £1,038m £957m £862m
Total stage 3 book coverage (a)/(b) 11.24% 9.59% 15.73%
It provides a measure of the level of provision the Group holds for the
lifetime of the Stage 3 lending portfolio.
Additional information
Measuring the Group's performance
Capital (Basis - non-IFRS):
Metric KPI LTIP LTIP Year Definition/formula Why it matters?
Announced shareholder distributions Yes No N/a Dividends announced for the year plus buybacks as a percentage of statutory It shows how much of our profits after tax and distributions we are paying
profit after tax attributable to ordinary shareholders. out to our shareholders.
2022 2021 2020
Interim dividend (a) £36m n/a n/a
Final dividend (b) £106m £14m n/a
Buybacks (c) £125m n/a n/a
Statutory profit after tax attributable to ordinary equity holders (d) £467m £395m £(220)m
Announced shareholder distributions ((a)+(b)+(c))/(d) 57% 4% n/a
Common Equity Tier 1 (CET1) ratio (IFRS 9 transitional) No No N/a CET1 capital as a percentage of RWAs, on an IFRS 9 transitional basis. It's an indicator of bank solvency that gauges the strength of the Group's
2022 2021 2020 CET1 capital relative to risk weighted assets.
CET1 capital (IFRS 9 transitional) (a) £3,633m £3,616m £3,271m
RWA (IFRS 9 transitional) (b) £24,148m £24,232m £24,399m
CET1 ratio (IFRS 9 transitional) (a)/(b) 15.0% 14.9% 13.4%
CET1 ratio (IFRS 9 fully loaded) No No N/a CET1 capital as a percentage of RWAs, on an IFRS 9 fully loaded basis. It's an indicator of bank solvency that gauges the strength of the Group's
2022 2021 2020 CET1 capital without adjusting for temporary IFRS 9 relief.
CET1 capital (IFRS 9 fully loaded) (a) £3,519m £3,482m £2,961m
RWA (IFRS 9 fully loaded) (b) £24,056m £24,156m £24,246m
CET1 ratio (IFRS 9 fully loaded) (a)/(b) 14.6% 14.4% 12.2%
Tier 1 ratio No No N/a Tier 1 capital as a percentage of RWAs. It's an indicator of bank solvency that gauges the strength of the Group's
Tier 1 capital relative to risk weighted assets.
2022 2021 2020
Tier 1 capital (a) £4,299m £4,313m £4,186m
RWA (b) £24,148m £24,232m £24,399m
Tier 1 ratio (a)/(b) 17.8% 17.8% 17.2%
It shows how much of our profits after tax and distributions we are paying
out to our shareholders.
Common Equity Tier 1 (CET1) ratio (IFRS 9 transitional)
No
No
N/a
CET1 capital as a percentage of RWAs, on an IFRS 9 transitional basis.
2022 2021 2020
CET1 capital (IFRS 9 transitional) (a) £3,633m £3,616m £3,271m
RWA (IFRS 9 transitional) (b) £24,148m £24,232m £24,399m
CET1 ratio (IFRS 9 transitional) (a)/(b) 15.0% 14.9% 13.4%
It's an indicator of bank solvency that gauges the strength of the Group's
CET1 capital relative to risk weighted assets.
CET1 ratio (IFRS 9 fully loaded)
No
No
N/a
CET1 capital as a percentage of RWAs, on an IFRS 9 fully loaded basis.
2022 2021 2020
CET1 capital (IFRS 9 fully loaded) (a) £3,519m £3,482m £2,961m
RWA (IFRS 9 fully loaded) (b) £24,056m £24,156m £24,246m
CET1 ratio (IFRS 9 fully loaded) (a)/(b) 14.6% 14.4% 12.2%
It's an indicator of bank solvency that gauges the strength of the Group's
CET1 capital without adjusting for temporary IFRS 9 relief.
Tier 1 ratio
No
No
N/a
Tier 1 capital as a percentage of RWAs.
2022 2021 2020
Tier 1 capital (a) £4,299m £4,313m £4,186m
RWA (b) £24,148m £24,232m £24,399m
Tier 1 ratio (a)/(b) 17.8% 17.8% 17.2%
It's an indicator of bank solvency that gauges the strength of the Group's
Tier 1 capital relative to risk weighted assets.
Additional information
Measuring the Group's performance
Capital continued (Basis - non-IFRS):
Metric KPI LTIP LTIP Year Definition/formula Why it matters?
Total capital ratio No No N/a Total capital resources as a percentage of RWAs. It's an indicator of bank solvency that gauges the strength of the Group's
total capital relative to risk weighted assets.
2022 2021 2020
Total capital (a) £5,319m £5,332m £4,935m
RWA (b) £24,148m £24,232m £24,399m
Total capital ratio (a)/(b) 22.0% 22.0% 20.2%
Tangible net asset value (TNAV) per share No No N/a Tangible equity (total equity less intangible assets and AT1) divided by the It represents the value per share of the Group based on the Group's tangible
number of ordinary shares in issue at the year end (which includes deferred net assets and can be used as a comparison against the current market share
shares and excludes own shares held). price.
2022 2021 2020
Tangible equity (a) £5,407m £4,185m £3,526m
Number of ordinary shares in issue (b) 1,409m 1,440m 1,439m
Deferred shares (c) 3m 5m 6m
Own shares held (d) 0.3m 0.1m 0.2m
Tangible net asset value per share (a)/((b)+(c)-(d)) 383.0p 289.8p 244.2p
Total shareholder return (TSR) No Yes 2022 Share price at the end of the financial period, less the share price at the The use of total shareholder return enables us to target a measure that is
start of the financial period including dividends received over the period, directly linked to an investor's total return on a share, incorporating both
divided by the share price at the start of the financial period. share price movement and dividends paid.
2022 2021 2020
Share price at the end of the financial period (a) 124.3p 204.4p 73.0p
Share price at the start of the financial period (b) 204.4p 73.0p 114.9p
Dividends (assuming reinvestment) (c) 3.2p n/a n/a
Total shareholder return ((a)-(b)+(c))/(b) (37.6)% 180.1% (36.5)%
It's an indicator of bank solvency that gauges the strength of the Group's
total capital relative to risk weighted assets.
Tangible net asset value (TNAV) per share
No
No
N/a
Tangible equity (total equity less intangible assets and AT1) divided by the
number of ordinary shares in issue at the year end (which includes deferred
shares and excludes own shares held).
2022 2021 2020
Tangible equity (a) £5,407m £4,185m £3,526m
Number of ordinary shares in issue (b) 1,409m 1,440m 1,439m
Deferred shares (c) 3m 5m 6m
Own shares held (d) 0.3m 0.1m 0.2m
Tangible net asset value per share (a)/((b)+(c)-(d)) 383.0p 289.8p 244.2p
It represents the value per share of the Group based on the Group's tangible
net assets and can be used as a comparison against the current market share
price.
Total shareholder return (TSR)
No
Yes
2022
Share price at the end of the financial period, less the share price at the
start of the financial period including dividends received over the period,
divided by the share price at the start of the financial period.
2022 2021 2020
Share price at the end of the financial period (a) 124.3p 204.4p 73.0p
Share price at the start of the financial period (b) 204.4p 73.0p 114.9p
Dividends (assuming reinvestment) (c) 3.2p n/a n/a
Total shareholder return ((a)-(b)+(c))/(b) (37.6)% 180.1% (36.5)%
The use of total shareholder return enables us to target a measure that is
directly linked to an investor's total return on a share, incorporating both
share price movement and dividends paid.
Additional information
Measuring the Group's performance
Non-financial performance metrics:
Metric KPI LTIP LTIP Year Definition and formula (where applicable) Why it matters?
Colleague engagement Yes No N/a Outcomes from the MyVoice colleague engagement survey preceding the end of the Measures our understanding of employee sentiment noting our Purpose of Making
financial year. you happier about money extends to our colleagues and ensures our customers
will be supported by delighted colleagues working in a healthy, flexible,
digitally-led environment.
Customer complaints per 1,000 accounts Yes No N/a In line with FCA regulations, number of complaints per thousand accounts Provides a measure to benchmark against peers and drives accountability within
calculated as the Group to improve customer service and ensure we are making our customers
Total number of complaints received in 6 month period to reporting date happier about money
x 1,000
Total number of accounts as at reporting date
Currently excludes complaints relating to Insurance and Pure Protection FCA
reporting group given historically skewed influence of legacy PPI
Digital primacy Yes No N/a It measures the proportion of active PCA and Card customers who are digital Measures the level of digitisation across our customer journeys whilst
only in their engagement with Virgin Money. To qualify, each customer must: demonstrating the realisation of our ambition 'to be the UK's best digital
bank.'
1. be digitally adopted and active (successfully logged in to the mobile app
in the past 90 days);
2. signed up to our paperless proposition;
3. not transacted in stores within the last 90 days; and
4. have not completed an authenticated call with contact centres in the past
90 days.
Group Yes No N/a % of interactions scored as a 'Smile'. A 'Smile' is determined by our It's a score that is used to supplement NPS however we use the Smile scores as
Smile customers and only counted as a 'Smile' if they score the following three our key customer experience metric given its ability to capture the role
score aspects at the highest ranking: of emotion in customer advocacy.
• Whether the customer got what they wanted on an interaction.
• How easy the interaction was.
• How the interaction made them feel.
Total active relationship customer accounts Yes No N/a Active PCA, BCA and Card customer accounts where active is defined as > £0 It's an indicator of how well the Group is performing against its 'pioneering
balance for Cards; transaction in the last 12 months for PCA and BCA customer growth' strategic priority.
accounts.
Currently excludes complaints relating to Insurance and Pure Protection FCA
reporting group given historically skewed influence of legacy PPI
Provides a measure to benchmark against peers and drives accountability within
the Group to improve customer service and ensure we are making our customers
happier about money
Digital primacy
Yes
No
N/a
It measures the proportion of active PCA and Card customers who are digital
only in their engagement with Virgin Money. To qualify, each customer must:
1. be digitally adopted and active (successfully logged in to the mobile app
in the past 90 days);
2. signed up to our paperless proposition;
3. not transacted in stores within the last 90 days; and
4. have not completed an authenticated call with contact centres in the past
90 days.
Measures the level of digitisation across our customer journeys whilst
demonstrating the realisation of our ambition 'to be the UK's best digital
bank.'
Group
Smile
score
Yes
No
N/a
% of interactions scored as a 'Smile'. A 'Smile' is determined by our
customers and only counted as a 'Smile' if they score the following three
aspects at the highest ranking:
• Whether the customer got what they wanted on an interaction.
• How easy the interaction was.
• How the interaction made them feel.
It's a score that is used to supplement NPS however we use the Smile scores as
our key customer experience metric given its ability to capture the role
of emotion in customer advocacy.
Total active relationship customer accounts
Yes
No
N/a
Active PCA, BCA and Card customer accounts where active is defined as > £0
balance for Cards; transaction in the last 12 months for PCA and BCA customer
accounts.
It's an indicator of how well the Group is performing against its 'pioneering
growth' strategic priority.
Additional information
Measuring the Group's performance
Non-financial performance metrics:
Metric KPI LTIP LTIP Year Definition and formula (where applicable) Why it matters?
ESG scorecard No Yes 2022 Demonstrating progress against the Group's short, medium and long term targets Our ESG scorecard tracks our progress in creating a sustainable future and the
for: inclusion of an ESG scorecard within our LTIP ensures that Executive Director
remuneration is aligned with the Group's aspiration to drive positive social
1. Senior colleague gender representation((1)); and environmental impact through everything we do.
2. Senior colleague ethnic minority representation((1));
3. Group-wide ethnic minority representation((1));
4. Carbon emissions, Scope 1 and 2;
5. Net zero plan delivery (financed emissions reduction); and
6. Colleague engagement.
(1) As a percentage of the population declared.
Risk scorecard No Yes 2022 Demonstrating progress against the Group's targets for customer complaints, Our Risk scorecard demonstrates our commitment to, and monitoring of, prudent
operational risk losses, cost of risk, Group risk profile and Group risk risk management within the business, and its inclusion within our LTIP
appetite. ensures Executive Director remuneration is aligned with the Group's
aspirations to deliver exceptional customer experience and ensure operations
and processes drive resilience and positive customer outcomes.
Additional information
Underlying adjustments to the statutory view of performance
Management exclude certain items from the Group's statutory position to arrive
at an underlying performance basis. Management's approach to underlying
adjustments is aligned to the European Securities and Markets Authority (ESMA)
guidelines on APMs and recommendations are subject to review and agreement by
the Board Audit Committee. Additional detail on these items is provided below
to help understand their exclusion from underlying performance.
Item 2022 2021 Reason for exclusion from the Group's current underlying performance
£m £m
Restructuring charges (82) (146) The current period costs relate to the Group's Digital-First strategy. The
Group expects to incur c.£275m of restructuring charges across FY22-24.
FY21 costs represented the Group's three year integration plan following the
acquisition of Virgin Money Holidays (UK) PLC and comprised a number of
one-off expenses that were required to realise the anticipated
cost synergies.
Acquisition accounting unwinds (35) (88) This consists principally 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 non‑underlying
adjustments over the expected three to five-year period until they have been
fully reversed.
Legacy conduct (8) (76) These costs are historical in nature and are not indicative of the Group's
current practices.
Other:
SME transformation - (1) These costs related to the transformation of the Group's Business banking
proposition and mainly comprised costs associated with the RBS incentivised
switching scheme.
UTM transition costs (9) (6) These costs relate to UTM's transformation costs principally for the build
of a new platform for administration and servicing.
VISA Shares 2 1 A one-off gain on conversion of Visa B Preference shares to Series A
preference shares.
Internally developed software adjustments (62) (68) These costs relate to the write-off of WIP and intangible asset balances held
on the balance sheet as a result of a reassessment of the Group's
practices on capitalisation against the backdrop of the move to an Agile
project delivery.
Total other (69) (74)
Total underlying adjustments (194) (384)
Additional information
Glossary
Term Definition
Additional Tier 1 (AT1) Securities that are considered AT1 capital in the context of CRD IV.
Agile Agile working is about bringing people, processes, connectivity and
technology, time and place together to find the most appropriate and effective
way of working.
arrears A customer is in arrears (or in a state of delinquency) when they fail to
adhere to their contractual payment obligations resulting in an outstanding
loan that is unpaid or overdue. When a customer is in arrears, the total
outstanding loans on which payments are overdue are said to be delinquent.
average assets Represents the average of assets over the year adjusted for any disposed
operations.
Bank Clydesdale Bank PLC.
Basel II The capital adequacy framework issued by the Basel Committee on Banking
Supervision (BCBS) in June 2004.
Basel III Reforms issued by the BCBS in December 2017 with subsequent revisions.
basis points (bps) One hundredth of a percent (0.01%); meaning that 100 basis points is equal to
1%. This term is commonly used in describing interest rate movements.
Board Refers to the Virgin Money UK PLC Board or the Clydesdale Bank PLC Board
as appropriate.
Bounce back loan scheme A scheme implemented by the UK Government to provide financial support to
businesses across the UK that were losing revenue, and seeing their cash flow
disrupted as a result of COVID-19, enabling them to benefit from £50,000 or
less in finance.
Business lending Lending to non-retail customers, including overdrafts, asset and lease
financing, term lending, bill acceptances, foreign currency loans,
international and trade finance, securitisation and specialised finance.
carbon related assets Assets tied to the energy and utilities sectors under the Global Industry
Classification Standard (mapped to internal industry classifications),
excluding water utilities and independent power and renewable electricity
producer industries.
carrying value (also referred to as carrying amount) The value of an asset or a liability in the balance sheet based on either
amortised cost or fair value principles.
cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents
comprise cash and non-mandatory deposits with central banks and amounts
due from other banks with a maturity of less than three months.
Code The 2018 UK Corporate Governance Code.
collateral The assets of a borrower that are used as security against a loan facility.
commercial paper An unsecured promissory note issued to finance short-term credit requirements.
These instruments have a specified maturity date and stipulate the face
amount to be paid to the investor on that date.
Common Equity Tier 1 capital (CET1) The highest quality form of regulatory capital that comprises total
shareholders' equity, less goodwill and intangible assets and certain other
regulatory adjustments.
Company Virgin Money UK PLC.
Coronavirus business interruption loan scheme A scheme implemented by the UK Government to provide financial support to
smaller businesses across the UK that were losing revenue, and seeing their
cash flow disrupted, as a result of COVID-19.
Coronavirus large business interruption loan scheme A scheme implemented by the UK Government to provide financial support to
mid-sized and larger businesses across the UK that were suffering disruption
to their cash flow due to lost or deferred revenues as a result of COVID-19.
counterparty The other party that participates in a financial transaction, with every
transaction requiring a counterparty in order for the transaction to complete.
Coverage ratio Impairment allowance as at the year end shown as a percentage of gross loans
and advances as at the year end.
covered bonds A corporate bond with primary recourse to the institution and secondary
recourse to a pool of assets that act as security for the bonds on issuer
default. Covered bonds remain on the issuer's balance sheet and are a source
of term funding for the Group.
CRD IV European legislation to implement Basel III. It replaces earlier European CRDs
with a revised package consisting of a new CRD and a new CRR. CRD IV sets
out capital and liquidity requirements for European banks and harmonises the
European framework for bank supervision. See also 'Basel III'.
credit conversion factor (CCF) CCFs are used in determining the EAD in relation to a credit risk exposure.
The CCF is an estimate of the proportion of undrawn and off-balance sheet
commitments expected to be drawn down at the point of default.
Credit impaired financial asset A financial asset that is in default or has an individually assessed
provision. This is also referred to as a 'Stage 3' impairment loss and
subject to a lifetime ECL calculation. The Group considers 90 DPD as a
backstop in determining whether a financial asset is credit impaired.
Credit risk mitigation Techniques to reduce the potential loss in the event that a customer (borrower
or counterparty) becomes unable to meet its obligations. This may include the
taking of financial or physical security, the assignment of receivables or the
use of credit derivatives, guarantees, credit insurance, set-off or netting.
CRR II Capital Requirements Regulation (EU) 575/2013 and Directive (EU) 2013/36,
revised by Regulation (EU) 2019/876 and Directive (EU) 2019/878, as
implemented in the UK by PRA Policy Statement 22/21 and incorporated into the
PRA Rulebook from 1 January 2022.
customer deposits Money deposited by individuals or corporate entities that are not credit
institutions, and can be either interest bearing, non-interest bearing or term
deposits.
days past due (DPD) The number of days a facility has borrowing in excess of an agreed or expired
limit or, where facilities are subject to a regular repayment schedule,
contractual payments are not fully up to date.
Additional information
Glossary
Term Definition
default A customer is in default when either they are more than 90 DPD on a credit
obligation to the Group, or are considered unlikely to pay their credit
obligations in full without recourse to actions such as realisation of
security (if held).
delinquency See 'arrears'.
Demerger The demerger of the Group from NAB which took effect on 8 February 2016
pursuant to which all of the issued share capital of CYB Investments Limited
was transferred to the Company (formerly CYBG PLC) by NAB in consideration
for the issue and transfer of the Company (formerly CYBG PLC) shares to NAB in
part for the benefit of NAB (which NAB subsequently sold pursuant to the
Company's IPO) and in part for the benefit of NAB shareholders under a scheme
of arrangement under part 5.1 of the Australian Corporations Act.
derivative A financial instrument that is a contract or agreement whose value is related
to the value of an underlying instrument, reference rate or index.
effective interest rate (EIR) The rate used to calculate interest income or expense under the effective
interest method.
encumbered assets Assets that have been pledged as security, collateral or legally 'ring-fenced'
in some other way which prevents those assets being transferred, pledged,
sold or otherwise disposed.
exposure A claim, contingent claim or position which carries a risk of financial loss.
exposure at default (EAD) The estimate of the amount that the customer will owe at the time of default.
fair value The price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction in the principal (or most
advantageous) market at the measurement date under current market conditions.
forbearance The term generally applied to the facilities provided or changes to facilities
provided to assist borrowers, who are experiencing, or are about to
experience, a period of financial stress.
Gen Z The current generation of young people born between the mid to late 1990s
and the early 2010s.
Group Virgin Money UK PLC and its controlled entities.
hedge ineffectiveness Represents the extent to which the income statement is impacted by changes in
fair value or cash flows of hedging instruments not being fully offset by
changes in fair value or cash flows of hedged items.
IFRS 9 The financial instrument accounting standard which was adopted by the Group
with effect from 1 October 2018.
IFRS 9 transitional adjustments - dynamic That part of the transitional adjustments on regulatory capital arising from
the increase in impairment provisions (on non-credit impaired exposures) from
the date of initial adoption of IFRS 9 to the reporting date.
IFRS 9 transitional adjustments - static That part of the transitional adjustments on regulatory capital arising from
the increase in impairment provisions on initial adoption of IFRS 9 from
those calculated under IAS 39.
impairment allowances An ECL provision held on the balance sheet for financial assets calculated
in accordance with IFRS 9. The impairment allowance is calculated as either
a 12-month or a lifetime ECL.
impairment losses The ECL calculated in accordance with IFRS 9 and recognised in the income
statement with the carrying value of the financial asset reduced by creating
an impairment allowance. Impairment losses are calculated as either
a 12-month or lifetime ECL.
Internal Capital Adequacy Assessment Process (ICAAP) The Group's assessment of the levels of capital that it needs to hold through
an examination of its risk profile from regulatory and economic capital
viewpoints.
Internal Liquidity Adequacy Assessment Process (ILAAP) The Group's assessment and management of balance sheet risks relating
to funding and liquidity.
Internal Ratings-Based approach (IRB) A method of calculating credit risk capital requirements using internal,
rather than supervisory, estimates of risk parameters.
investment grade The highest possible range of credit ratings, from 'AAA' to 'BBB', as measured
by external credit rating agencies.
Level 1 fair value measurements Financial instruments whose fair value is derived from unadjusted quoted
prices for identical instruments in active markets.
Level 2 fair value measurements Financial instruments whose fair value is derived from quoted prices for
similar instruments in active markets and financial instruments valued using
models where all significant inputs are observable.
Level 3 fair value measurements Financial instruments whose fair value is derived from valuation techniques
where one or more significant inputs are unobservable.
lifetime ECL The ECL calculation performed on financial assets where a SICR since
origination has been identified. This can be either a 'Stage 2' or 'Stage 3'
impairment loss depending on whether the financial asset is credit impaired.
Listing Rules Regulations applicable to any company listed on a UK stock exchange, subject
to the oversight of the UK Listing Authority (UKLA). The Listing Rules set
out mandatory standards for any company wishing to list its shares or
securities for sale to the public.
loan to value ratio (LTV) A ratio that expresses the amount of a loan as a percentage of the value of
the property on which it is secured.
location-based emissions Calculated using the average emissions intensity of the grids on which energy
consumption occurs, using mostly grid-average emission factor data.
loss-absorbing capacity (LAC) requirement The required level of MREL resources that the Group is required to hold to
meet its MREL requirement and applicable capital buffers set by the BoE.
loss given default (LGD) The estimate of the loss that the Group will suffer if the customer defaults
(incorporating the effect of any collateral held).
market-based emissions Calculated as the electricity that companies have purposefully chosen to
purchase. It derives emission factors from contractual instruments, which
include any type of contract between two parties for the sale and purchase
of energy bundled with attributes about the energy generation, or for
unbundled attribute claims.
Additional information
Glossary
Term Definition
medium-term notes Debt instruments issued by corporates, including financial institutions,
across a range of maturities.
Minimum Requirement for Own Funds and Eligible Liabilities (MREL) A minimum requirement for institutions to maintain equity and eligible debt
liabilities, to help ensure that if an institution fails the resolution
authority can use these financial resources to absorb losses and recapitalise
the continuing business.
National Databank The National Databank provides free mobile data, texts and calls to people
in need via Good Things Foundation's network of local community partners.
net interest income (NII) The amount of interest received or receivable on assets, net of interest paid
or payable on liabilities.
Net Promoter Score (NPS) This is an externally collated customer loyalty metric that measures loyalty
between a provider, who in this context is the Group, and a consumer.
Paris Climate Agreement Legally binding international treaty to limit global warming to below 2
degrees Celsius, and preferably to 1.5 degrees Celsius above pre-industrial
levels.
Personal lending Lending to individuals rather than institutions excluding mortgage lending
which is reported separately.
probability of default (PD) The probability that a customer will default over either the next 12 months
or lifetime of the account.
Recovery loan scheme (RLS) A scheme implemented by the UK Government to provide financial support to
small and medium sized businesses across the UK to promote growth and
investment following the disruption caused by COVID-19.
regulatory capital The capital which the Group holds, determined in accordance with rules
established by the PRA.
relationship deposits Current account and linked savings balances.
residential mortgage-backed securities (RMBS) Securities that represent interests in groups or pools of underlying
mortgages. Investors in these securities have the right to cash received from
future mortgage payments (interest and principal).
ring-fencing A regime of rules which require banks to change the way that they are
structured by separating retail banking services from investment and
international banking. This is to ensure the economy and taxpayers are
protected in the event of any future financial crises.
risk appetite The level and types of risk the Group is willing to assume within the
boundaries of its risk capacity to achieve its strategic objectives.
risk-weighted asset (RWA) On and off-balance sheet assets of the Group are allocated a risk weighting
based on the amount of capital required to support the asset.
sale and repurchase agreement (repo) A short-term funding agreement that allows a borrower to create a
collateralised loan by selling a financial asset to a lender. As part of the
agreement, the borrower commits to repurchase the security at a date in the
future repaying the proceeds of the loan. For the counterparty (buying the
security and agreeing to sell in the future) it is a reverse repurchase
agreement or a reverse repo.
Scheme The Group's defined benefit pension scheme, the Yorkshire and Clydesdale Bank
Pension Scheme.
Science based targets Science based targets provide a clearly defined pathway for companies and
financial institutions to reduce GHG emissions, helping prevent the worst
impacts of climate change and future-proof business growth.
Targets are considered 'science based' if they are in line with what the
latest climate science deems necessary to meet the goals of the Paris
Agreement - limiting global warming to 1.5°C above pre-industrial levels.
Scope 1/2/3 emissions Scope 1, 2, and 3 emissions are a way of categorising business emissions,
accounting for both direct and indirect emitted GHGs. Scope 1 emissions are
GHGs released directly from a business. Scope 2 emissions are indirect GHGs
released from the energy purchased by an organisation. Scope 3 emissions are
also indirect GHG emissions, accounting for upstream and downstream emissions
of a product or service, and emissions across a business's value chain.
secured lending Lending in which the borrower pledges some asset (e.g. property) as collateral
for the lending.
securitisation The practice of pooling similar types of contractual debt and packaging the
cash flows from the financial asset into securities that can be sold to
institutional investors in debt capital markets. It provides the Group with a
source of secured funding that can achieve a reduction in funding costs by
offering typically 'AAA' rated securities secured by the underlying financial
asset.
significant increase in credit risk (SICR) The assessment performed on financial assets at the reporting date to
determine whether a 12-month or lifetime ECL calculation is required.
Qualitative and quantitative triggers are assessed in determining whether
there has been a SICR since origination. The Group considers 30 DPD as a
backstop in determining whether a SICR since origination has occurred.
standardised approach In relation to credit risk, a method for calculating credit risk capital
requirements using External Credit Assessment Institutions ratings and
supervisory risk weights. In relation to operational risk, a method of
calculating the operational capital requirement by the application of a
supervisory defined percentage charge to the gross income of eight specified
business lines.
stress testing The term used to describe techniques where plausible events are considered
as vulnerabilities to ascertain how this will impact the own funds or
liquidity which a bank holds.
structured entity An entity created to accomplish a narrow well-defined objective (e.g.
securitisation of financial assets). An SE may take the form of a
corporation, trust, partnership or unincorporated entity. SEs are often
created with legal arrangements that impose strict limits on the activities of
the SE. May also be referred to as an SPV.
subordinated debt Liabilities which rank after the claims of other creditors of the issuer in
the event of insolvency or liquidation.
Term Funding Scheme (TFS) A scheme launched in 2016 by the BoE to allow banks and building societies
to borrow from the BoE at rates close to base rate. This is designed to
increase lending to businesses by lowering interest rates and increasing
access to credit.
Tier 1 capital A measure of a bank's financial strength defined by CRD IV. It captures CET1
capital plus other Tier 1 securities (as defined by CRD IV) in issue,
subject to deductions.
Additional information
Glossary
Term Definition
Tier 2 capital A component of regulatory capital, including qualifying subordinated debt,
eligible collective impairment allowances and other Tier 2 securities as
defined by CRD IV.
unsecured lending Lending in which the borrower pledges no assets as collateral for the lending
(such as credit cards and current account overdrafts).
value at risk (VaR) A measure of the loss that could occur on risk positions as a result of
adverse movements in market risk factors (e.g. rates, prices, volatilities)
over a specified time horizon and to a given level of confidence.
Additional information
Abbreviations
AFD Approaching financial difficulty
AGM Annual General Meeting
ALCO Asset and Liability Committee
APM Alternative Performance Measure
ASX Australian Securities Exchange
AT1 Additional Tier 1
ATM Automated teller machine
BCA Business current account
BCBS Basel Committee on Banking Supervision
BCR Banking Competition Remedies
BNPL Buy now, pay later
BoE Bank of England
bps Basis points
BTL Buy-to-let
CBES Climate Biennial Exploratory Scenario
CBI Confederation of British Industry
CCF Credit conversion factor
CCyB Countercyclical Capital Buffer
CDI CHESS Depositary Interest
CDP Carbon Disclosure Project
CER Certified Emissions Reduction
CET1 Common Equity Tier 1 Capital
CIR Cost to income ratio
CMA Competition and Markets Authority
CPI Consumer Price Index
CRD Capital Requirements Directive
CRR Capital Requirements Regulation
CSRBB Credit spread risk in the banking book
CYBI CYB Investments Limited
DEP Deferred Equity Plan
DPD Days past due
DTR Disclosure Guidance and Transparency Rules
EAD Exposure at default
EBA European Banking Authority
EBT Employee benefit trust
ECL Expected credit loss
EIR Effective interest rate
EPC Energy performance certificate
EPS Earnings per share
ESG Environmental, social and governance
FCA Financial Conduct Authority
FIRB Foundation internal ratings-based
FPC Financial Policy Committee
FRC Financial Reporting Council
FTE Full time equivalent
FVOCI Fair value through other comprehensive income
FVTPL Fair value through profit or loss
GAAP Generally Accepted Accounting Principles
GDIA Group Director Internal Audit
GDP Gross Domestic Product
GDPR General Data Protection Regulation
GHG Greenhouse Gases
G-SII Global Systemically Important Institution
HMRC Her Majesty's Revenue and Customs
HPI House Price Index
HQLA High Quality Liquid Asset
IAS International Accounting Standard
IASB International Accounting Standards Board
IBOR Interbank Offered Rate
ICAAP Internal Capital Adequacy Assessment Process
IFRS International Financial Reporting Standard
ILAAP Internal Liquidity Adequacy Assessment Process
IPO Initial Public Offering
IRB Internal ratings-based
IRRBB Interest rate risk in the banking book
ISA International Standards on Auditing
ISDA International Swaps and Derivatives Association
ISSB International Sustainability Standards Board
JV Joint venture
KMP Key management personnel
KPI Key Performance Indicator
LAC Loss-absorbing capacity
LCR Liquidity coverage ratio
LDR Loan to deposit ratio
LGBTQ+ Lesbian, gay, bisexual, transgender, queer (or questioning) plus
LGD Loss Given Default
LIBOR London Interbank Offered Rate
LSE London Stock Exchange
LTIP Long-term incentive plan
LTV Loan to value
MGC Model Governance Committee
MREL Minimum Requirement for Own Funds and Eligible Liabilities
MRT Material Risk Takers
NAB National Australia Bank Limited
NII Net interest income
NIM Net interest margin
NPS Net promoter score
NSFR Net stable funding ratio
NZBA Net-Zero Banking Alliance
PBT Profit before tax
PCA Personal current accounts
PCAF Partnership for Carbon Accounting Financials
Additional information
Abbreviations
PD Probability of Default
PIE Pension Increase Exchange
PMA Post model adjustment
POCI Purchased or originated credit impaired
PPI Payment protection insurance
PRA Prudential Regulation Authority
RAF Risk Appetite Framework
RAS Risk Appetite Statement
RLS Recovery Loan Scheme
RMBS Residential mortgage-backed securities
RMF Risk Management Framework
RoTE Return on Tangible Equity
RPI Retail Price Index
RWA Risk-weighted asset
SASB Sustainability Accounting Standards Board
SAYE Save As You Earn
SDG Sustainable Development Goal
SICR Significant increase in credit risk
SIP Share Incentive Plan
SME Small or medium-sized enterprise
SMF Sterling Monetary Framework
SONIA Sterling Overnight Index Average
SST Solvency Stress Test
STEM Science, Technology, Engineering and Maths
STIP Short-term Incentive Plan
TCFD Task Force on Climate-related Financial Disclosures
TFS Term Funding Scheme
TFSME Term Funding Scheme with additional incentives for SMEs
TNAV Tangible net asset value
TNFD Taskforce on Nature-related Financial Disclosures
UN PRB United Nations' Principles for Responsible Banking
UNEPFI United Nations Environment Programme Finance Initiative
UTM Virgin Money Unit Trust Managers Limited
VAA Virgin Atlantic Airways Limited
VaR Value at risk
VIU Value-in-use
WIP Work-in-progress
YBHL Yorkshire Bank Home Loans Limited
YoY Year-on-year
Additional information
Country by country reporting
The Capital Requirements (Country by Country Reporting) Regulations 2013 came
into effect on 1 January 2014 and place certain reporting obligations on
financial institutions that are within the scope of the European Union's CRD
IV. The purpose of the Regulations is to provide clarity on the source of
the Group's income and the locations of its operations.
The vast majority of entities that are consolidated within the Group's
financial statements are UK registered entities. The activities of the
Group are described in the Strategic report contained in the Group's
Annual Report & Accounts.
2022
UK
Average FTE employees (number) 6,866
Total operating income (£m) 1,716
Profit before tax (£m) 595
Corporation tax paid (£m) 59
Public subsidies received (£m) -
The only other non-UK registered entity of the Group is a Trustee company
that is part of the Group's securitisation vehicles (Lanark and Lannraig).
Lannraig Trustees Limited is registered in Jersey. This entity plays a part
in the overall securitisation process by having the beneficial interest in
certain mortgage assets assigned to it. This entity has no assets or
liabilities recognised in its financial statements with the securitisation
activity taking place in other UK registered entities of the structures.
This entity does not undertake any external economic activity and
has no employees. The results of this entity as well as those of
the entire Lanark and Lannraig securitisation structures are consolidated in
the financial statements of the Group.
Additional information
Other information
The financial information included in this results announcement does not
constitute statutory accounts within the meaning of section 434 of the
Companies Act 2006. Statutory accounts for the year ended 30 September 2022
were approved by the directors on 20 November 2022 and will be delivered to
the Registrar of Companies following publication in December 2022. The
auditor's report on those accounts was unqualified and did not include a
statement under sections 498(2) (accounting records or returns inadequate or
accounts not agreeing with records and returns) or 498(3) (failure to obtain
necessary information and explanations) of the Companies Act 2006.
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