91XR Clydesdale Bk27

14 May 2024

Virgin Money UK PLC (the "Group", or the "Company, or "Virgin Money")

H1 2024 Trading Update

As previously announced, the boards of directors of Virgin Money UK PLC and Nationwide Building Society (Nationwide) have agreed the terms of a recommended cash acquisition of Virgin Money by Nationwide to be effected by means of a scheme of arrangement (Scheme). Further to the update set out in the Scheme Document published by the Company on 22 April 2024 in connection with the proposed acquisition, the Virgin Money Board recently finalised the appointment of Ernst & Young LLP (EY) as Virgin Money's auditors, following PricewaterhouseCoopers LLP giving notice that they would be resigning in light of potential conflicts arising from the possible acquisition. The Group will announce its Interim results for the six-month period ending 31 March 2024 on 13 June 2024, following the conclusion of EY's review. Additionally, the Company provides the following unaudited update on trading in H1 2024, ahead of the shareholder meetings to approve the Scheme and related matters, which are scheduled to be held on 22 May 2024.

This announcement is not a preliminary statement of Interim results. Due to the results presented in this update not having been subject to final review by the Company's auditors as would be required for a preliminary statement of Interim results, adjustments could arise from the finalisation of the review. The announcement therefore contains some details that remain subject to finalisation of the review, which is reflected in the use of ranges for some quoted financial metrics. At this point, Virgin Money UK PLC confirms it is not aware of, nor been notified of, any matter which may result in the need to make a change to the information in this update in connection with EY's review.

David Duffy, CEO:

"Over the first six months, we have continued to deliver on our strategic ambitions in line with expectations. While we expect there to be headwinds through the second half of the year, we remain well placed to deliver growth in our target segments."

H1 2024 Trading update - performance in line with expectations

Overview

The Group has delivered continued business momentum during H1, supported by ongoing strategic execution, with trading in Q2 broadly as anticipated. The Group believes the acquisition of Virgin Money by Nationwide presents an exciting opportunity to build on our significant strategic progress by combining two complementary businesses that together can offer more great products and services to a larger customer base, while delivering value for our shareholders.

Continued strategic execution

Virgin Money has continued to make progress in executing its strategy, following on from the update provided in the Q1 trading statement. Key highlights:

·    Completed purchase of abrdn's c.50% stake in Virgin Money Investments in April for £20m following successful roll-out of new investment and pension services

·   Fully rolled-out premium broker service to 225 mortgage intermediaries, covering c.40% of VMUK applications, contributing to a stronger pipeline of recommended cases from those brokers

·    New virtual assistant Redi has now supported over 1 million conversations, attracting strong Smile scores and solving more than 50% of queries without the need for further escalation

·    Financial crime prevention programme on-track; c.£15m invested during H1

·    Progressing second phase of Consumer Duty review ahead of July implementation

Financial update to 31 March 2024

The Group delivered good financial progress during H1 while maintaining a strong capital position. This included ongoing growth in target lending segments, resilient margins, ongoing cost efficiencies mitigating inflation and broadly consistent credit quality trends. Key highlights:

Targeted growth in customer lending in line with strategy; deposit mix remains broadly stable

·    Customer loans stable in H1 at £72.7bn as 5% growth across target lending segments of business and unsecured lending was offset by lower mortgages balances

·    Mortgages 2% lower in H1 at £56.6bn, reflecting subdued market; customer demand has improved since the start of the calendar year, with application volumes higher in Q2 versus Q1

·    Business lending 7% higher in H1 at £9.3bn, driven by strong demand in sector specialisms

·    Unsecured lending increased 3% in H1 to £6.7bn, driven by 5% growth in credit card lending

·    Customer deposits 2% higher in H1 at £68.2bn; overall deposit mix remains broadly stable

H1 Net interest margin (NIM) performing in-line with expectations

·    NIM improved in Q2 relative to Q1, supported by EIR adjustments in our credit cards portfolio, reflecting strong customer activity and updated assumptions

·    The Group expects NIM for H1 to be at the upper end of the FY24 190-195bps range

Cost savings programme mitigating ongoing inflation

·    Continue to execute cost saving programme, partly offsetting headwinds from inflation, including annual wage rises, and the new BoE levy (annual charge, £10m in Q2)

·    The Group expects the adjusted cost:income ratio[1] to remain broadly stable in H1 (FY23: 52%)

·    Incurred further restructuring costs in H1 in line with expectations; some initial transaction costs incurred in H1, expected to be significantly higher in H2

Asset quality remains solid; cost of risk (CoR) tracking in-line with expectations   

·    Credit quality remains solid and arrears trends are broadly consistent with those set out as part of the Q1 trading statement

·    The Group expects a CoR in H1 of between 25-30bps, incorporating a benefit from the ongoing SICR[2] review on the Group's credit card portfolio and a modestly improving economic outlook

Capital, funding and liquidity remains strong

·    CET1 ratio improved further in Q2 and is expected to be >14.5% at H1, as capital generation and the cancellation of the share buyback more than offset RWA growth in the period

·    The cancellation of the c.£87m unutilised element of the £150m share buyback programme, given the proposed acquisition, drove c.35bps improvement in Q2

·    Liquidity remained robust throughout the period with the 12-month average LCR >150%

·    Funding remains strong; the Group successfully issued a new €750m Senior MREL note in March to maintain a prudent management buffer above its regulatory requirement

Outlook

Following a strong H1, during the second half the Group expects downward pressure on NIM relative to H1, primarily reflecting a lower expected contribution from cards EIR adjustments, and ongoing competition. The Group also anticipates cost pressures from inflation and investment in H2, which will only be partially mitigated by the ongoing cost savings programme:

·    Continue to anticipate 5-10% growth across target lending segments of business and unsecured lending in FY24, as guided at FY23

·    Expect NIM in H2 to be impacted by lower contribution from cards EIR adjustments, ongoing competition and lower interest rates, partially mitigated by the reinvestment rate of the structural hedge

·    Continue to expect NIM to be in the range of 190-195bps for FY24, as guided at FY23, with NIM lower in H2 vs. H1

·    In light of the proposed acquisition by Nationwide, the Group has deferred certain restructuring activity

·    Adjusted cost:income ratio anticipated to be higher in H2 vs. H1, reflecting the latest outlook for income, inflation, ongoing investment and cost savings

·    Continue to expect the cost of risk to be in the range 30-35bps for FY24, as guided at FY23, incorporating SICR review on credit card portfolio and a modestly improving economic backdrop

·    As previously announced, the Board intends to recommend a FY24 dividend of 2p per share[3]

·    Given the proposed acquisition by Nationwide, the Group has cancelled its share buyback programme and does not intend to announce any further share buybacks or dividends

·    As a result of these factors, statutory RoTE expected to be lower in H2 vs. H1

Key dates

·    Shareholder meetings to approve Scheme - 22^nd May 2024

·    Virgin Money UK PLC Interim Results publication - 13^th June 2024

Announcement authorised for release by Lorna McMillan, Group Company Secretary.

Forward looking statements

The information relates to Virgin Money UK PLC and its subsidiaries, which together comprise the "Group".

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 geopolitical factors, the repercussions of the outbreak of coronaviruses (including but not limited to the COVID-19 pandemic), changes to its board and/ or employee composition, exposures to terrorist activity, IT system failures, cyber-crime, fraud and pension scheme liabilities, risks relating to environmental matters such as climate change including the Group's ability along with the government and other stakeholders to measure, manage and mitigate the impacts of climate change effectively,  changes to law and/or the policies and practices of the Bank of England, the Financial Conduct Authority 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, the conflict in the Middle East, any referendum on Scottish independence, and any UK or global cost of living crisis or recession.

In light of these risks, uncertainties and assumptions, the events in the forward looking statements may not occur. Forward looking statements involve inherent risks and uncertainties. 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 representation, warranty or assurance that any such projections or estimates will be realised or that actual returns or other results will not be materially lower than those set out in 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. Whilst every effort has been made to ensure the accuracy of the information in this document or oral or written material discussed or distributed at any presentation, the Group and their directors, officers, employees, agents, advisers and affiliates do not take any responsibility for such information or to update or revise it. Such information is subject to change. 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.

Certain figures contained in the information, 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 the information may not conform exactly to the total figure given.

No statement in this announcement is intended as a profit forecast, profit estimate or quantified benefit statement for any period and no statement in this announcement should be interpreted to mean that earnings per share for Virgin Money for the current or future financial years would necessarily match or exceed the historical published earnings or earnings per share for Virgin Money or the Group.