TIDMVMUK TIDM91XR
RNS Number : 9655U
Virgin Money UK PLC
28 November 2019
Virgin Money UK PLC Results Announcement 2019
28 November 2019
Results Announcement
For the year ended 30 September 2019
BASIS OF PRESENTATION
Virgin Money UK PLC ('Virgin Money' or 'the Company'), formerly known
as CYBG PLC ('CYBG') (the Company was renamed on 30 October 2019), together
with its subsidiary undertakings (which together comprise 'the Group'),
operate under the Clydesdale Bank, Yorkshire Bank, B and Virgin Money
brands. This results announcement covers the results of the Group for
the year ended 30 September 2019. The term 'Virgin Money' is used throughout
this results announcement either in reference to the Group, or when
referring to the acquired business of Virgin Money Holdings (UK) PLC
or subsequent integration of the acquired business within the newly
combined group.
Statutory basis: Statutory information is set out on pages 18 to 21
and within the financial statements.
Pro forma results: On 15 October 2018, the Company acquired all the
voting rights in Virgin Money Holdings (UK) PLC by means of a scheme
of arrangement under Part 26 of the UK Companies Act 2006, with the
transaction being accounted for as an acquisition of Virgin Money Holdings
(UK) PLC. We believe that it is helpful to also provide additional information
which is more readily comparable with the historic results of the combined
businesses. Therefore we have also prepared pro forma results for the
Group as if Virgin Money UK PLC and Virgin Money Holdings (UK) PLC had
always been a combined group, in order to assist in explaining trends
in financial performance by showing a full year performance for the
combined group for both the current year and prior year. A reconciliation
between the results on a pro forma basis and a statutory basis is included
on page 21. The pro forma results are also presented on an underlying
basis as there have been a number of factors which have had a significant
effect on the comparability of the Group's financial position and results.
Underlying basis: The pro forma results are adjusted to remove certain
items that do not promote an understanding of historical or future trends
of earnings or cash flows, which therefore allows a more meaningful
comparison of the Group's underlying performance. A reconciliation from
the underlying pro forma results to the pro forma basis is shown on
page 21 and management's rationale for the adjustments is shown on page
108.
Alternative performance measures (APMs): The financial key performance
indicators (KPIs) used by management 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 financial performance
- glossary' on pages 106 to 108. 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 (including but not
limited to the integration of the business of Virgin Money Holdings
(UK) plc and its subsidiaries into the Group), trends in its
operating industry, changes to customer behaviours and covenant,
macroeconomic and/or geopolitical factors, changes to its Board
and/or employee composition, exposures to terrorist activity, IT
system failures, cybercrime, fraud and pension scheme liabilities,
changes to law and/or the policies and practices of the Bank of
England (BoE), the FCA and/or other regulatory and governmental
bodies, inflation, deflation, interest rates, exchange 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 referendum vote to
leave the European Union (EU), the UK's exit from the EU (including
any change to the UK's currency), Eurozone instability, and any
referendum on Scottish independence.
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. No member of the Group
or their respective Directors, officers, employees, agents,
advisers or affiliates undertakes any obligation to update or
revise any such forward-looking statement following the publication
of this document nor accepts any responsibility, liability or duty
of care whatsoever for (whether in contract, tort or otherwise) or
makes any representation or warranty, express or implied, as to the
truth, fullness, fairness, merchantability, accuracy, sufficiency
or completeness of, the information in this document.
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.
28 November 2019
Virgin Money UK PLC - results for the full year to 30 September
2019
Note: this summary is on a pro forma basis as if Virgin Money
was acquired on 01-Oct-17 (actual completion 15-Oct-18)
David Duffy, Chief Executive Officer:
"In the first year of our newly combined business, we have
delivered a good operating performance in challenging conditions
and made great progress on the integration and rebrand to Virgin
Money.
Our statutory result was significantly affected by additional
PPI provisions, driven by the unprecedented surge in PPI
information requests in August, along with anticipated Virgin Money
acquisition-related costs.
Our customer divisions have performed well - we have delivered a
further c.GBP2bn in net lending to support UK SMEs and consumers,
attracted c.GBP3bn in customer deposits, and made marked
improvements to our customer experience.
We achieved all the required approvals in 2019 to enable us to
operate as one bank, with one brand, and are ready to deliver our
strategy to disrupt the status quo with brilliant customer service
and unique Virgin Money products. In December we are launching
Virgin Money's first digital personal current account and three new
Virgin Money concept stores. A unique loyalty and rewards programme
for customers featuring a number of Virgin Group companies will
follow in 2020, along with the launch of our brand new Virgin Money
business account."
Key financial highlights
-- Resilient operating performance in a challenging environment
- NIM of 1.66% in line with guidance and 6% reduction in underlying
costs to GBP942m; pre-provision operating profit improved +1% in
2019
-- Underlying profit of GBP539m down 7% due to higher
impairments from IFRS 9 adoption and normalisation
-- Transformation on track - GBP53m of run rate net cost savings
achieved; on track for c.GBP200m FY22 target
-- Statutory loss after tax of GBP194m due to legacy conduct
costs and restructuring & acquisition costs; Q4 PPI provision
of GBP385m is within the Group's previous guidance range
-- Robust capital position with CET1 ratio of 13.3%; provides
capacity to execute our strategy and deliver all of the targets
announced at our Capital Markets Day (CMD) in June
-- Dividend suspended for FY19 in light of additional PPI
provisions; the Board will reconsider dividends for FY20 in line
with normal practice
Delivering our strategic priorities
-- Pioneering Growth - strong growth in lending and deposits in
line with our strategy - above market asset growth in Business
(+4.5%) and Personal (+16%), and disciplined growth in Mortgages
(+1.7%); good growth in lower-cost relationship deposits (+7%)
across both Business and Personal
-- Delighted Customers & Colleagues - improved Group NPS of
+37 (2018: +34), with B digital banking service NPS of +52, and
customer experience enhancements such as the new Virgin Money
credit card app, our JV with Salary Finance offering workplace
personal lending and an energy switching partnership with
GoCompare; colleague engagement score of 76% despite major change
agenda
-- Super Straightforward Efficiency - significant progress made
in the first year of the Virgin Money integration; all 6.6m
customers can now be served under the Virgin Money brand after
successful completion of the FSMA Part VII process
-- Discipline & Sustainability - robust capital position
supports delivery of CMD strategy and targets; cost of risk of
21bps was stable through the year and we maintained our prudent
underwriting approach
Significant new developments for customers as our full rebrand
is launched
-- First ever Virgin Money digital current account ready to
launch in December, built on our innovative FinTech-friendly
digital platform
-- First three new concept Virgin Money stores will also open in December
-- New Digital Disruption Hub in Newcastle will accelerate
customer experience and digital functionality improvements from
January 2020 in support of our target for Top 3 CMA service quality
rankings
-- Plans to launch a unique personal rewards and loyalty
programme leveraging the wider Virgin Group and a business banking
proposition in 2020 are progressing well
-- FY20 guidance in line with medium-term strategic and financial targets
Full Year 2019 financial results summary
Above market growth in Business and Personal; good growth in
relationship deposits
-- Customer lending growth of 2.9% to GBP73.0bn, all within our existing risk appetite:
- Business lending growth of 4.5% to GBP7.9bn; supported by
originations of GBP2.2bn during 2019
- Personal lending growth of 16.1% to GBP5.0bn driven by
high-quality Virgin Money credit card growth, new balances from our
Salary Finance partnership and an improved online personal loan
proposition
- Mortgage lending growth of 1.7% to GBP60.1bn, maintaining
market share at c.4% in line with strategy
-- Deposit growth of 4.6% to GBP63.8bn, with 7.1% growth in
lower-cost relationship deposits to GBP21.3bn
-- Robust asset quality with a cost of risk of 21bps stable
through 2019 but increased on FY18 (15bps) largely due to the
adoption of IFRS9 and normalisation
Resilient operating performance; statutory loss due to conduct,
restructuring & acquisition costs
-- Statutory loss after tax of GBP194m reflects legacy conduct
costs and restructuring & acquisition costs
-- Additional PPI provisions of GBP385m taken in Q4 (FY18:
GBP415m); c.9% information request complaint conversion rate
-- Underlying profit of GBP539m is 7% lower YoY due to higher
impairments; pre-provision operating profit increased 1%:
- FY19 NIM of 1.66% in line with guidance (Q4: 1.60%) reflecting competitive market conditions
- Non-interest income reduced 10% primarily due to a GBP12m
lower contribution from our Investments business and GBP9m of
hedging-related adverse fair value movements
- Costs down 6% to GBP942m in line with guidance; cost:income
ratio of 57% and positive jaws of 3%
-- Underlying Return on Tangible Equity (RoTE) of 10.8% (FY18: 11.0%)
Integration on track with great progress made during the
year
-- Integration is progressing well with FSMA Part VII banking
business transfer completed in October 2019; can now begin the
integration of our customer propositions and platforms, and
commence our rebrand
-- Run rate net cost savings of GBP53m delivered; on track for
c.GBP200m net cost savings target by FY22
-- GBP156m of restructuring costs includes accelerated office
closures and redundancies; c.GBP360m estimate for FY19-21
remains
-- Acquisition costs of GBP189m comprises GBP102m of one-off
costs and GBP87m of acquisition accounting unwind
Robust capital position supports execution of strategy and
delivery targets; ordinary dividend suspended
-- CET1 ratio of 13.3% reflects legacy conduct and restructuring
& acquisition costs (FY18: 15.1%)
-- Ordinary dividend suspended for FY19; progressive and
sustainable dividend ambition remains and the Board will reconsider
dividends for FY20 in line with normal practice
-- CET1 ratio above medium-term operating level of c.13%;
retains a significant buffer to CRD IV regulatory requirement of
11.0%, supports delivery of CMD strategy and targets
-- TNAV per share of 249.2p; down 10.8p vs FY18 due to PPI
Capital Markets Day strategy on track and all targets
re-affirmed
-- Guidance for FY20:
- NIM of c.160-165bps
- Underlying operating costs of <GBP900m
- CET1 ratio operating level of c.13%
-- CMD strategy remains on track with all targets re-affirmed,
including: modest improvement in NIM by FY22, <GBP780m FY22
operating costs and statutory RoTE of >12% by FY22
Contact details
For further information, please contact:
Investors and Analysts
Andrew Downey +44 20 3216 2694
Head of Investor Relations +44 7823 443 150
andrew.downey@virginmoneyukplc.com
Media (UK)
Christina Kelly +44 7484 905 358
Senior Media Relations Manager christina.kelly@virginmoneyukplc.com
Simon Hall +44 7855 257 081
Media Relations Manager simon.hall@virginmoney.com
Press Office +44 800 066 5998
press.office@virginmoneyukplc.com
Powerscourt
Victoria Palmer-Moore +44 7725 565 545
Andy Smith +44 7872 604 889
Media (Australia)
Citadel Magnus
James Strong +61 448 881 174
Peter Brookes +61 407 911 389
Virgin Money UK PLC will be hosting a presentation for analysts
and investors covering the 2019 full year financial results
starting at 08:30 GMT (19:30 AEDT) and this will be webcast live
and available at:
https://webcast.openbriefing.com/virginmoney-FY19/
Alternatively, a conference call facility will be available to
listen to the meeting. The dial in details for the call are:
Conference Call Details:
-- Australia 02 8417 2995
-- United Kingdom 0800 640 6441
-- United Kingdom (Local) 020 3936 2999
-- United States 1 646 664 1960
-- All other locations +44 20 3936 2999
Participant Access Code - 391935
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/
Business and financial review
Chief Executive Officer's review
"In 2019 we refreshed our strategy, launched our three new
divisions and delivered significant integration milestones. We are
now one Bank with the culture and capabilities to deliver on our
strategy of disrupting the status quo."
2019 has seen us build our platform for the future. Designing
our refreshed strategy was crucial and developing it with our new
Purpose and Values at its core gives us a clear direction in
support of our ambition to disrupt the status quo.
The combination of Virgin Money and CYBG has created a unique
digitally-enabled competitor that combines the strengths of both
the major banks and the neo banks, enabling us to offer a
differentiated customer proposition.
Working closely with the Board, we formulated our strategy and
targets, which we announced to a positive reception at our Capital
Markets Day (CMD) in June. This strategy will support what we
believe is a compelling investment case and positions us to compete
effectively with current and alternative providers of customer
propositions in the banking models of the future.
A year of progress and achievements
Our integration programme has been a key focus throughout the
year. The critical achievement of this work was the FSMA Part VII
banking business transfer approval in October 2019, which we
delivered faster than expected. This means we can now begin the
integration of our customer propositions and offer the full range
of products and services from across the combined business. We can
also now launch the Group rebrand activity and proceed with the
platform integration activities that support our cost savings
targets.
Our Group strategy will be brought to life for our customers
through our three new customer-facing divisions: Business, Personal
and Mortgages, each with their own customer-focused ambitions,
strategies and KPIs.
We have also made good progress in realising some of our initial
integration cost savings, including addressing senior management
duplication, starting the rationalisation of our office and branch
footprints, and commencing deduplication of suppliers. This has
enabled us to deliver GBP53m of run-rate net cost savings in 2019,
a strong start towards our targeted c.GBP200m of net cost
savings.
Resilient operating performance
In line with the balance sheet optimisation strategy we outlined
at our CMD, we grew above market in Business (+4.5%) and Personal
(+16%), but tempered our growth in Mortgages. We also delivered 7%
growth in relationship deposits, as we optimise our funding
mix.
This strategy contributed to the delivery of a resilient
operating performance in a competitive environment. Although we
increased operating profit by 1% through our initial cost savings,
underlying profit before tax reduced by 7%, due to higher
impairments from IFRS 9 and normalisation.
Statutory loss driven by legacy conduct and acquisition
costs
We, like the rest of the industry, were surprised by the scale
of the PPI information requests and complaints during August. We
have moved swiftly to address the issue and are leveraging
innovative technology solutions to enable us to deal with genuine
customer complaints as quickly, and as cost effectively, as we can.
It is nonetheless frustrating to incur a further GBP385m in
provisions in Q4 as we look to close out this legacy issue.
The scale of PPI provisions and acquisition costs incurred
during the year led to a statutory loss of GBP194m for FY2019.
However, as outlined at our CMD, we have a clear path to statutory
profitability and a statutory return on tangible equity of >12%
by FY2022.
Robust capital position supports our strategy
Although the sizeable PPI provision did impact our capital
position, the Board and I are confident that our CET1 ratio of
13.3% retains both a significant buffer to our regulatory
requirement of 11% and provides the capacity to deliver our
strategy. We have however taken the difficult decision to suspend
the dividend in 2019. The Board, incorporating feedback from our
major shareholders, believes this is the right short-term action to
enable us to deliver on our longer-term strategy and targets.
Customer experience improvements
We have almost completed the transfer of all CYBG customers and
products onto our FinTech-friendly banking platform, and we can now
commence the integration of the Virgin Money customer platforms
too. We have launched EZBob as an SME solution, Salary Finance for
unsecured lending and a money-saving utility app with GoCompare. We
want to accelerate the pace of these and other initiatives and we
have therefore announced the creation of a new digital disruption
hub in Newcastle. This scaled capability will allow our three
business divisions to deliver disruptive propositions to enhance
the customer experience in a rapid and agile manner, with our
innovations benchmarked to all markets and industries globally.
Outlook
Our ambition is to deliver the product and service diversity and
benefits of a large-scale bank with the customer experience and
innovation of the neo banks, and we will also expand our
partnership platform to facilitate the delivery of further
value-based propositions like GoCompare. We are working on new
propositions with a number of the 25+ other Virgin Group companies
and plan to launch reward and loyalty offerings.
Ultimately, we hope to demonstrate the unique advantages of
being linked to the broader Virgin Group. We will be the only bank
that offers a full range of banking and lifestyle services through
a linked rewards programme that offers value back to our customers.
We will begin bringing these capabilities to market during
2020.
We recognise the continuously changing landscape in financial
services and will evaluate partnerships where we believe there is
an opportunity to provide our customers with a unique proposition,
a class-leading service and a value for money outcome. We need to
remain vigilant around the competitive landscape while at the same
time delivering a significant amount of change in our organisation.
Finally, we are reinforcing our governance to ensure compliance
with the regulatory requirements as a new Tier 1 bank.
We are a Purpose-driven organisation with a refreshed strategy
and priorities. We have a clear path to statutory profitability and
a statutory return on tangible equity of >12% by FY2022. We are
also focused on an ambitious sustainability strategy centred on
inclusion, community engagement and protecting and nurturing the
environment. Our Virgin Money Giving platform and charitable
foundation will help us to achieve our goals in these areas.
2019 has been a year of immense work to build the foundations
for our future success across the Board, my Leadership Team and all
of our colleagues, and I would like to thank everybody for their
efforts. I am excited about what we will achieve together in 2020
as we start to deliver on our ambition to disrupt the status
quo.
David Duffy
Chief Executive Officer
27 November 2019
Business and financial review
Chief Financial Officer's review
"In 2019 we delivered a resilient operating performance and made
good progress against our financial targets. We have a strong
balance sheet and are well placed to deliver our strategy."
Review of the year
2019 has seen the combined Group make a strong start. We
delivered a resilient operating performance in a challenging
environment, while executing on key integration milestones that now
enable us to commence the customer and platform integration
programme. We have also made good initial progress in the delivery
of our refreshed strategy and targets that we set out at our
Capital Markets Day (CMD) in June. The Group experienced an
unwelcome and unexpected surge in PPI claims ahead of August's
complaint deadline, but we have been able to absorb the additional
cost impact and remain focused on implementing our CMD
strategy.
Balance sheet progress
Our strategy to reshape the balance sheet is off to a good start
with asset growth of 2.9%. This was achieved through above market
growth in Business and Personal lending, with more muted growth in
Mortgages as we optimised for value in line with our strategy. We
also delivered strong growth of 7.1% in relationship deposits as we
look to rebalance our funding away from less sticky and more
expensive non-linked savings and term deposits.
Resilient operating performance
The Group delivered a resilient operating performance with pro
forma underlying profit before tax of GBP539m (2018: GBP581m) and
underlying return on tangible equity of 10.8% (2018: 11.0%).
The Group delivered slightly lower income of GBP1,639m (down 3%
year-on-year) in a challenging environment, but more than offset
this with reduced costs of GBP942m (down 6%) to deliver an
increased operating profit of GBP692m (up 1%). Impairments rose to
GBP153m (up 44%) following the adoption of IFRS 9 and
normalisation, but underlying asset quality remains strong. As a
result, underlying profit before tax was 7% lower than 2018.
Statutory loss driven by legacy conduct
In line with the rest of the industry, we received an
unprecedented surge in PPI information requests and complaints
during August, which required us to take additional PPI provisions
of GBP385m in the second half of the year (GBP415m for the full
year).
The scale of the PPI provision, coupled with the restructuring
and acquisition costs incurred this year (GBP345m), meant that the
Group has reported a statutory loss after tax of GBP194m (2018:
GBP145m loss after tax).
Robust capital position supports strategy
While the PPI provision clearly had a significant impact on the
Group's capital position, thanks to the significant buffer the
Group was prudently holding, we have been able to absorb the impact
and remain robustly capitalised. However we have, incorporating
feedback from our major shareholders, taken the prudent decision to
suspend the dividend in 2019.
Our CET1 ratio of 13.3% as at 30 September 2019 retains a
significant buffer to our CRD IV regulatory requirement of 11.0%
and provides sufficient capacity to deliver our CMD strategy.
Conclusion
2019 has been a year of building our foundations for the future,
while seeking to close out legacy issues. Our refreshed strategy is
predicated on actions within our own control and leverages the key
strategic advantages available to us. We look forward to another
year of strong delivery and progress in 2020.
Basis of preparation note
The information and commentary in this section presents the
Group results on a pro forma basis as if CYBG PLC and Virgin Money
Holdings (UK) PLC had always been a combined group. This assists in
explaining trends in financial performance by showing a full
12-month performance for the combined group for both the current
and prior year.
The acquisition has had a significant impact on the Group's
statutory results and financial position and we believe that it is
most helpful to provide historical information which is more
readily comparable with the results of the combined businesses.
The statutory results, which include the results of Virgin Money
Holdings (UK) PLC from the date of acquisition on 15 October 2018
are set out at the end of this section on pages 18 to 21.
A reconciliation between the results on a pro forma basis and a
statutory basis is also included on page 20.
Business and financial review
Chief Financial Officer's review
Statutory loss after Underlying profit before Underlying Return on
tax tax Tangible Equity
GBP(194)m GBP539m 10.8%
2018: GBP(145)m 2018: GBP581m 2018: 11.0%
Net Interest Margin Underlying cost to income
(NIM) ratio Cost of risk
1.66% 57% 21bps
2018: 1.78% 2018: 59% 2018: 15bps
Relationship deposit
CET1 ratio Asset growth growth
13.3% +2.9% +7.1%
2018: 15.1% 2018: N/A 2018: N/A
Income
2019 2018
Summary for the year ended 30 September GBPm GBPm ChangE
------------------------------------------ ------ ------ -------
Underlying net interest income 1,433 1,457 (2)%
Non-interest income 206 228 (10)%
------------------------------------------ ------ ------ -------
Total underlying operating income 1,639 1,685 (3)%
------------------------------------------ ------ ------ -------
Net interest margin (NIM) 1.66% 1.78% (12)bps
Average interest-earning assets 86,362 81,934 5%
------------------------------------------ ------ ------ -------
Business and financial review
Chief Financial Officer's review
Overview
Total income of GBP1,639m was 3% lower year-on-year, reflecting
competitive market conditions impacting net interest income, a
lower contribution from our investments business, and adverse fair
value movements within non-interest income.
Net interest income and NIM
Net interest income declined 2% year-on-year reflecting the
continued competitive pressures in the marketplace.
In Mortgages, sustained competition in recent years has driven
front book mortgage pricing well below average back book rates.
This has impacted our book more than others over the past few years
as we have a less seasoned, shorter duration book. The average
yield on the mortgage book declined 12bps due to a negative c.30bps
average front book vs. back book variance during 2019. However,
growth in average mortgage balances helped mitigate these pressures
to deliver broadly stable mortgage interest income. In Business,
expanding yields due to higher rates and growth in average balances
has driven increased interest income. In Personal, better yields
due to the seasoning of the credit card book and growth in average
balances also increased interest income.
Our customer deposit costs increased by 10bps in 2019 to 98bps,
4bps of which relates to the full year impact of the base rate
increase in August 2018. The remainder of the increase is due to
increased deposit pricing pressure on non-linked savings and term
deposits. Wholesale funding costs increased primarily due to rate
increases and additional MREL issuance.
As a result, and as expected and guided, the Group's Net
Interest Margin (NIM) declined by 12bps to 1.66%. Mortgage pricing
pressures reduced NIM by 8bps and deposit pricing, including the
base rate increase impact, led to a further 10bps of NIM reduction.
This was offset by 7bps of benefit from growth in Business and
Personal lending, with a further 1bps of net reduction from other
items, including wholesale funding and liquidity impacts.
The Group manages the risk to its earnings from movements in
interest rates centrally, by hedging assets, liabilities and equity
which are less sensitive to movements in rates. The weighted
average life of this structural hedge was unchanged at 2.5 years
(2018: 2.5 years), in line with the expected life of liabilities of
5 years. The average hedge balance increased to GBP24.0bn (2018:
GBP21.5bn) due to the alignment of the treatment of some
administered rate deposits acquired from Virgin Money with the
Group's policy. Total structural hedge balances generated gross
incremental net interest income of GBP228m (2018: GBP198m),
representing a yield of 0.9% (2018: 0.9%).
2019 2018
------------------------------------ ------------------------------------ ------------------------------------
Interest Interest
Average income/ Average Average income/ Average
balance (expense) yield/(rate) balance (expense) yield/(rate)
Average balance sheet GBPm GBPm % GBPm GBPm %
------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Interest-earning assets
Mortgages 60,288 1,551 2.57 57,960 1,557 2.69
Business lending(1) 7,542 314 4.17 7,311 288 3.94
Personal lending 4,670 359 7.69 4,360 298 6.84
Liquid assets 12,298 98 0.79 11,007 62 0.56
Due from other banks 1,564 13 0.86 1,296 6 0.42
Swap income/other - (11) n/a - (38) n/a
------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Total average interest-earning
assets 86,362 2,324 2.69 81,934 2,173 2.65
Total average non-interest-earning
assets 3,545 3,167
------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Total average assets 89,907 85,101
------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Interest-bearing liabilities
Current accounts 11,570 (19) (0.16) 11,555 (12) (0.11)
Savings accounts 24,366 (214) (0.88) 22,265 (143) (0.64)
Term deposits 22,877 (370) (1.62) 22,847 (364) (1.60)
Wholesale funding 19,427 (288) (1.48) 16,783 (197) (1.17)
------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Total average interest-bearing
liabilities 78,240 (891) (1.14) 73,450 (716) (0.98)
Total average non-interest--bearing
liabilities 6,590 6,379
------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Total average liabilities 84,830 79,829
Total average equity 5,077 5,272
------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Total average liabilities and
average equity 89,907 85,101
------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Net interest income 1,433 1.66 1,457 1.78
------------------------------------ --------- ---------- ------------- --------- ---------- -------------
(1) Includes loans designated at fair value through profit or
loss.
Business and financial review
Chief Financial Officer's review
Non-interest income
Non-interest income reduced GBP22m year-on-year (down 10%). Fee
income across Personal and Business was broadly stable. The major
drivers of the reduction were the contribution from our Investments
business, which was GBP12m lower in 2019 as a result of our
post-acquisition decision to reduce asset management fees
(c.GBP9m), and the initial impact of the transfer of the business
into the JV with Aberdeen Standard Investments (c.GBP3m). In
addition, there were adverse fair value movements relating to hedge
accounting ineffectiveness, which should equalise over time, but
reduced non-interest income by GBP9m year-on-year.
Costs
2019 2018
For the year ended 30 September GBPm GBPm Change
---------------------------------------------- ----- ----- --------
Personnel expenses 365 423 (14)%
Depreciation and amortisation expenses 111 121 (8)%
Other operating and administrative expenses 466 454 3%
---------------------------------------------- ----- ----- --------
Total underlying operating and administrative
expenses 942 998 (6)%
Underlying cost:income ratio (CIR) 57% 59% (2)%pts
---------------------------------------------- ----- ----- --------
Overview
Underlying operating and administrative expenses reduced by 6%
year-on-year to GBP942m, in line with our guidance for <GBP950m
for the year, as our integration programme gathers pace.
Personnel expenses reduced 14% reflecting early action to
address senior management deduplication as well as initial benefits
from our other integration workstreams. Other operating expenses
increased by 3% as we continued to invest in our customer
propositions and also reflected the cost of running two separate
banks ahead of the FSMA Part VII approval in October 2019.
Net cost savings target on track
We have made good initial progress in delivering against our
target of c.GBP200m of net cost savings by the end of FY2022, with
GBP53m of annual run-rate net cost savings achieved already. This
has been delivered primarily through deduplication of senior
management (c.GBP20m of run-rate savings), as well as the
realisation of initial central costs synergies such as
harmonisation of suppliers (c.GBP27m of run-rate savings) and
operational efficiency initiatives including deduplication of head
office functions (c.GBP12m of run-rate savings). This was partly
offset by a GBP7m increase in the Virgin Money brand trademark
licence fee.
Improving efficiency
The 6% reduction in costs more than offset the 3% reduction in
income delivering positive jaws of 3%. This enabled the Group to
reduce its cost:income ratio by 2%pts to 57%, as we progress on the
path towards our target for a mid-40s% ratio by FY2022.
Business and financial review
Chief Financial Officer's review
Impairments(1)
2019 2018
------------------- ------------------------------------ ----------------------------------------------
Total
Mortgages Business personal Total Mortgages Business personal Total Change
bps bps bps bps bps bps bps bps (bps)
------------------- --------- -------- -------- ----- --------- -------- -------- ----- --------
Gross cost
of risk 1 45 333 27 1 36 250 20 7
Specific provision
releases and
recoveries (6) (5) (1)
------------------- --------- -------- -------- ----- --------- -------- -------- ----- --------
Net cost of
risk 21 15 6
------------------- --------- -------- -------- ----- --------- -------- -------- ----- --------
(1) IFRS 9 transitional disclosures are available in note 5.4
within the notes to the consolidated financial statements
Overview
The impairment charge increased by 44% or GBP47m, in line with
expectations. This reflected the full adoption of IFRS 9 across the
Group, portfolio seasoning and a return to more normal levels of
impairment in Business. The cost of risk of 21bps was therefore
6bps higher than FY2018, but was stable across the year as asset
quality has remained resilient.
Divisional performance
Mortgage impairment levels remain very low with no signs of
asset quality stress in the portfolio.
Business gross cost of risk increased to 45bps, which reflected
a more normalised level following an abnormally low level of
impairments in FY2018 with no significant one-off charges. We
remain focused on managing our Business risk profile through
maintaining a diversified portfolio, leveraging our sector
specialist underwriting experience and applying strict client
exposure limits. The underlying credit quality of the book remains
strong, with the probability of default improved on origination in
2019 and unchanged across the portfolio relative to 2018.
Gross cost of risk in Personal increased by 83bps, reflecting
the adoption of IFRS 9 and the seasoning of the credit card
portfolio. Our focus in Personal is to grow our underweight
position through better accessing our existing customer base and
leveraging the Virgin Money brand to target more affluent segments
of the external market.
Asset quality in the credit card portfolio remains strong, with
30-day arrears of 1.1% well below the industry average of 2.3% and
customer affordability remaining robust. Customer indebtedness is
also lower than the industry with a debt to income of c.23% vs.
c.30% for the industry.
Performance in the personal loan portfolio has benefited from
enhanced scorecards and credit tightening strategies, with growth
in high-quality customers reducing 90 days past due rates on the
book to 0.6% from 0.7% a year ago.
Business and financial review
Chief Financial Officer's review
Exceptional items and statutory loss
2019 2018
GBPm GBPm
------------------------------------------------------------ ----- -----
Underlying profit on ordinary activities before tax 539 581
Exceptional items
- Restructuring costs (156) -
- Acquisition costs (189) (39)
- Legacy conduct (433) (396)
- Other items (26) (62)
------------------------------------------------------------ ----- -----
Pro forma (loss)/profit on ordinary activities before
tax (265) 84
Add/(deduct) Virgin Money Holdings (UK) PLC pre-acquisition
loss/(profit)(1) 33 (248)
------------------------------------------------------------ ----- -----
Statutory loss on ordinary activities before tax (232) (164)
Tax credit 38 19
------------------------------------------------------------ ----- -----
Statutory loss for the year (194) (145)
------------------------------------------------------------ ----- -----
(1) In order to reconcile the pro forma (loss)/profit to the
statutory loss, the pre-acquisition results of Virgin Money
Holdings (UK) PLC are removed.
Overview
The Group's pro forma loss before tax was GBP265m, reflecting
GBP804m of exceptional costs incurred during the year, which have
been excluded from the underlying performance of the business.
These included significant legacy conduct costs, one-off
acquisition costs, as well as the first full year of restructuring
costs to achieve integration.
Restructuring costs
As outlined at the CMD in June the Group expects to incur
c.GBP360m of restructuring costs across FY2019-21. The Group had
anticipated incurring this evenly over the period with c.GBP120m
expected in 2019, however, due to the acceleration of redundancy
initiatives and property closures into September 2019, we have
incurred GBP156m of restructuring costs during the year. We will
see the synergy benefits of these initiatives in FY2020. The Group
expects to incur a further c.GBP140m in 2020 as we accelerate
initiatives to mitigate the timing of investments and inflation,
and the remainder in 2021. We continue to expect total
restructuring costs to be c.GBP360m over the three-year period.
Acquisition costs
The Group incurred acquisition costs of GBP189m during the
year.
This included a one-off charge of GBP127m for intangible asset
write-offs following a review of the Group's software estate. This
identified a number of assets (including GBP70m in relation to the
Virgin Money Digital Bank asset) that are no longer of value to the
Group's future strategy and were therefore required to be written
down. However, this charge is capital neutral.
Other one-off impacts include GBP55m of transaction-related
costs incurred by Virgin Money Holdings (UK) PLC and an effective
interest rate (EIR) adjustment credit of GBP80m relating to the
mortgage portfolio following the harmonisation of accounting
policies.
The Group recognised fair value acquisition accounting
adjustments of GBP270m net that will be unwound through the income
statement over the lives of the related assets and liabilities (c.5
years) and GBP87m was charged in 2019.
Legacy conduct
Legacy conduct costs of GBP433m include GBP415m of PPI
provisions, with an additional GBP385m taken in Q4 following the
unprecedented industry-wide surge in information requests and
complaints in August ahead of the PPI time bar deadline. This
provision reflects the costs of additional complaints (including
those from the Official Receiver), processing costs in relation to
the large volume of information requests, and the costs to process
and remediate valid complaints arising from the information
requests. While we still have a residual volume of requests to
process, detailed sampling has informed the provision we have taken
and this is our best estimate. The Group also incurred GBP18m of
provision costs in relation to a number of other smaller legacy
items.
Other items
The Group incurred several other one-off exceptional costs
during the year, including GBP30m of costs in preparation for
participating in the RBS Incentivised Switching Scheme, an GBP11m
charge for GMP pensions equalisation, and an GBP18m charge for
consent solicitation fees incurred in relation to changing the
obligor on Virgin Money Holdings (UK) PLC's outstanding debt
instruments to the Group's holding company. These were partially
offset by a GBP35m gain on sale of c.50% of Virgin Money Unit Trust
Managers to Aberdeen Standard Investments.
Business and financial review
Chief Financial Officer's review
Returns and TNAV
2019 2018 Change
-------------------------------------------- ------ ------ ---------
Underlying Return on Tangible Equity (RoTE) 10.8% 11.0% (0.2)%pts
Tangible Net Asset Value (TNAV) per share 249.2p 260.0p (10.8)p
-------------------------------------------- ------ ------ ---------
Underlying RoTE of 10.8% was slightly lower than the prior year,
reflecting lower underlying profit, but with a minimal impact on
average tangible equity from the conduct charges as the bulk of
those costs were incurred on the last day of the financial year.
Statutory RoTE was negative reflecting the significant legacy
conduct, restructuring and acquisition costs during the year.
TNAV per share reduced c.11p in 2019 to 249.2p, with TNAV build
of 31p from underlying profit after tax being more than offset by
28p of legacy conduct charges and a net 14p negative impact from
other movements including restructuring and acquisition related
adjustments.
Balance sheet
As at 30 September 2019 2018 Change
-------------------------------------- ------ ------ -------
Mortgages 60,079 59,074 1.7%
Business 7,876 7,538 4.5%
Personal 5,024 4,327 16.1%
-------------------------------------- ------ ------ -------
Total customer lending 72,979 70,939 2.9%
-------------------------------------- ------ ------ -------
Relationship deposits(1) 21,347 19,938 7.1%
Non-linked savings 20,197 17,175 17.6%
Term deposits 22,243 23,851 (6.7)%
-------------------------------------- ------ ------ -------
Total customer deposits 63,787 60,963 4.6%
-------------------------------------- ------ ------ -------
Risk Weighted Assets (RWAs) 24,046 22,943 4.8%
of which Mortgages 8,846 8,794 0.6%
of which Business 7,124 6,604 7.9%
of which Personal 4,042 3,463 16.7%
Wholesale funding 18,506 18,675 (0.9)%
of which Term Funding Scheme (TFS) 7,342 8,637 (15.0)%
Loan to Deposit Ratio (LDR) 114% 116% (2)%pts
Liquidity Coverage Ratio (LCR) 152% 161% (9)%pts
-------------------------------------- ------ ------ -------
(1) Current account and linked savings balances.
Overview
The Group began the execution of its balance sheet optimisation
strategy in 2019 in which we seek to rebalance our asset mix
towards higher-margin lending and to grow our lower cost
relationship deposits to enable us to replace more expensive
non-linked savings and term deposits.
Continued customer balance growth
Customer lending balances increased by 2.9% during 2019 with
above market growth in Personal and Business lending, and more
muted growth in Mortgages. Our lending continues to be underwritten
within our prudent risk appetite and approach.
Customer deposits increased by 4.6%, including a strong 7.1%
growth in our lower cost relationship deposits. We also continued
to grow our non-linked savings balances (+17.6%) to enable us to
replace our more expensive term deposits and to help fund the
balance sheet.
The stronger relative growth in our customer deposits meant that
our Loan to Deposit ratio reduced to 114%.
Business and financial review
Chief Financial Officer's review
Further progress on our wholesale funding strategy
Wholesale funding balances were broadly flat during the year,
although there were significant movements within the component
parts. Supported by strong deposit and wholesale funding generation
we repaid GBP1.3bn of TFS, as we follow a prudent repayment
schedule ahead of contractual maturity.
We were also active in other wholesale funding markets, with a
number of successful and over-subscribed transactions during the
year, including Virgin Money PLC's inaugural Covered Bond issuance.
This new Covered Bond programme raised over GBP1bn in funding
across Euro and Sterling markets across two separate trades. We
also issued two further successful transactions from our Lanark
mortgage-backed securities platform, raising c.GBP1.1bn.
These were supported by GBP250m of Additional Tier 1 (AT1)
issuance in March 2019 and GBP250m of Tier 2 subordinated debt
issuance in December 2018 which strengthened our capital stack, as
well as GBP400m of senior unsecured debt issuance in August 2019 as
we build towards meeting our final MREL requirements in 2022.
Our balance sheet strength was also underpinned by the consent
solicitation activity undertaken to change the obligor on Virgin
Money Holdings (UK) PLC's outstanding MREL and AT1 instruments to
the Group's parent company. All of the Group's regulatory capital
and MREL instruments are now issued out of Virgin Money UK PLC,
consistent with the single point of entry resolution model.
Further issuance in secured and unsecured formats is expected in
2020, and we continue to expect that we will issue between GBP1.5bn
and GBP2.0bn of MREL eligible senior unsecured funding by December
2021.
Liquidity and LCR
LCR remained strong at 152%. While the current position reflects
some excess liquidity to mitigate the risks from the FSMA Part VII
process and Brexit uncertainty, the 9%pts reduction in LCR
highlights the ability of the combined Group to operate more
efficiently while continuing to meet regulatory and internal risk
appetite metrics.
Risk weighted assets
RWAs have grown by 4.8% during the year, with overall risk
weight density increasing slightly, largely reflecting the shift in
the mix of the Group's lending towards higher RWA density lending
in Business and Personal.
Mortgage RWAs remained stable due to lower lending in the year,
along with model improvements that have reduced the portfolio risk
weight density. RWAs in our Personal portfolios have grown broadly
in line with assets, while Business RWAs have increased slightly
above asset growth largely reflecting model updates undertaken as
part of the final implementation of IRB. Non-credit risk RWAs of
GBP2,989m were broadly stable year-on-year.
Capital
As at 30 September 2019 2018 Change
-------------------- ----- ----- ---------
CET1 ratio 13.3% 15.1% (1.8)%pts
Total capital ratio 20.1% 20.6% (0.5)%pts
MREL ratio 26.6% 24.1% 2.5%pts
UK leverage ratio 4.9% 5.1% (0.2)%pts
-------------------- ----- ----- ---------
Overview
Despite heavy capital utilisation during the year from legacy
conduct and restructuring and acquisition costs, the Group
maintained a robust capital position with a CET1 ratio of 13.3% and
a total capital ratio of 20.1% as at 30 September 2019.
Capital requirements
Following completion of the Group's ICAAP the PRA has updated
the capital requirements for the Group. The Pillar 2A CET1
requirement was reduced from 3.6% to 3.0% and the Group's
fully-loaded CRD IV minimum CET1 capital requirement is now 60bps
lower at 11.0%.
CET1 capital movements
Underlying capital generation in the period was 77bps, largely
driven by strong underlying profits of 234bps, offset by growth in
lending, AT1 distributions and ongoing investment as we continue to
invest in developing the business to achieve our strategic
ambitions.
Restructuring and acquisition costs, which are elevated this
year due to the one-off elements, absorbed 84bps of capital
demonstrating that the Group's underlying capital generation of
77bps was sufficient to fund its ongoing strategy. However, the
scale of the legacy conduct charge consumed 172bps of capital,
leaving the Group's CET1 ratio at 13.3%.
Robust capital position supports strategy
While the PPI provision did have a significant impact on the
Group's capital position, thanks to the significant buffer the
Group was prudently holding, we have been able to absorb the impact
and remain robustly capitalised.
However, after incorporating feedback from our major
shareholders, the Board has concluded that it is prudent to
conserve capital through the suspension of an ordinary dividend for
2019.
Our closing CET1 ratio of 13.3% remains above our medium-term
operating level of c.13% and retains a significant management
buffer to our CRD IV regulatory requirement of 11.0%. The Group has
assessed its revised capital plan and determined that it has
sufficient capacity to deliver the strategy and targets as outlined
at the CMD in June.
Business and financial review
Chief Financial Officer's review
MREL
The Group's MREL ratio increased to 26.6%, reflecting GBP400m of
senior unsecured debt issuance in August 2019 and GBP250m of Tier 2
subordinated debt issuance in December 2018. We are comfortably
ahead of our interim 2020 MREL requirement of 21.5%, and while the
final MREL requirements are not yet confirmed, we expect to issue
between GBP1.5bn and GBP2.0bn of further MREL eligible senior
unsecured between now and 2022 to meet our estimated final MREL
requirements.
2019
---------------------------------------------------------------- -----
Opening CET1 ratio 10.5%
IRB accreditation impact 3.5%
---------------------------------------------------------------- -----
IRB pro forma CET1 ratio 14.0%
Virgin Money acquisition impact 1.1%
---------------------------------------------------------------- -----
Opening Combined Group pro forma CET1 ratio (pre-IFRS 9 impact) 15.1%
IFRS 9 transitional impact (bps) (2)
---------------------------------------------------------------- -----
Opening Combined Group pro forma CET1 ratio as of 1 October
2018 (post-IFRS 9 impact) 15.1%
Generated (bps) 234
RWA growth (bps) (65)
Investment spend (bps) (65)
AT1 distributions (bps) (27)
---------------------------------------------------------------- -----
Underlying capital generated (bps) 77
---------------------------------------------------------------- -----
Restructuring and acquisition costs (bps) (84)
Legacy conduct (bps) (172)
FY2018 ordinary dividends paid (bps) (19)
Other (bps) 18
---------------------------------------------------------------- -----
Net capital absorbed (bps) (180)
---------------------------------------------------------------- -----
Closing CET1 ratio 13.3%
---------------------------------------------------------------- -----
On track to deliver targets
FY2020 guidance
Net Interest Margin (NIM)
c.1.60-1.65%
Underlying costs
<GBP900m
CET1 ratio operating level
c.13%
Dividend
Reconsider in FY2020
All CMD targets reaffirmed, including:
>12%
Statutory RoTE by FY22
>100bps
CET1 generation p.a. by FY22
Progressive and sustainable
ordinary dividend c.50% payout
ratio over time
Business and financial review
Chief Financial Officer's review
Outlook and guidance
The political and economic outlook remains highly uncertain.
With the inevitable volatility arising from an impending General
Election and lack of clarity as to the final shape of any Brexit
arrangements, the UK's near-term economic prospects remain hard to
forecast. Although sentiment has improved as the threat of a
no-deal Brexit has receded, GDP growth may remain muted and we are
prepared for an outcome in which other key economic indicators
decline.
Our strategy was designed to mitigate a muted economic outlook
and the evident industry pressures, with a focus on leveraging the
significant self-help opportunities available to us from reshaping
our balance sheet and becoming more cost-efficient through
deduplication, platform integration and digital transformation.
Despite the short-term external challenges, we remain confident
in the prospects for the Group and we are reaffirming all of the
targets we set at our CMD. We continue to believe that the delivery
of our strategy and targets will deliver increased shareholder
value as measured by the achievement of a statutory RoTE of >12%
by FY2022, CET1 capital generation of >100bps per annum by
FY2022 and an ordinary dividend ambition that is progressive and
sustainable, moving towards a c.50% payout ratio over time.
In the near term, we foresee continuing industry pressures and
economic uncertainty, but our self-help strategy is well placed to
mitigate these. While 2020 will be a year of continued integration
activity and associated costs, it will also see some exciting
developments launched for our customers, now that the FSMA Part VII
banking business transfer process is complete.
Our Net Interest Margin (NIM) for FY2020 is expected to be in a
range of between 1.60% and 1.65%. Pressure from back book repricing
in our mortgage portfolio will ease in FY2020 as our front book
versus back book variance narrows. We will also start to see
benefits from further growth in margin accretive lending and
lower-cost relationship deposits, although pressures from wholesale
funding costs and TFS repayment will continue.
On costs, we will continue working towards our net cost savings
target of c.GBP200m by FY2022 and expect the Group's underlying
operating expenses to be less than GBP900m in FY2020. This will be
underpinned by the delivery of further integration and digitisation
initiatives, but will be partly offset by continued cost inflation
and ongoing investment.
On capital, we intend to operate in line with our CET1 ratio
operating level of c.13%. Underlying capital generation will be
used to fund the capital consumption from restructuring and
acquisition costs, but we will also look to take further
opportunities to optimise our RWAs as we reshape the balance
sheet.
While it was necessary to suspend our dividends in 2019 due to
the unexpected legacy conduct charge, we remain committed to our
dividend ambition and the Board will reconsider dividends in line
with normal practice in FY2020.
Lending and deposit growth will continue as set out at the CMD,
with above system growth in Business and Personal, while Mortgages
will grow in line with the market. On deposits, we expect a high
single-digit CAGR in our relationship deposits, underpinned by the
launch and development of the digitally-enabled Virgin Money
Personal Current Account at the end of 2019.
Finally, we will participate in the Bank of England's annual
cyclical scenario (ACS) stress tests for the first time in 2020. We
have begun preparatory work which will be completed next year, with
the published results expected in late 2020.
In summary, the year ahead promises to be another busy but
exciting period as we execute our strategy in support of delivering
on our ambition to disrupt the status quo.
Ian Smith
Group Chief Financial Officer
27 November 2019
Business and financial review
Overview of Group results - Pro forma basis
Summary income statement - underlying and pro forma basis(1)
2019 2018 Change
GBPm GBPm %
------------------------------------------------- ----- ----- ------
Underlying net interest income 1,433 1,457 (2)
Non-interest income 206 228 (10)
------------------------------------------------- ----- ----- ------
Total underlying operating income 1,639 1,685 (3)
Underlying operating and administrative expenses (942) (998) (6)
UK Bank levy (5) -
------------------------------------------------- ----- ----- ------
Underlying operating profit before impairment
losses 692 687 1
Underlying impairment losses on credit exposures (153) (106) 44
------------------------------------------------- ----- ----- ------
Underlying profit on ordinary activities before
tax 539 581 (7)
- Restructuring costs (156) -
- Acquisition costs (189) (39) 385
- Legacy conduct (433) (396) 9
- Other items(2) (26) (62) (58)
------------------------------------------------- ----- ----- ------
Pro forma (loss)/profit on ordinary activities
before tax (265) 84 n/a
------------------------------------------------- ----- ----- ------
(1) The summary income statement is presented on an underlying
and pro forma basis as explained in the Basis of Presentation.
(2) Other includes a GBP30m charge in relation to SME
transformation, including preparations to participate in the RBS
Incentivised Switching Scheme, GBP18m of consent solicitation costs
relating to the change in obligor of senior debt from Virgin Money
Holdings (UK) PLC to CYBG PLC, a charge of GBP11m for Guaranteed
Minimum Pension (GMP) equalisation in the Group's defined benefit
scheme, GBP5m of legacy restructuring and separation costs, and
GBP1m of expenses relating to the transition of Virgin Money Unit
Trust Managers (VMUTM) into the joint venture. Offsetting this is a
GBP35m gain on the partial disposal of VMUTM and a GBP4m gain
recognised on the disposal of the Group's VocaLink share.
Summary balance sheet - pro forma basis
2019 2018 Change
As at 30 September GBPm GBPm %
------------------------------ ------ ------ ------
Customer loans 72,979 70,939 2.9
Other financial assets 16,391 16,202 1.2
Other non-financial assets 1,629 1,407 15.8
------------------------------ ------ ------ ------
Total assets 90,999 88,548 2.8
------------------------------ ------ ------ ------
Customer deposits 63,787 60,963 4.6
Wholesale funding 18,506 18,675 (0.9)
Other liabilities 3,685 3,726 (1.1)
------------------------------ ------ ------ ------
Total liabilities 85,978 83,364 3.1
Ordinary shareholders' equity 4,106 4,312 (4.8)
AT1 equity 915 450 103.3
Non-controlling interests - 422
------------------------------ ------ ------ ------
Equity 5,021 5,184 (3.1)
Total liabilities and equity 90,999 88,548 2.8
------------------------------ ------ ------ ------
Business and financial review
Overview of Group results - Pro forma basis
Key Performance Indicators(1)
12 months 12 months
to to
30 Sep 2019 30 Sep 2018 Change
---------------------------- ------------ ------------ ---------
PROFITABILITY
Net interest margin 1.66% 1.78% (12)bps
Underlying RoTE 10.8% 11.0% (0.2)%pts
Underlying CIR 57% 59% (2)%pts
Underlying return on assets 0.54% 0.56% (2)bps
Underlying EPS(2) 28.1p 29.8p (1.7)p
---------------------------- ------------ ------------ ---------
As at 30 Sep 2019 30 Sep 2018 Change
-------------------------------------------- ----------- ----------- ---------
ASSET QUALITY
Impairment charge to average customer loans
(cost of risk) 0.21% 0.15% 6bps
Total provision to customer loans 0.53% 0.51% 2bps
Indexed LTV of mortgage portfolio(3) 57.2% 57.3% (0.1)%pts
-------------------------------------------- ----------- ----------- ---------
Regulatory Capital
CET1 ratio(4) 13.3% 15.1% (1.8)%pts
Tier 1 ratio 17.1% 18.3% (1.2)%pts
Total capital ratio 20.1% 20.6% (0.5)%pts
MREL ratio 26.6% 24.1% 2.5%pts
CRD IV leverage ratio 4.3% 4.6% (0.3)%pts
UK leverage ratio 4.9% 5.1% (0.2)%pts
TNAV per share(5) 249.2p 260.0p (10.8)p
-------------------------------------------- ----------- ----------- ---------
Funding and Liquidity
Loan to deposit ratio (LDR) 114% 116% (2)%pts
Liquidity coverage ratio (LCR) 152% 161% (9)%pts
Net stable funding ratio (NSFR) 128% 126% 2%pts
-------------------------------------------- ----------- ----------- ---------
(1) For a definition of each of the KPIs, refer to 'Measuring
financial performance - glossary' on pages 106 to 108. The KPIs
include statutory, regulatory and alternative performance
measures.
(2) For pro forma purposes, the weighted average number of
ordinary shares in issue assumes that the 540,856,644 share
issuance arising on the acquisition of Virgin Money was completed
on 1 October 2017, and excludes own shares held.
(3) LTV of the mortgage portfolio is defined as mortgage
portfolio weighted by balance. The Clydesdale Bank PLC portfolio is
indexed using the MIAC Acadametrics indices at a given date, while
the Virgin Money portfolio is indexed using the Markit indices.
(4) The pro forma CET 1 ratio at 30 September 2018 reflects the
impact of the acquisition of Virgin Money and IRB
accreditation.
(5) The pro forma total number of ordinary shares in issue used
in the TNAV per share calculation for the comparative periods is
the number of ordinary shares in issue on 15 October 2018 following
the acquisition of Virgin Money (excluding own shares held). This
has been applied across all periods for comparability purposes.
Business and financial review
Overview of Group results - Statutory basis
The following tables present the Group on a statutory basis.
That is, they include the results of Virgin Money from the date of
acquisition on 15 October 2018. The acquisition has had a
significant impact on the Group's statutory results and financial
position as shown below. Therefore, we believe that it is more
helpful to consider the more readily comparable pro forma
information set out on the previous pages.
Summary income statement
2019 2018 Change
For the year ended 30 September GBPm GBPm %
------------------------------------------------- ------- ------- ------
Net interest income 1,514 851 78
Non-interest income 235 156 51
------------------------------------------------- ------- ------- ------
Total operating income 1,749 1,007 74
Operating and administrative expenses (1,724) (1,130) 53
------------------------------------------------- ------- ------- ------
UK bank levy (5) -
------------------------------------------------- ------- ------- ------
Operating profit/(loss) before impairment losses 20 (123) (116)
Impairment losses on credit exposures(1) (252) (41) 515
------------------------------------------------- ------- ------- ------
Statutory loss on ordinary activities before
tax (232) (164) 41
Tax credit 38 19 100
------------------------------------------------- ------- ------- ------
Statutory loss after tax (194) (145) 34
------------------------------------------------- ------- ------- ------
(1) Impairment losses on credit exposures for the current period
are calculated on an expected credit loss (ECL) basis under IFRS 9,
which the Group adopted on 1 October 2018, and includes the IFRS 9
impairment impact on acquired assets (GBP103m charge). For all
other periods, impairment losses are calculated under the incurred
loss basis as required by IAS 39.
The Group has recognised a statutory loss after tax of GBP194m
(30 September 2018: loss of GBP145m). The increased loss reflects
additional costs relating to the acquisition of Virgin Money
Holdings (UK) PLC in addition to further significant conduct
charges. As outlined at the CMD, the Group has a clear path to
narrowing the difference between underlying and statutory profit
over the next three years as we put legacy conduct behind us and
restructuring and acquisition costs reduce over time.
Summary balance sheet
2019 2018 Change
As at 30 September GBPm GBPm %
------------------------------ ------ ------ ------
Customer loans 72,979 33,281 119
Other financial assets 16,391 9,234 78
Other non-financial assets 1,629 941 73
------------------------------ ------ ------ ------
Total assets 90,999 43,456 109
------------------------------ ------ ------ ------
Customer deposits 63,787 28,854 121
Wholesale funding 18,506 8,095 129
Other liabilities 3,685 3,321 11
------------------------------ ------ ------ ------
Total liabilities 85,978 40,270 114
Ordinary shareholders' equity 4,106 2,736 50
AT1 equity 915 450 103
------------------------------ ------ ------ ------
Equity 5,021 3,186 58
Total liabilities and equity 90,999 43,456 109
------------------------------ ------ ------ ------
Business and financial review
Overview of Group results - Statutory basis
Key Performance Indicators(1)
12 months 12 months
to to
30 Sep 2019 30 Sep 2018 Change
------------------------------------------- ------------ ------------ --------
Profitability
Statutory return on tangible equity (RoTE) (6.8)% (6.9)% 0.1%pts
Statutory cost to income ratio (CIR) 99% 112% (13)%pts
Statutory return on assets (0.23)% (0.34)% 0.11%pts
Statutory basic loss per share (17.9)p (19.7)p 1.8p
------------------------------------------- ------------ ------------ --------
As at 30 Sep 2019 30 Sep 2018 Change
------------------------------------------ ----------- ----------- ---------
Regulatory capital
CET1 ratio 13.3% 10.5% 2.8%pts
Tier 1 ratio 17.1% 12.7% 4.4%pts
Total capital ratio 20.1% 15.9% 4.2%pts
MREL ratio 26.6% 19.8% 6.8%pts
CRD IV leverage ratio 4.3% 5.6% (1.3)%pts
UK leverage ratio 4.9% 6.5% (1.6)%pts
Tangible net asset value (TNAV) per share 249.2p 262.3p (13.1)p
------------------------------------------ ----------- ----------- ---------
Funding and liquidity
Loan to deposit ratio (LDR) 114% 115% (1)%pts
Liquidity coverage ratio (LCR) 152% 137% 15%pts
Net stable funding ratio (NSFR) 128% 119% 9%pts
------------------------------------------ ----------- ----------- ---------
(1) For a definition of each of the KPIs, refer to 'Measuring
financial performance - glossary' on pages 106 to 108. The KPIs
include statutory, regulatory and alternative performance
measures.
Business and financial review
Overview of Group results - Statutory basis
Reconciliation of statutory to pro forma results
The statutory basis presented within this section reflects the
Group's results as reported in the financial statements,
incorporating Virgin Money Holdings (UK) PLC from 15 October 2018.
The pro forma basis includes the consolidated results of Virgin
Money Holdings (UK) PLC as if the acquisition had occurred on 1
October 2018. The underlying results reflect the Group's results
prepared on an underlying basis as presented to the CEO, Executive
Leadership Team and Board. These exclude certain items that are
included in the statutory results, as management believes that
these items are not reflective of the underlying business and do
not aid meaningful period-on-period comparison. The table below
reconciles the statutory results to the pro forma results, and full
details on the adjusted items to the underlying results are
included on page 108.
Include Virgin
Money
pre-acquisition
Statutory basis results Pro forma basis
-------------------------------------- ----------------- ------------------ -----------------
1 Oct
to
15 Oct
2019 2018 2018 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------- -------- ------- ---------- ------ -------- -------
Net interest income 1,514 851 22 606 1,536 1,457
Non-interest income(1) 235 156 9 75 244 231
-------------------------------------- -------- ------- ---------- ------ -------- -------
Total operating income 1,749 1,007 31 681 1,780 1,688
Operating and administrative expenses (1,724) (1,130) (60) (368) (1,784) (1,498)
UK bank levy (5) - - - (5) -
-------------------------------------- -------- ------- ---------- ------ -------- -------
Operating profit/(loss) before
impairment losses 20 (123) (29) 313 (9) 190
Impairment losses on credit exposures (252) (41) (4) (65) (256) (106)
(Loss)/profit on ordinary activities
before tax (232) (164) (33) 248 (265) 84
-------------------------------------- -------- ------- ---------- ------ -------- -------
Restructuring costs 156 -
Acquisition costs 189 39
Legacy conduct 433 396
Other items 26 62
-------------------------------------- -------- ------- ---------- ------ -------- -------
Underlying profit on ordinary
activities before tax 539 581
-------------------------------------- -------- ------- ---------- ------ -------- -------
(1) 'Fair value gains and losses on financial instruments' were
previously treated as an adjustment to underlying profit within the
Virgin Money accounts but have been reclassified to underlying
non-interest income in line with the Group's presentation.
Business and financial review
Overview of Group results - Statutory basis
Reconciliation of pro forma to underlying results
The underlying results presented within this section reflect the
Group's results prepared on an underlying basis as presented to the
CEO, Executive Leadership Team and Board. These exclude certain
items that are included in the pro forma results, as management
believes that these items are not reflective of the underlying
business and do not aid meaningful period on period comparison. The
tables below reconcile the pro forma results to the underlying
basis, and full details on the adjusted items are included on page
108:
Include
Virgin Money
Statutory pre-acquisition PrO forma Restructuring acquisition legacy Underlying
results results results costs costs conduct Other basis
2019 income statement GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ---------------- ------------- ----------- -------- -----
Net interest
income 1,514 22 1,536 - (103) - - 1,433
Non-interest
income 235 9 244 - - - (38) 206
--------------------- --------- ---------------- --------- ------------- ----------- -------- ----- ----------
Total operating
income 1,749 31 1,780 - (103) - (38) 1,639
Total operating
and administrative
expenses before
impairment losses (1,724) (60) (1,784) 156 189 433 64 (942)
UK bank levy (5) - (5) - - - - (5)
--------------------- --------- ---------------- --------- ------------- ----------- -------- ----- ----------
Operating
profit/(loss)
before impairment
losses 20 (29) (9) 156 86 433 26 692
Impairment losses
on credit exposures (252) (4) (256) - 103 - - (153)
--------------------- --------- ---------------- --------- ------------- ----------- -------- ----- ----------
(Loss)/profit
on ordinary
activities
before tax (232) (33) (265) 156 189 433 26 539
--------------------- --------- ---------------- --------- ------------- ----------- -------- ----- ----------
Financial performance
measures
RoTE (6.8)% (0.7)% (7.5)% 3.5% 4.3% 9.9% 0.6% 10.8%
CIR 99% 1% 100% (10)% (5)% (26)% (2)% 57%
Return on assets (0.23)% (0.03)% (0.26)% 0.15% 0.19% 0.43% 0.03% 0.54%
Basic EPS (17.9)p (1.7)p (19.6)p 9.3p 11.2p 25.7p 1.5p 28.1p
--------------------- --------- ---------------- --------- ------------- ----------- -------- ----- ----------
Include
Virgin Money
Statutory pre-acquisition Pro forma acquisition Legacy Underlying
results results results costs conduct Other basis
2018 income statement GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ---------------- ----------- -------- -----
Net interest
income 851 606 1,457 - - - 1,457
Non-interest
income 156 75 231 - - (3) 228
------------------------ --------- ---------------- --------- ----------- -------- ----- ----------
Total operating
income 1,007 681 1,688 - - (3) 1,685
Total operating
and administrative
expenses before
impairment losses (1,130) (368) (1,498) 39 396 65 (998)
------------------------ --------- ---------------- --------- ----------- -------- ----- ----------
Operating (loss)/profit
before impairment
losses (123) 313 190 39 396 62 687
Impairment losses
on credit exposures (41) (65) (106) - - - (106)
------------------------ --------- ---------------- --------- ----------- -------- ----- ----------
(Loss)/profit
on ordinary activities
before tax (164) 248 84 39 396 62 581
------------------------ --------- ---------------- --------- ----------- -------- ----- ----------
Financial performance
measures
RoTE (6.9)% 6.4% (0.5)% 0.9% 9.1% 1.5% 11.0%
CIR 112% (23)% 89% (2)% (24)% (4)% 59%
Return on assets (0.34)% 0.38% 0.04% 0.04% 0.41% 0.07% 0.56%
Basic EPS (19.7)p 18.4p (1.3)p 2.4p 24.8p 3.9p 29.8p
------------------------ --------- ---------------- --------- ----------- -------- ----- ----------
Risk Management
Credit risk
The Group's approach to and management of risk is defined in the
Group's Risk Management Framework (RMF). Integral to the RMF is the
identification of principal risks, the process by which the Group
sets its risk appetite which is the nature and extent of risk it is
willing to assume to achieve its strategic objectives. The
framework identifies nine principal risks: operational risk; people
risk; financial risk; credit risk; technology risk; regulatory and
compliance risk; conduct risk; financial crime risk; and strategic
and enterprise risk.
The Group's risks are continually reassessed and reviewed
through a horizon scanning process, with escalation and reporting
to the Board. The horizon scanning process fully considers all
relevant internal and external factors, and is designed to consider
and capture those risks which are current but have not yet fully
crystallised, as well as those which are expected to crystallise in
future periods. These risks include, but are not limited to,
geopolitical and macroeconomic environment; competition; regulatory
change; and climate change. These risks and the overall risk
landscape are regularly monitored by both Executive and Board Risk
Committees.
Further detail on the Group's risks and how they are managed is
available in the 2019 Annual Report and Accounts.
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/or products that the Group offers, and those in
which the Group invests (including, among others, loans,
guarantees, credit-related commitments, letters of credit,
acceptances, inter-bank transactions, foreign exchange
transactions, swaps and bonds). Credit risk can be found both
on-balance sheet and off--balance sheet.
Key credit metrics
As at
----------------------------------------------- ------------------------------------------
30 Sep 2019 1 Oct 2018(1) 30 Sep 2018(1)
(audited) (unaudited) (audited)
GBPm GBPm GBPm
----------------------------------------------- ----------- ------------- --------------
Impairment provisions held on credit exposures
Business lending 147 150 136
Mortgage and Personal lending 215 74 59
----------------------------------------------- ----------- ------------- --------------
362 224 195
----------------------------------------------- ----------- ------------- --------------
For the YEAR ended
------------------------------------------------- ------------------------------------------
30 Sep 2019 1 Oct 2018(1) 30 Sep 2018(1)
(audited) (unaudited) (audited)
GBPm GBPm GBPm
------------------------------------------------- ----------- ------------- --------------
Underlying impairment charge on credit exposures
Business lending 25 N/a 15
Mortgage and Personal lending 123 N/a 26
------------------------------------------------- ----------- ------------- --------------
148 N/a 41
------------------------------------------------- ----------- ------------- --------------
Asset quality measures:
Underlying impairment charge(2) to average
customer loans (cost of risk) 0.21% N/a(3) 0.12%
90+ days past due (DPD) plus impaired assets
to customer loans N/a N/a 0.91%
Stage 3 assets to customer loans 1.09% 1.77% N/a
Total provision to customer loans 0.50% 0.68% 0.61%
Specific provision to impaired assets N/a N/a 35.50%
Stage 3 provision to Stage 3 loans 14.32% 14.55% N/a
------------------------------------------------- ----------- ------------- --------------
(1) These exclude the impact of the acquisition of Virgin Money
Holdings (UK) PLC with September 2018 figures presented on an IAS
39 basis.
(2) Inclusive of gains/losses on assets held at fair value and
elements of fraud loss but excludes the acquisition accounting
impact on impairment losses shown on page 108.
(3) An underlying impairment charge was not calculated as at 1
October 2018 and therefore this metric cannot be calculated for
that date.
Risk Management
Credit risk
A number of the Group's key credit metrics are no longer
applicable as a result of the change to an IFRS 9 basis of
calculating expected credit losses (ECLs) and have been replaced
with metrics appropriate to the revised basis as shown in the table
above.
The increase in underlying impairment charge from GBP41m to
GBP148m primarily reflects a higher charge on our personal
exposures which includes the charge relative to the acquired credit
cards portfolio. The charge relative to business and mortgage
exposures has also increased. The cost of risk, at 21bps, is
reflective of a return to normalisation, however it remains below
our expectation of a long-term loss rate of 30bps.
Asset quality measures remain resilient, reflective of the focus
on responsible credit decisions and controlled risk appetite. The
level of Stage 3 assets remains modest against a growing book. This
reflects the credit quality of the portfolios, supported by the low
interest rate environment. The ratio of total provisions to
customer loans at 0.50% is reflective of a well-collateralised
portfolio, supported by the increase in the size of the mortgage
portfolio which proportionately requires a lower provision coverage
and is a key driver of the overall reduction.
Reconciliation of the impairment loss provision from IAS 39 to
IFRS 9
The movement in the Group's opening impairment provision as a
result of adopting an ECL impairment methodology as required by
IFRS 9 from 1 October 2018 is illustrated below:
GBPm
-------------------------------------------------------------- -----
Closing IAS 39 impairment provision as at 30 September 2018 195
Less: removal of IAS 39 collective provision (152)
Add: introduction of a 12-month ECL calculation (Stage 1) 53
Add: introduction of a lifetime ECL calculation (Stage 2 and
3) 121
Add: undrawn balances 5
Add: multiple economic scenarios 2
-------------------------------------------------------------- -----
Opening IFRS 9 impairment loss provision as at 1 October 2018 224
-------------------------------------------------------------- -----
Removal of IAS 39 collective provision
The IAS 39 concept of a collective impairment provision to cover
losses that have been incurred but not yet identified on loans
subject to an individual assessment is no longer an acceptable
basis for impairment provisioning under IFRS 9.
Introduction of a 12-month ECL calculation
IFRS 9 requires a 12-month ECL calculation on all assets which
have not undergone a significant increase in credit risk since
origination. These are classed as Stage 1 under IFRS 9, with the
calculation on loans and advances allocating the ECL at an
individual account level. The 12-month ECL calculation is based on
the possibility of default occurring within 12 months of the
reporting date.
Introduction of a lifetime ECL calculation
IFRS 9 requires a lifetime ECL calculation where a financial
asset has been assessed as experiencing a significant increase in
credit risk based on the Group's staging criteria. These can be
classed as either Stage 2 or Stage 3 under IFRS 9, with the
calculation on loans and advances allocating the ECL at an
individual account level. Not all of these accounts would have been
included in the IAS 39 collective provision, with the quantum of
the ECL calculation also higher due to the requirement for lifetime
losses to be included. The lifetime ECL calculation is based on the
possibility of credit losses occurring over the lifetime of the
asset.
Undrawn balances
IFRS 9 requires that impairment allowances be held on an
expected loss basis rather than the incurred loss basis under IAS
39. This change has brought into scope pipeline exposures where an
irrevocable commitment has been made to a customer, but no drawdown
had occurred at the IFRS 9 adoption date, and for which no
impairment allowance was held previously.
Multiple economic scenarios
This represents the difference, at adoption of IFRS 9, between
calculated provisions under the Group's base scenario and the final
aggregate position over the three scenarios (base, mild upside and
severe downside).
Risk Management
Credit risk
Gross loans and advances by IFRS 9 stage allocation
(audited)
The distribution of the Group's gross loans and advances by IFRS
9 stage allocation is analysed below.
Stage Stage Stage Stage
Gross loans and advances Stage 2 2 2 Stage 3
to customers 1 <30 DPD >30 DPD Total 3 POCI Total
as at 30 September 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ------- -------- -------- ------ ----- ----- -------
Mortgages 58,120 1,637 168 1,805 363 103 60,391
Personal of which: 4,787 392 32 424 61 8 5,280
------------------------- ------- -------- -------- ------ ----- ----- -------
- credit cards 3,806 353 25 378 46 8 4,238
- personal overdrafts 53 - 1 1 4 - 58
- other personal lending 928 39 6 45 11 - 984
------------------------- ------- -------- -------- ------ ----- ----- -------
Business 5,018 2,280 5 2,285 272 - 7,575
------------------------- ------- -------- -------- ------ ----- ----- -------
Closing balance 67,925 4,309 205 4,514 696 111 73,246
------------------------- ------- -------- -------- ------ ----- ----- -------
Gross loans and advances Stage Stage Stage Stage
to customers(1) Stage 2 2 2 Stage 3
as at 1 October 2018 (excluding 1 <30 DPD >30 DPD Total 3 POCI Total
Virgin Money) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- ------- -------- -------- ------ ----- ----- -------
Mortgages 23,572 605 84 689 279 - 24,540
Personal of which: 1,143 28 10 38 22 - 1,203
--------------------------------- ------- -------- -------- ------ ----- ----- -------
- credit cards 370 1 3 4 7 - 381
- personal overdrafts 50 - 1 1 4 - 55
- other personal lending 723 27 6 33 11 - 767
--------------------------------- ------- -------- -------- ------ ----- ----- -------
Business 4,741 2,161 9 2,170 263 - 7,174
--------------------------------- ------- -------- -------- ------ ----- ----- -------
Closing balance 29,456 2,794 103 2,897 564 - 32,917
--------------------------------- ------- -------- -------- ------ ----- ----- -------
(1) Excludes loans designated at fair value through profit and
loss, balances due from customers on acceptances, accrued interest
and deferred and unamortised fee income.
Overall, the lending portfolio increased by GBP40.3bn between 1
October 2018 and 30 September 2019. In addition to underlying
growth, the increase reflects the acquisition of Virgin Money
Holdings (UK) PLC on 15 October 2018, with the acquired portfolio
totalling GBP39.5bn as at 30 September 2019. Of this, GBP111m is
Stage 3 purchased or originated credit impaired (POCI),
representing the acquired assets that were classed as credit
impaired at date of acquisition.
Mortgages
With total gross loans and advances of GBP60.4bn as at 30
September 2019, there has been underlying growth in the portfolio
year-on-year, although the increase in lending balance results
mainly from the impact of the acquired portfolio. Over 95% are
classed as Stage 1. Stage 3 POCI for Mortgages reduced from GBP137m
on acquisition to GBP103m as at 30 September 2019 as a result of
customer redemptions and balance paydowns.
Personal
Of the GBP5.3bn total personal portfolio, the majority is credit
cards, at GBP4.2bn. The year-on-year growth results mainly from the
acquired credit cards portfolio, however, underlying growth is
evident on both the credit card and other personal lending
portfolios. The personal portfolio evidences stable performance
with 91% of balances classed as Stage 1. Stage 3 POCI has reduced
from GBP34m on acquisition to GBP8m as at 30 September 2019, due to
write-offs and customer balance paydowns.
Business
At GBP7.6bn, business lending continues to evidence core
underlying growth. The proportion of lending in Stage 2 has
remained stable at 30% year-on-year, reflective of the Group's
controlled and cautious approach to identifying customers
experiencing financial difficulty and, where appropriate, providing
early intervention assistance such as forbearance, to support
customers in meeting their financial commitments to the Group.
Risk Management
Credit risk
Credit quality of loans and advances
The following tables highlight the significant exposure to
credit risk in respect of which ECL model is applied for the
Group's mortgage, personal and business loans and advances,
including loan commitments and financial guarantee contracts, based
on the following risk gradings:
Credit risk exposure, by internal PD rating, by IFRS 9 stage
allocation (audited)
The distribution of the Group's credit exposures, by internal PD
rating is analysed below.
Gross carrying amount
------------------------ -------------------------------------------------------
Stage 2 Stage 3
Stage 1 (not credit (credit Stage 3
12-month impaired) impaired) (POCI)
Lifetime Lifetime Lifetime
ECLs ECLs ECLs ECLs Total
As at 30 September 2019 GBPm GBPm GBPm GBPm GBPm
------------------------ --------- ------------ ---------- --------- -------
Mortgages
<0.15 38,816 389 - - 39,205
0.15 to <0.25 5,836 103 - - 5,939
0.25 to <0.50 7,983 245 - - 8,228
0.50 to <0.75 2,422 96 - - 2,518
0.75 to <2.50 2,648 455 - - 3,103
2.50 to <10.00 376 274 - - 650
10.00 to <100.00 39 243 - - 282
100.00 (Default) - - 363 103 466
------------------------ --------- ------------ ---------- --------- -------
Total 58,120 1,805 363 103 60,391
------------------------ --------- ------------ ---------- --------- -------
personal
<0.15 93 - - - 93
0.15 to <0.25 68 - - - 68
0.25 to <0.50 1,326 6 - - 1,332
0.50 to <0.75 967 8 - - 975
0.75 to <2.50 1,743 36 - - 1,779
2.50 to <10.00 553 231 - - 784
10.00 to <100.00 37 143 - - 180
100.00 (Default) - - 61 8 69
------------------------ --------- ------------ ---------- --------- -------
Total 4,787 424 61 8 5,280
------------------------ --------- ------------ ---------- --------- -------
Business
<0.15 530 5 - - 535
0.15 to <0.25 440 17 - - 457
0.25 to <0.50 718 52 - - 770
0.50 to <0.75 537 101 - - 638
0.75 to <2.50 2,199 1,019 - - 3,218
2.50 to <10.00 592 919 - - 1,511
10.00 to <100.00 2 172 - - 174
100.00 (Default) - - 272 - 272
------------------------ --------- ------------ ---------- --------- -------
Total 5,018 2,285 272 - 7,575
------------------------ --------- ------------ ---------- --------- -------
Risk Management
Credit risk
Gross carrying amount
-------------------------------- -------------------------------------------------------
Stage 2 Stage 3
Stage 1 (not credit (credit Stage 3
12-month impaired) impaired) (POCI)
Lifetime Lifetime Lifetime
ECLs ECLs ECLs ECLs Total
As at 1 October 2018 (excluding
Virgin Money) GBPm GBPm GBPm GBPm GBPm
-------------------------------- --------- ------------ ---------- --------- -------
MORTGAGES
<0.15 8,085 13 - - 8,098
0.15 to <0.25 4,292 27 - - 4,319
0.25 to <0.50 6,199 77 - - 6,276
0.50 to <0.75 1,791 49 - - 1,840
0.75 to <2.50 2,813 205 - - 3,018
2.50 to <10.00 370 194 - - 564
10.00 to <100.00 22 124 - - 146
100.00 (Default) - - 279 - 279
-------------------------------- --------- ------------ ---------- --------- -------
Total 23,572 689 279 - 24,540
-------------------------------- --------- ------------ ---------- --------- -------
personal
<0.15 113 - - - 113
0.15 to <0.25 97 - - - 97
0.25 to <0.50 249 - - - 249
0.50 to <0.75 153 - - - 153
0.75 to <2.50 354 2 - - 356
2.50 to <10.00 166 15 - - 181
10.00 to <100.00 11 21 - - 32
100.00 (Default) - - 22 - 22
-------------------------------- --------- ------------ ---------- --------- -------
Total 1,143 38 22 - 1,203
-------------------------------- --------- ------------ ---------- --------- -------
business
<0.15 571 8 - - 579
0.15 to <0.25 371 13 - - 384
0.25 to <0.50 549 34 - - 583
0.50 to <0.75 700 157 - - 857
0.75 to <2.50 1,930 917 - - 2,847
2.50 to <10.00 594 943 - - 1,537
10.00 to <100.00 26 98 - - 124
100.00 (Default) - - 263 - 263
-------------------------------- --------- ------------ ---------- --------- -------
Total 4,741 2,170 263 - 7,174
-------------------------------- --------- ------------ ---------- --------- -------
Risk Management
Credit risk
ECL impairment allowance by IFRS 9 stage allocation
(audited)
The following tables disclose the impairment allowance by
portfolio:
Stage Stage Stage Stage
Stage 2 2 2 Stage 3
1 <30 DPD >30 DPD Total 3 POCI Total
As at 30 September 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ----- -------- -------- ------ ----- ----- -----
Mortgages 6 5 4 9 26 (1) 40
Personal of which: 53 71 16 87 37 (2) 175
------------------------- ----- -------- -------- ------ ----- ----- -----
- credit cards 42 65 12 77 28 (2) 145
- personal overdrafts 2 - 1 1 3 - 6
- other personal lending 9 6 3 9 6 - 24
------------------------- ----- -------- -------- ------ ----- ----- -----
Business 20 72 - 72 55 - 147
------------------------- ----- -------- -------- ------ ----- ----- -----
Closing balance 79 148 20 168 118 (3) 362
------------------------- ----- -------- -------- ------ ----- ----- -----
Stage Stage Stage Stage
Stage 2 2 2 Stage 3
As at 1 October 2018 (excluding 1 <30 DPD >30 DPD Total 3 POCI Total
Virgin Money) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- ----- -------- -------- ------ ----- ----- -----
Mortgages 3 2 1 3 23 - 29
Personal of which: 15 5 7 12 18 - 45
-------------------------------- ----- -------- -------- ------ ----- ----- -----
- credit cards 6 - 1 1 7 - 14
- personal overdrafts 2 - 1 1 3 - 6
- other personal lending 7 5 5 10 8 - 25
-------------------------------- ----- -------- -------- ------ ----- ----- -----
Business 35 71 - 71 44 - 150
-------------------------------- ----- -------- -------- ------ ----- ----- -----
Closing balance 53 78 8 86 85 - 224
-------------------------------- ----- -------- -------- ------ ----- ----- -----
The Group's impairment allowance has increased by GBP138m in the
period from 1 October 2018 to 30 September 2019, which is primarily
due to the impact of the acquisition of Virgin Money Holdings (UK)
PLC. Acquisition accounting requires that the acquired loans and
advances balance is fair valued on acquisition, resulting in a nil
ECL allowance on acquisition. The loans and advances balance is
then subject to the IFRS 9 ECL methodology with a full ECL
allowance calculated, which resulted in a charge of GBP67m being
recognised in the Group income statement immediately following the
acquisition date. The ECL allowance for the acquired portfolio
subsequently increased to GBP136m as at 30 September 2019.
Mortgages
The Mortgage impairment allowance of GBP40m is reflective of the
level of collateral held and the low expected credit loss for this
portfolio. The increase of GBP11m from 2018 is due to the impact of
the acquired mortgage portfolio.
Personal
The total impairment allowance for the personal portfolio of
GBP175m has increased by GBP130m in the period. This is primarily
due to the level of impairment allowance relative to the acquired
credit cards portfolio, where the ECL at point of acquisition was
GBP60m and subsequently increased to GBP125m as at 30 September
2019. The underlying impairment allowance for the personal
exposures increased over the period as a result of the combined
effect of portfolio growth, higher default rates due to seasoning
and maturation of the portfolio and routine recalibration of
underlying provisioning models.
Business
Total impairment allowance for the business portfolio decreased
by GBP3m to GBP147m. This is the result of a GBP15m reduction in
Stage 1 ECL, primarily due to IFRS 9 modelling adjustments,
partially offset by an GBP11m increase in Stage 3 due to a higher
level of single name, individually assessed provisions.
Risk Management
Credit risk
ECL impairment allowance coverage ratios (audited)
Stage Stage Stage Stage
2 2 2 3
Stage Stage
1 <30 DPD >30 DPD Total 3 POCI Total
As at 30 September 2019 % % % % % % %
------------------------- ----- -------- -------- ------ ----- ------- -----
Mortgages 0.01 0.29 2.26 0.47 7.13 (0.80) 0.07
Personal of which: 1.15 18.22 51.18 20.64 62.14 (22.61) 3.39
------------------------- ----- -------- -------- ------ ----- ------- -----
- credit cards 1.11 18.49 46.91 20.35 60.39 (22.61) 3.42
- personal overdrafts 5.00 14.17 66.02 56.00 91.21 - 11.41
- other personal lending 1.09 15.56 68.29 22.35 60.64 - 2.75
------------------------- ----- -------- -------- ------ ----- ------- -----
Business 0.40 3.13 2.27 3.13 19.99 - 1.93
------------------------- ----- -------- -------- ------ ----- ------- -----
Closing balance 0.12 3.41 9.68 3.69 16.89 (2.30) 0.50
------------------------- ----- -------- -------- ------ ----- ------- -----
Stage Stage Stage Stage
2 2 2 3
Stage Stage
1 <30 DPD >30 DPD Total 3 POCI Total
As at 1 October 2018 (excluding
Virgin Money) % % % % % % %
-------------------------------- ----- -------- -------- ------ ----- ----- -----
Mortgages 0.01 0.32 1.61 0.48 8.19 - 0.12
Personal of which: 1.38 18.17 65.20 30.04 80.36 - 3.78
-------------------------------- ----- -------- -------- ------ ----- ----- -----
- credit cards 1.78 9.52 53.16 39.89 94.32 - 3.94
- personal overdrafts 3.66 10.02 59.21 51.07 78.12 - 10.06
- other personal lending 1.03 18.61 71.71 28.05 72.56 - 3.24
-------------------------------- ----- -------- -------- ------ ----- ----- -----
Business 0.73 3.25 5.13 3.26 16.79 - 2.08
-------------------------------- ----- -------- -------- ------ ----- ----- -----
Closing balance 0.18 2.77 7.86 2.95 15.05 - 0.68
-------------------------------- ----- -------- -------- ------ ----- ----- -----
The impact of the Virgin Money Holdings (UK) PLC acquisition
results in a proportionately higher volume of the total portfolio
being mortgage lending which requires a lower proportionate
impairment allowance, consequently the total portfolio coverage has
reduced by 18bps in line with the revised portfolio profile.
Mortgages
The coverage ratio reduced by 5bps in the period as a result of
the composition, quality and value of the acquired mortgage
portfolio.
Personal
The total coverage ratio reduced by 39bps, primarily in the
credit card portfolio where the quality of the acquired portfolio,
in particular the growing Virgin Atlantic credit card portfolio, is
stronger than the pre-existing portfolios.
Business
Coverage for the business portfolio decreased by 15bps,
reflective of portfolio growth in Stage 1 where proportionately
less provision coverage is required, and a small number of
significant write-offs from Stage 3.
Risk Management
Credit risk
Mortgage lending by average LTV (audited)
The LTV ratio of mortgage lending, coupled with the relationship
of the debt to customers' income, is integral to the credit quality
of these loans. The table below sets out the indexed LTV analysis
of the Group's mortgage stock:
2019 2018(1)
% %
----------------- ---- -------
LTV(2)
Less than 50% 35 31
50% to 75% 48 51
76% to 80% 6 6
81% to 85% 5 5
86% to 90% 4 4
91% to 95% 2 2
96% to 100% - -
Greater than 100% - -
Unknown - 1
----------------- ---- -------
100 100
----------------- ---- -------
(1) 30 September 2018 shown as reported, excluding Virgin
Money.
(2) LTV of the mortgage portfolio is defined as mortgage
portfolio weighted by balance. Currently the Clydesdale Bank PLC
portfolio is indexed using the MIAC Acadametrics indices at a given
date, while the Virgin Money Holdings (UK) PLC portfolio is indexed
using the Markit indices. The Group view is a combined summary of
the two portfolios. 'Unknown' in the prior period represented loans
where data was not available due to front book data matching and a
de minimis amount due to weaknesses in historic data capture
processes.
Forbearance
Mortgage and personal forbearance
The table below summarises the level of forbearance in respect
of the Group's mortgage and credit card portfolios at each balance
sheet date. All balances subject to forbearance are classed as
either Stage 2 or Stage 3 for ECL purposes.
Impairment allowance
on
loans and advances
Total loans and advances subject to forbearance
subject to forbearance measures measures
---------------------------------- ------------------------------------ -------------------------
Gross
carrying Impairment
Number of amount % of total allowance Coverage
As at 30 September 2019 (audited) loans GBPm portfolio GBPm %
---------------------------------- ----------- ---------- ----------- ------------- ----------
Mortgages
Formal arrangements 1,352 157 0.26 4.4 2.83
Temporary arrangements 913 119 0.20 3.1 2.62
Payment arrangement(1) 1,118 113 0.19 1.6 1.41
Payment holiday(1) 981 114 0.19 0.7 0.58
Interest only conversion 358 54 0.09 0.3 0.57
Term extension 174 16 0.03 0.1 0.64
Other 35 3 0.00 - 0.50
Legal 130 13 0.02 0.3 2.46
---------------------------------- ----------- ---------- ----------- ------------- ----------
Total mortgage forbearance 5,061 589 0.98 10.5 1.79
---------------------------------- ----------- ---------- ----------- ------------- ----------
Personal forbearance - credit
cards 5,522 24 0.53 9.5 41.30
---------------------------------- ----------- ---------- ----------- ------------- ----------
Total 10,583 613 0.95 20.0 3.31
---------------------------------- ----------- ---------- ----------- ------------- ----------
(1) Payment arrangement and payment holiday have been introduced
as additional concession types within the Group's mortgage
forbearance policy.
Risk Management
Credit risk
Impairment allowance
on
loans and advances
Total loans and advances subject to forbearance
subject to forbearance measures measures
----------------------------------- ------------------------------------ --------------------------
Gross
As at 30 September 2018 (excluding carrying Impairment
Virgin Money) Number of amount % of total allowance Coverage
(audited) loans GBPm portfolio GBPm %
----------------------------------- ----------- ---------- ----------- -------------- ----------
Mortgages
Formal arrangements 1,497 168 0.68 3.3 2.00
Temporary arrangements 1,275 161 0.66 2.3 1.45
Interest only conversion 231 32 0.13 0.1 0.18
Term extension 150 12 0.05 0.1 0.48
Other 41 4 0.02 - 0.36
Legal 148 15 0.06 0.5 3.34
----------------------------------- ----------- ---------- ----------- -------------- ----------
Total mortgage forbearance 3,342 392 1.60 6.3 1.61
----------------------------------- ----------- ---------- ----------- -------------- ----------
Personal forbearance - credit
cards 787 2 0.18 0.9 40.68
----------------------------------- ----------- ---------- ----------- -------------- ----------
Total 4,129 394 1.58 7.2 1.83
----------------------------------- ----------- ---------- ----------- -------------- ----------
The increase in mortgage and credit card forbearance is
attributable to the acquisition of the Virgin Money Holdings (UK)
PLC portfolios.
When all other avenues of resolution including forbearance have
been explored, the Group will take steps to repossess and sell
underlying collateral. In the 12-month period to 30 September 2019,
there were 66 repossessions of which 14 were voluntary (12 months
to 30 September 2018 (excluding Virgin Money): 38 including 16
voluntary).
Forbearance - other personal lending
Excluding credit cards, the Group currently exercises limited
forbearance strategies in relation to other types of personal
lending; namely current accounts and personal loans. The Group has
assessed the total loan balances subject to forbearance on other
types of personal lending to be GBP11.5m as at 30 September 2019
(30 September 2018 (excluding Virgin Money): GBP10.1m),
representing 1.10% of the personal lending portfolio (30 September
2018: 1.22%).
Impairment provisions on forborne balances totalled GBP3.6m as
at 30 September 2019 (30 September 2018 (excluding Virgin Money):
GBP2.8m) providing overall coverage of 31.58% (30 September 2018:
28.30%).
Business forbearance
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.
Impairment allowance
on
loans and advances
Total loans and advances subject to forbearance
subject to forbearance measures measures
---------------------------------- ------------------------------------ -------------------------
Gross
carrying Impairment
Number of amount % of total allowance Coverage
As at 30 September 2019 (audited) customers GBPm portfolio GBPm %
---------------------------------- ------------ --------- ----------- ------------- ----------
Term extension 187 153 1.93 14.9 9.70
Deferral of contracted capital
repayments 98 134 1.68 15.0 11.16
Reduction in contracted interest
rate 3 1 0.02 - 3.37
Alternative forms of payment 2 7 0.08 0.4 5.37
Debt forgiveness 2 4 0.05 - 1.06
Refinancing 16 10 0.12 1.5 15.03
Covenant breach/reset/waiver 60 200 2.50 23.6 11.82
---------------------------------- ------------ --------- ----------- ------------- ----------
Total business forbearance 368 509 6.38 55.4 10.87
---------------------------------- ------------ --------- ----------- ------------- ----------
Risk Management
Credit risk
Impairment allowance
on
loans and advances
Total loans and advances subject to forbearance
subject to forbearance measures measures
---------------------------------- ------------------------------------ -------------------------
Gross
carrying Impairment
Number of amount % of total allowance Coverage
As at 30 September 2018 (audited) customers GBPm portfolio GBPm %
---------------------------------- ------------ --------- ----------- ------------- ----------
Term extension 179 162 2.15 10.5 6.48
Deferral of contracted capital
repayments 103 129 1.73 15.6 12.02
Reduction in contracted interest
rate 2 1 0.01 - 4.05
Alternative forms of payment 4 25 0.33 7.5 30.46
Debt forgiveness 4 11 0.14 0.6 5.64
Refinancing 17 10 0.13 1.0 9.87
Covenant breach/reset/waiver 61 207 2.75 9.2 4.43
---------------------------------- ------------ --------- ----------- ------------- ----------
Total business forbearance 370 545 7.24 44.4 8.14
---------------------------------- ------------ --------- ----------- ------------- ----------
Included in other financial assets at fair value is a portfolio
of loans that is included in the above table. The gross value of
fair value loans subject to forbearance as at 30 September 2019 is
GBP8m (30 September 2018: GBP15m), representing 0.11% of the total
business portfolio (30 September 2018: 0.19%). The credit risk
adjustment on these amounts totalled GBP0.6m (30 September 2018:
GBP2m), a coverage of 6.94% (30 September 2018: 11.66%).
Risk Management
Financial risk
Financial risk covers several categories of risk which impact
the manner in which the Group can support its customers in a safe
and sound manner. They include capital risk, funding risk,
liquidity risk, market risk, model risk, pension risk and financial
risks arising from climate change.
Capital
Capital is held by the Group to protect its depositors, to cover
inherent risks in a normal and stressed operating environment and
to support the Group's strategy of pioneering growth. Capital risk
is the risk that the Group has insufficient quantity or quality of
capital to support its operations.
Capital position
The Group's capital position as at 30 September 2019 is
summarised below:
Regulatory capital (unaudited)(1)
2019 2018
GBPm GBPm
--------------------------------------------------- ----- -----
Statutory total equity 5,021 3,186
CET1 capital: regulatory adjustments(2)
AT1 capital instruments (915) (450)
Defined benefit pension fund assets (257) (138)
Prudent valuation adjustment (5) (3)
Intangible assets (501) (412)
Goodwill (11) -
Deferred tax asset relying on future profitability (146) (99)
Cash flow hedge reserve 26 39
Excess expected losses (88) -
AT1 coupon accrual (20) (10)
IFRS 9 transitional adjustments 100 -
--------------------------------------------------- ----- -----
Total CET1 capital 3,204 2,113
--------------------------------------------------- ----- -----
AT1 capital
AT1 capital instruments 915 450
--------------------------------------------------- ----- -----
Total AT1 capital 915 450
--------------------------------------------------- ----- -----
Total Tier 1 capital 4,119 2,563
--------------------------------------------------- ----- -----
Tier 2 capital
Subordinated debt 721 474
Credit risk adjustments(3) - 152
--------------------------------------------------- ----- -----
Total Tier 2 capital 721 626
--------------------------------------------------- ----- -----
Total regulatory capital 4,840 3,189
--------------------------------------------------- ----- -----
(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.
(3) The current period does not include Tier 2 credit risk
adjustments due to the transition to IFRS 9 reporting.
Risk Management
Financial risk
CRD IV CRD IV
2019 2018
Regulatory capital flow of funds (unaudited)(1) GBPm GBPm
--------------------------------------------------------- ------ ------
CET1 capital(2)
CET1 capital at 1 October 2,113 2,437
Share capital and share premium 3 1
Retained earnings and other reserves (including special
purpose entities) (210) (217)
Acquisition of Virgin Money Holdings (UK) plc 1,567 -
Prudent valuation adjustment (2) 1
Intangible assets (89) (73)
Goodwill arising on acquisition of Virgin Money Holdings
(UK) plc (11) -
Deferred tax asset relying on future profitability (47) (71)
Defined benefit pension fund assets (119) (3)
Cash flow hedge reserve (13) 38
IRB shortfall of credit risk adjustments to expected
losses (88) -
IFRS 9 transitional relief 100 -
--------------------------------------------------------- ------ ------
Total CET1 capital at 30 September 3,204 2,113
--------------------------------------------------------- ------ ------
AT1 capital
AT1 capital at 1 October 450 450
AT1 capital issued and transferred from Virgin Money
Holdings (UK) plc 465 -
--------------------------------------------------------- ------ ------
Total AT1 capital at 30 September 915 450
--------------------------------------------------------- ------ ------
Total Tier 1 capital at 30 September 4,119 2,563
--------------------------------------------------------- ------ ------
Tier 2 capital
Tier 2 capital at 1 October 626 627
Credit risk adjustments(3) (152) (2)
Other movements - 1
Capital instruments issued: subordinated debt 247 -
Tier 2 capital at 30 September 721 626
--------------------------------------------------------- ------ ------
Total capital at 30 September 4,840 3,189
--------------------------------------------------------- ------ ------
(1) The table shows the capital position on a CRD IV 'fully
loaded' basis and transitional IFRS 9 basis.
(2) CET1 capital is comprised of shares issued and related share
premium, retained earnings and other reserves less specified
regulatory adjustments.
(3) The transition to IFRS 9 reporting has removed the
requirement for Tier 2 credit risk adjustments.
The Group's CET1 capital increased by GBP1,091m in the year
primarily driven by the positive impact of the acquisition of
Virgin Money Holdings (UK) plc, offset by exceptional items in the
year.
Risk Management
Financial risk
During the year, there were also increases in AT1 and Tier 2
capital. The Group issued an additional GBP250m of Tier 2 capital
in December 2018 in the form of Fixed Rate Reset 10 non-call 5-year
Subordinated Contingent Convertible Notes. In addition, in August
2019, Virgin Money Holdings (UK) plc successfully received investor
consent to transfer obligations on its outstanding AT1 (GBP230m) to
Virgin Money UK PLC.
2019 2018
Minimum Pillar 1 capital requirements (unaudited) GBPm GBPm
-------------------------------------------------- ----- -----
Credit risk 1,685 1,449
Operational risk 209 132
Counterparty credit risk 15 10
Credit valuation adjustment 15 17
-------------------------------------------------- ----- -----
Total Pillar 1 regulatory capital requirements 1,924 1,608
-------------------------------------------------- ----- -----
IFRS 9 transitional arrangements (unaudited)(1)
30 September 2019
(GBPm)
--------------------------------------- ----------------------------
IFRS 9 IFRS 9
transitional Fully loaded
Available capital (amounts) basis basis
--------------------------------------- ------------- -------------
CET1 capital 3,204 3,104
Tier 1 capital 4,119 4,019
Total capital 4,840 4,740
RWA (amounts)
Total RWA 24,046 23,983
--------------------------------------- ------------- -------------
Capital ratios
CET1 (as a percentage of RWA) 13.3% 12.9%
Tier 1 (as a percentage of RWA) 17.1% 16.8%
Total capital (as a percentage of RWA) 20.1% 19.8%
--------------------------------------- ------------- -------------
Leverage ratio
Leverage ratio total exposure measure 94,744 94,644
Leverage ratio 4.3% 4.2%
--------------------------------------- ------------- -------------
(1) The table shows a comparison of capital resources,
requirements and ratios with and without the application of
transitional arrangements for IFRS 9.
RWA movements (unaudited)
12 months to 30 September 12 months to 30 September
2019 2018
-------------------------------------------- --------------------------------------------
Other Capital Other Capital
IRB RWA STD RWA RWA Total Required IRB RWA STD RWA RWA(2) Total Required
RWA flow statement GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ------- -------- ----- ------- --------- ------- ------- ------- ------ ---------
RWA at 1 October - 18,104 1,998 20,102 1,608 - 17,753 1,925 19,678 1,574
Asset size 958 478 10 1,446 116 - 347 73 420 34
Asset quality (291) (8) - (299) (24) - 4 - 4 -
Model updates (396) - - (396) (32) - - - - -
Methodology and policy 250 - - 250 20 - - - - -
Acquisitions and
disposals 4,330 2,870 962 8,162 654 - - - - -
IRB accreditation 10,247 (15,592) - (5,345) (428) - - - - -
Other 6 101 19 126 10 - - - - -
----------------------- ------- -------- ----- ------- --------- ------- ------- ------- ------ ---------
RWA at 30 September 15,104 5,953 2,989 24,046 1,924 - 18,104 1,998 20,102 1,608
----------------------- ------- -------- ----- ------- --------- ------- ------- ------- ------ ---------
In October 2018, the Group received IRB accreditation from the
PRA for both the mortgage and business portfolios. The impact of
this can be seen in the IRB accreditation line above. Also in
October 2018, the Group acquired Virgin Money Holdings (UK) plc,
which calculates RWA on mortgages under IRB methodology and on all
other portfolios under standardised methodology. This impact can be
seen in the Acquisitions and disposals line above.
Risk Management
Financial risk
Formal FIRB accreditation for the business portfolios was
received in October 2018 for a suite of recalibrated models which
were implemented during November 2018, resulting in a GBP170m model
impact, included within the Model updates line above. The
differential is predominantly in relation to the retail mortgage
quarterly PD model calibrations. Since this implementation, no
additional model changes have occurred.
Methodology and processing enhancements implemented prior to
formal IRB reporting are captured within the Methodology and policy
line.
Other includes operational risk, CVA and counterparty credit
risk.
Pillar 1 RWAs and capital requirements by business line
(unaudited)
At 30 September 2019 At 30 September 2018
------------------------------------- --------------------------- ---------------------------
Capital Capital
Capital requirements for calculating required RWA Exposure required RWA Exposure
RWA GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------- --------- ------ -------- --------- ------ --------
Corporates 501 6,258 8,587 - - -
Retail 708 8,846 64,067 - - -
------------------------------------- --------- ------ -------- --------- ------ --------
Total IRB approach 1,209 15,104 72,654 - - -
------------------------------------- --------- ------ -------- --------- ------ --------
Central governments or central
banks 1 9 11,663 - 1 11,361
Regional governments or local
authorities 1 13 175 1 12 143
Public sector entities - 5 335 - 2 155
Multilateral development banks - - 1,034 - - 155
Financial institutions 16 195 948 11 136 630
Corporates 28 347 376 316 3,956 4,311
Retail 319 3,993 5,324 90 1,124 1,499
Secured by mortgages on immovable
property 40 498 875 938 11,708 28,423
Exposures in default 5 59 55 45 562 465
Collective investments undertakings - 1 1 - 1 1
Equity exposures 1 11 9 - 5 4
Items associated with particularly
high risk 1 11 7 4 49 33
Covered bonds 11 141 1,415 5 61 615
Other items 53 670 754 39 487 715
------------------------------------- --------- ------ -------- --------- ------ --------
Total standardised approach 476 5,953 22,971 1,449 18,104 48,510
------------------------------------- --------- ------ -------- --------- ------ --------
Total credit risk 1,685 21,057 95,625 1,449 18,104 48,510
------------------------------------- --------- ------ -------- --------- ------ --------
Operational risk 209 2,606 132 1,655
Counterparty credit risk 15 191 10 125
Credit valuation adjustment 15 192 17 218
------------------------------------- --------- ------ -------- --------- ------ --------
Total Pillar 1 regulatory capital
requirements 1,924 24,046 1,608 20,102
------------------------------------- --------- ------ -------- --------- ------ --------
The exposure amounts disclosed above are post-credit conversion
factors and pre-credit mitigation.
Additional breakdown analysis of the IRB portfolios can be seen
within the 'EU CR6 - IRB Approach - Credit risk by exposure class
and PD range' table in the Group's Pillar 3 disclosures.
Prior period comparatives are reported under the standardised
approach to credit risk as accreditation for IRB was received in
October 2018.
Risk Management
Financial risk
Pro forma reported
2019 2018 2018
Capital position and CET1 (unaudited) GBPm GBPm GBPm
-------------------------------------- ------ --------- --------
RWA(1)
Retail mortgages 8,846 8,794 9,002
Business lending 7,124 6,604 7,407
Other retail lending 4,042 3,463 981
Other lending 481 109 109
Other(2) 564 1,013 605
-------------------------------------- ------ --------- --------
Credit risk 21,057 19,983 18,104
Credit valuation adjustment 192 243 218
Operational risk 2,606 2,523 1,655
Counterparty credit risk 191 194 125
-------------------------------------- ------ --------- --------
Total RWA 24,046 22,943 20,102
-------------------------------------- ------ --------- --------
Capital ratios
CET1 ratio 13.3% 15.1% 10.5%
Tier 1 ratio 17.1% 18.3% 12.7%
-------------------------------------- ------ --------- --------
Total capital ratio 20.1% 20.6% 15.9%
-------------------------------------- ------ --------- --------
(1) RWA are calculated under the Advanced internal ratings-based
(AIRB) approach for the mortgage portfolio and the FIRB approach
for the business portfolio, with all other portfolios being
calculated under the standardised approach, via either sequential
IRB implementation or Permanent Partial Use (PPU).
(2) The items included in the Other exposure class that attract
a capital charge include items in the course of collection, fixed
assets, prepayments, other debtors and deferred tax assets that are
not deducted.
The Group measures the amount of capital it is required to hold
by applying CRD IV as implemented in the UK by the PRA and
supplemented through additional regulation under the PRA Rulebook.
The table below summarises the amount of capital in relation to
RWAs the Group is currently required to hold, excluding any PRA
buffer.
As at 30 Sep 2019
------------------------------------- --------------------
Minimum requirements (unaudited) CET1 Total Capital
------------------------------------- ----- -------------
Pillar 1(1) 4.5% 8.0%
Pillar 2A 3.0% 5.3%
------------------------------------- ----- -------------
Total capital requirement 7.5% 13.3%
------------------------------------- ----- -------------
Capital conservation buffer 2.5% 2.5%
UK countercyclical capital buffer(2) 1.0% 1.0%
------------------------------------- ----- -------------
Total (excluding PRA buffer)(3) 11.0% 16.8%
------------------------------------- ----- -------------
(1) The minimum amount of total capital under Pillar 1 of the
regulatory framework is determined as 8% of RWAs, of which at least
4.5% of RWAs is required to be covered by CET1 capital.
(2) The UK countercyclical capital buffer (CCyB) may be set
between 0% and 2.5%. On 28 November 2018 the UK CCyB increased from
0.5% to 1.0%. At its October 2019 meeting, the FPC maintained the
UK CCyB rate at 1%, noting the underlying vulnerabilities
(excluding Brexit) that can amplify economic shocks have not
changed materially since the November 2018 Financial Stability
Report and remain at a standard level overall in the UK.
(3) 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. A PRA
buffer can consist of two components:
- a risk management and governance buffer that is set as a scalar of the Pillar 1 and Pillar 2A requirements; and
- a buffer relating to the results of the BoE stress tests.
Underlying capital generation by the core divisions post
additional AT1 distribution was 77bps, largely driven by strong
underlying profits more than offsetting asset growth and investment
spending. After absorbing the net impact of costs associated with
restructuring, the acquisition of Virgin Money Holdings (UK) plc
and legacy conduct issues, the Group's CET1 ratio was 13.3%.
Risk Management
Financial risk
In August 2019, Virgin Money Holdings (UK) plc successfully
received investor consent to transfer obligations on its
outstanding AT1 (GBP230m) and Senior Notes (GBP350m) to Virgin
Money UK PLC (formerly named CYBG PLC). All of the Group's
regulatory capital and MREL instruments are now issued out of
Virgin Money UK PLC, consistent with the single point of entry
resolution model. This also removed the previous need to adjust for
non-controlling interests in the Group's capital calculations.
Dividend
As disclosed in the Business and financial review, the Board has
recommended not to pay a final dividend for the financial year
ending 30 September 2019.
Leverage
reported
2019 2018
Leverage ratio (unaudited) GBPm GBPm
-------------------------------------------------------- ------ --------
Total Tier 1 capital for the leverage ratio
Total CET1 capital 3,204 2,113
AT1 capital 915 450
-------------------------------------------------------- ------ --------
Total Tier 1 4,119 2,563
-------------------------------------------------------- ------ --------
Exposures for the leverage ratio
Total assets as per published financial statements 90,999 43,456
Adjustment for off-balance sheet items 2,728 1,763
Adjustment for derivative financial instruments (35) (134)
Adjustment for securities financing transactions (SFTs) 1,934 1,468
Other regulatory adjustments (882) (613)
-------------------------------------------------------- ------ --------
Leverage ratio exposure 94,744 45,940
-------------------------------------------------------- ------ --------
pro forma reported
2019 2018 2018
GBPm GBPm GBPm
------------------------- ----- --------- --------
CRD IV leverage ratio(1) 4.3% 4.6% 5.6%
------------------------- ----- --------- --------
UK leverage ratio(2) 4.9% 5.1% 6.5%
------------------------- ----- --------- --------
(1) IFRS 9 transitional capital arrangements have been applied
to the leverage ratio calculation as at 30 September 2019.
(2) The Group's leverage ratio on a modified basis as at 30
September 2019, excluding qualifying central bank claims from the
exposure measure in accordance with the policy statement issued by
the PRA in October 2017.
The UK leverage ratio framework, which came into force on 1
January 2016, is relevant to PRA regulated banks and building
societies with consolidated retail deposits equal to or greater
than GBP50bn. The Group is currently excluded from the full
reporting requirements of the UK leverage ratio framework but will
be required to comply in the first reporting period following the
date at which this threshold is breached, which is 31 December
2019.
The leverage ratio is monitored against a Board approved RAS,
with responsibility for managing the ratio delegated to the Group's
Asset and Liability Committee (ALCO), which monitors it on a
monthly basis.
The leverage ratio is the ratio of Tier 1 capital to total
exposures, defined as:
- capital: Tier 1 capital defined on a CRD IV fully loaded and IFRS 9 transitional basis; and
- exposures: total on- and off-balance sheet exposures (subject
to credit conversion factors) as defined in the delegated act
amending CRR article 429 (Calculation of the Leverage Ratio), which
includes deductions applied to Tier 1 capital.
Other regulatory adjustments consist of adjustments that are
required under CRD IV to be deducted from Tier 1 capital. The
removal of these from the exposure measure ensures consistency is
maintained between the capital and exposure components of the
ratio.
The Group's leverage ratio is 4.3% (30 September 2018 pro forma:
4.6%) which exceeds the Basel Committee's proposed minimum of 3%,
applicable from 2018, and the UK minimum ratio of 3.60% (3.25% plus
0.35% countercyclical leverage buffer.)
Risk Management
Financial risk
Funding and liquidity risk
Funding risk occurs where the Group is unable to raise or
maintain funds of sufficient quantity and quality to support the
delivery of the business plan or sustain lending commitments.
Prudent funding risk management reduces the likelihood of liquidity
risks occurring, increases the stability of funding sources,
minimises concentration risks and controls future balance sheet
growth. 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.
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 Group
was compliant with all internal and regulatory liquidity metrics at
30 September 2019 (30 September 2018: compliant). The LCR moved
from 137% to 152% during the year.
The liquid asset portfolio provides a buffer against sudden and
potentially sharp outflows of funds. Liquid assets must therefore
be of a 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 liquid asset portfolio is primarily
comprised of cash at BoE, UK government securities (gilts) and
listed securities (e.g. bonds issued by supra-nationals and
AAA-rated covered bonds).
pro forma REPORTED Average Average
2019 2018 2018 Change 2019 2018
(audited) (Unaudited) (audited) (audited) (audited) (audited)
Liquid asset portfolio(1) GBPm GBPm GBPm % GBPm GBPm
--------------------------------- ---------- ------------ ---------- ---------- ---------- ----------
Level 1
Cash and balances with central
banks 7,469 7,979 3,942 89.5% 7,266 3,405
UK government treasury bills and
gilts 1,076 908 513 109.7% 870 568
Other debt securities 2,867 2,180 943 204.0% 2,604 913
--------------------------------- ---------- ------------ ---------- ---------- ---------- ----------
Total level 1 11,412 11,067 5,398 111.4% 10,740 4,886
--------------------------------- ---------- ------------ ---------- ---------- ---------- ----------
LEVEL 2(2) 29 175 - - 103 -
--------------------------------- ---------- ------------ ---------- ---------- ---------- ----------
Total LCR eligible assets 11,441 11,242 5,398 111.9% 10,843 4,886
--------------------------------- ---------- ------------ ---------- ---------- ---------- ----------
(1) Excludes encumbered assets.
(2) Includes Level 2A and Level 2B.
Encumbered assets by asset category
The Group manages the level of asset encumbrance to ensure
appropriate assets are maintained to support potential future
planned and stressed funding requirements. Encumbrance limits are
set in the Group RAS and calibrated to ensure that after a stress
scenario is applied that increases asset encumbrance, the balance
sheet can recover over an acceptable period of time. Examples of
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 Term Funding 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 (audited)
Other assets
-------------- ------- ----------- --------------------------------------------- ------
Assets encumbered
with Assets not positioned
non-central bank at the central
counterparties bank
---------------------------------- ------------------------------------- ------
Positioned
at the Other
central Readily assets
bank available capable Cannot
Covered Securi- (including for of being be
bonds tisations Other Total encumbered) encumbrance encumbered encumbered Total Total
September 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------- ---------- ----- ------ ----------- ----------- ----------- ----------- ------ ------
Loans and
advances to
customers 2,896 8,571 - 11,467 19,929 19,933 18,589 3,430 61,881 73,348
Cash and
balances with
central banks - - - - 3,219 7,077 - - 10,296 10,296
Due from other
banks 156 550 171 877 - - 131 10 141 1,018
Derivative
financial
instruments - - - - - - - 366 366 366
Financial
instruments
at fair value
through other
comprehensive
income 41 34 555 630 - 3,697 - 1 3,698 4,328
Other assets - - 409 409 - - 173 1,061 1,234 1,643
-------------- ------- ---------- ----- ------ ----------- ----------- ----------- ----------- ------ ------
Total assets 3,093 9,155 1,135 13,383 23,148 30,707 18,893 4,868 77,616 90,999
-------------- ------- ---------- ----- ------ ----------- ----------- ----------- ----------- ------ ------
Risk Management
Financial risk
Other assets
------------- ------- ------------ ---------------------------------------------- ------
Assets encumbered
with Assets not positioned
non-central bank at the central
counterparties bank
--------------------------------- -------------------------------------- ------
Positioned
at the Other
central Readily assets
bank available capable Cannot
Covered Securi- (including for of being be
September bonds tisations Other Total encumbered) encumbrance encumbered encumbered Total Total
2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ------- ---------- ----- ----- ------------ ------------ ----------- ----------- ------ ------
Loans and
advances to
customers 1,393 5,243 - 6,636 6,940 5,016 11,322 2,830 26,108 32,744
Cash and
balances
with
central
banks - - - - 2,809 3,764 - - 6,573 6,573
Due from
other banks 161 299 163 623 - - 70 - 70 693
Derivatives - - - - - - - 262 262 262
Financial
assets -
available
for sale - - 36 36 46 1,468 5 7 1,526 1,562
Other
financial
assets - - - - - - 362 - 362 362
Other assets - - 143 143 - - 95 1,022 1,117 1,260
------------- ------- ---------- ----- ----- ------------ ------------ ----------- ----------- ------ ------
Total assets 1,554 5,542 342 7,438 9,795 10,248 11,854 4,121 36,018 43,456
------------- ------- ---------- ----- ----- ------------ ------------ ----------- ----------- ------ ------
Analysis of debt securities in issue by residual maturity
(unaudited)
3 months 3 to 12 1 to 5 Over
or less months years 5 years Total Total
GBPm GBPm GBPm GBPm 2019 2018
-------------------------------- -------- ------- ------ -------- ----- -----
Covered bonds - 10 599 1,303 1,912 742
Securitisation 574 928 3,549 - 5,051 2,956
Medium term notes - 311 298 1,288 1,897 796
Subordinated debt - 9 722 - 731 479
-------------------------------- -------- ------- ------ -------- ----- -----
Total debt securities in issue 574 1,258 5,168 2,591 9,591 4,973
-------------------------------- -------- ------- ------ -------- ----- -----
Of which issued by Virgin Money
UK PLC - 18 1,016 1,223 2,257 1,276
-------------------------------- -------- ------- ------ -------- ----- -----
Risk Management
Financial risk
External credit ratings
The Group's long-term credit ratings are summarised below:
Outlook as at As at
------------------------------ ---------------------- -------------------
30 Sep 30 Sep
material risk for the Group 30 Sep 2019(1) 2019 2018
------------------------------ ---------------------- ------- ----------
Virgin Money UK PLC
Moody's Positive Baa3 Not rated
Fitch Rating Watch Negative BBB+ BBB+
Standard & Poor's Stable BBB- BBB-
------------------------------ ---------------------- ------- ----------
Clydesdale Bank PLC
Moody's(2) Positive Baa1 Baa1
Fitch Rating Watch Negative A- BBB+
Standard & Poor's Stable BBB+ BBB+
------------------------------ ---------------------- ------- ----------
Virgin Money Holdings (UK) plc
Moody's Stable Baa3 Baa3
Fitch Rating Watch Negative BBB+ BBB+
------------------------------ ---------------------- ------- ----------
Virgin Money plc
Moody's Positive Baa1 Baa2
Fitch Rating Watch Negative A- BBB+
------------------------------ ---------------------- ------- ----------
(1) For detailed background on the latest credit opinion by
S&P and Fitch, please refer to the respective rating agency
websites.
(2) Long-term deposit rating
On 1 March 2019, due to a reassessment of the probability of a
no-deal/disruptive Brexit scenario, Fitch placed all of the Group's
long-term Issuer Default Ratings (IDR) on Rating Watch Negative
(along with 19 UK banks in total). None of the Group's other
ratings or its 'anchor' Viability Rating have been impacted.
On 3 June 2019, Fitch upgraded the long-term ratings of
Clydesdale Bank PLC and Virgin Money PLC to A-. The upgrades
followed an increase in the junior debt buffer at Clydesdale Bank
PLC.
On 21 October 2019, Fitch and Moody's withdrew the long-and
short-term ratings of Virgin Money Holdings (UK) PLC and Virgin
Money PLC following completion of the FSMA Part VII transfer. None
of the Group's other ratings was impacted by the FSMA Part VII
transfer.
As at 27 November 2019, there have been no other changes to the
Group's long-term credit ratings or outlooks since the report date,
with the exception of the outlook on the Virgin Money UK PLC and
Clydesdale Bank PLC Moody's ratings, which were moved from
'positive' to 'stable' on 12 November 2019. This followed a
revision in Moody's outlook for the UK Sovereign from 'stable' to
'negative'. This was as a result of Moody's view that UK
institutions have weakened and the UK's economic and fiscal
strength are likely to be weaker going forward. Subsequently,
Moody's adjusted the ratings outlook for 15 UK banks, including the
Group.
Directors' responsibility statement in respect of the Annual
Report and 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 2019. 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
27 November 2019
Group financial statements
Consolidated income statement
2019 2018
for the year ended 30 September Note GBPm GBPm
------------------------------------------------- ---- ------- -------
Interest income 2,420 1,098
Other similar interest 13 15
Interest expense and similar charges (919) (262)
------------------------------------------------- ---- ------- -------
Net interest income 2.2 1,514 851
Gains less losses on financial instruments
at fair value (17) (3)
Other operating income 252 159
------------------------------------------------- ---- ------- -------
Non-interest income 2.3 235 156
------------------------------------------------- ---- ------- -------
Total operating income 1,749 1,007
Operating and administrative expenses before
impairment losses 2.4 (1,729) (1,130)
------------------------------------------------- ---- ------- -------
Operating profit/(loss) before impairment losses 20 (123)
Impairment losses on credit exposures 3.2 (252) (41)
------------------------------------------------- ---- ------- -------
Loss on ordinary activities before tax (232) (164)
Tax credit 2.5 38 19
------------------------------------------------- ---- ------- -------
Loss for the year (194) (145)
------------------------------------------------- ---- ------- -------
Attributable to:
Ordinary shareholders (268) (181)
Other equity holders 41 36
Non-controlling interests 33 -
------------------------------------------------- ---- ------- -------
Loss for the year (194) (145)
------------------------------------------------- ---- ------- -------
Basic loss per share (pence) 2.6 (17.9) (19.7)
------------------------------------------------- ---- ------- -------
Diluted loss per share (pence) 2.6 (17.9) (19.7)
------------------------------------------------- ---- ------- -------
All material items dealt with in arriving at the loss before tax
for the above years relate to continuing activities.
The notes on pages 48 to 105 form an integral part of these
financial statements.
Group financial statements
Consolidated statement of comprehensive income
2019 2018
for the year ended 30 September Note GBPm GBPm
------------------------------------------------ ---- ----- -----
Loss for the year (194) (145)
Items that may be reclassified to the income
statement
Change in cash flow hedge reserve
Gains/(losses) during the year 73 (58)
Transfers to the income statement (57) 9
Taxation thereon - deferred tax (charge)/credit (9) 11
Taxation thereon - current tax credit 6 -
------------------------------------------------ ---- ----- -----
13 (38)
------------------------------------------------ ---- ----- -----
Change in FVOCI reserve
Gains during the year 13 -
Transfers to the income statement (4) -
Taxation thereon - deferred tax charge (2) -
------------------------------------------------ ---- ----- -----
7 -
------------------------------------------------ ---- ----- -----
Total items that may be reclassified to the
income statement 20 (38)
------------------------------------------------ ---- ----- -----
Items that will not be reclassified to the
income statement
Change in asset revaluation reserve 3.9 - -
Taxation thereon - deferred tax (charge)/credit (1) 1
Remeasurement of defined benefit pension plans 3.12 110 (9)
Taxation thereon - deferred tax (charge)/credit (56) 3
Taxation thereon - current tax credit 7 -
------------------------------------------------ ---- ----- -----
61 (6)
------------------------------------------------ ---- ----- -----
Total items that will not be reclassified to
the income statement 60 (5)
------------------------------------------------ ---- ----- -----
Other comprehensive income/(losses), net of
tax 80 (43)
------------------------------------------------ ---- ----- -----
Total comprehensive losses for the year, net
of tax (114) (188)
------------------------------------------------ ---- ----- -----
Attributable to:
Ordinary shareholders (188) (224)
Other equity holders 41 36
Non-controlling interests 33 -
------------------------------------------------ ---- ----- -----
Total comprehensive losses for the year, net
of tax (114) (188)
------------------------------------------------ ---- ----- -----
The notes on pages 48 to 105 form an integral part of these
financial statements.
Group financial statements
Consolidated balance sheet
2019 2018(2)
as at 30 September Note GBPm GBPm
---------------------------------------------- ---- ------ -------
Assets
Financial assets at amortised cost
Loans and advances to customers 3.1 73,095 32,748
Cash and balances with central banks 3.4 10,296 6,573
Due from other banks 1,018 693
Financial assets at fair value through profit
or loss
Loans and advances to customers 3.5 253 362
Derivative financial instruments 3.6 366 262
Other financial assets 3.5 14 -
Financial assets at fair value through other
comprehensive income(1) 3.7 4,328 -
Financial assets available for sale(1) 3.8 - 1,562
Property, plant and equipment 3.9 145 88
Intangible assets and goodwill 3.10 516 412
Current tax assets 13 -
Deferred tax assets 3.11 322 206
Defined benefit pension assets 3.12 396 212
Other assets 237 338
---------------------------------------------- ---- ------ -------
Total assets 90,999 43,456
---------------------------------------------- ---- ------ -------
Liabilities
Financial liabilities at amortised cost
Customer deposits 3.13 64,000 28,904
Debt securities in issue 3.14 9,591 4,973
Due to other banks 3.15 8,916 3,088
Financial liabilities at fair value through
profit or loss
Customer deposits 3.5 4 15
Derivative financial instruments 3.6 273 361
Deferred tax liabilities 3.11 201 77
Provisions for liabilities and charges 3.16 459 331
Other liabilities 3.17 2,534 2,521
---------------------------------------------- ---- ------ -------
Total liabilities 85,978 40,270
---------------------------------------------- ---- ------ -------
Equity
Share capital and share premium 4.1 146 89
Other equity instruments 4.1 915 450
Capital reorganisation reserve 4.1 (839) (839)
Merger reserve 4.1 2,128 633
Other reserves 4.1 10 (20)
Retained earnings 4.1 2,661 2,873
---------------------------------------------- ---- ------ -------
Total equity 5,021 3,186
---------------------------------------------- ---- ------ -------
Total liabilities and equity 90,999 43,456
---------------------------------------------- ---- ------ -------
(1) Changes required as a result of the adoption of IFRS 9 from
1 October 2018. Refer to notes 1.9 and 5.4.
(2) The comparative year has been restated in line with the
current year presentation. Refer to note 1.10.
The notes on pages 48 to 105 form an integral part of these
financial statements.
These financial statements were approved by the Board of
Directors on 27 November 2019 and were signed on its behalf by:
David Duffy Ian Smith
Chief Executive Officer Group Chief Financial Officer
Virgin Money UK PLC, Registered number: 09595911
Group financial statements
Consolidated statement of changes in equity
Other reserves
----------------- ------- ------- ------- ------- -------------------------------------------------------------------- -------- -------- ------
Share
capital Other Equity Available Cash Non
and Capital equity Own Deferred based Asset for flow control-
share reorg' Merger instru- shares shares comp' reval sale FVOCI hedge ling
premium reserve reserve ments held reserve reserve reserve reserve(1) reserve(1) reserve Retained interest Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm earnings GBPm equity
Note 4.1.1 4.1.3 4.1.4 4.1.2 4.1.5 4.1.5 4.1.5 4.1.5 4.1.5 4.1.5 4.1.5 GBPm 4.1.6 GBPm
----------------- ------- ------- ------- ------- ------ -------- ------- ------- ---------- ---------- -------- -------- -------- ------
As at 1 October
2017 88 (839) 633 450 - - 8 1 7 - (1) 3,055 - 3,402
Loss for the
year - - - - - - - - - - - (145) - (145)
Other
comprehensive
income/(losses),
net of tax - - - - - - - 1 - - (38) (6) - (43)
----------------- ------- ------- ------- ------- ------ -------- ------- ------- ---------- ---------- -------- -------- -------- ------
Total
comprehensive
income/(losses)
for the year - - - - - - - 1 - - (38) (151) - (188)
Dividends paid
to ordinary
shareholders - - - - - - - - - - - (9) - (9)
AT1 distribution
paid (net of
tax) - - - - - - - - - - - (29) - (29)
Transfer from
equity based
compensation
reserve - - - - - - (7) - - - - 7 - -
Ordinary shares
issued 1 - - - - - - - - - - - - 1
Equity based
compensation
expensed - - - - - - 9 - - - - - - 9
----------------- ------- ------- ------- ------- ------ -------- ------- ------- ---------- ---------- -------- -------- -------- ------
As at 30
September
2018 89 (839) 633 450 - - 10 2 7 - (39) 2,873 - 3,186
Changes on
adoption
of IFRS 9 and
IFRS 15 (note
5.4) - - - - - - - - (7) 4 - (18) - (21)
----------------- ------- ------- ------- ------- ------ -------- ------- ------- ---------- ---------- -------- -------- -------- ------
As at 1 October
2018 89 (839) 633 450 - - 10 2 - 4 (39) 2,855 - 3,165
Loss for the
year - - - - - - - - - - - (194) - (194)
Other
comprehensive
(losses)/income
net of tax - - - - - - - (1) - 7 13 61 - 80
----------------- ------- ------- ------- ------- ------ -------- ------- ------- ---------- ---------- -------- -------- -------- ------
Total
comprehensive
(losses)/income
for the year - - - - - - - (1) - 7 13 (133) - (114)
Acquisition
of Virgin Money
Holdings (UK)
PLC 54 - 1,495 - (5) 23 - - - - - - 422 1,989
Dividends paid
to ordinary
shareholders - - - - - - - - - - - (45) - (45)
AT1 distribution
paid (net of
tax) - - - - - - - - - - - (33) - (33)
Distributions
to
non--controlling
interests (net
of tax) - - - - - - - - - - - (26) - (26)
Transfer from
equity based
compensation
reserve - - - - - - (8) - - - - 8 - -
Equity based
compensation
expensed - - - - - - 4 - - - - - - 4
Settlement of
Virgin Money
Holdings (UK)
PLC share awards 3 - - - 4 (4) - - - - - 1 - 4
AT1 issuance - - - 465 - - - - - - - - - 465
Capital note
redemption - - - - - - - - - - - 34 (422) (388)
----------------- ------- ------- ------- ------- ------ -------- ------- ------- ---------- ---------- -------- -------- -------- ------
As at 30
September
2019 146 (839) 2,128 915 (1) 19 6 1 - 11 (26) 2,661 - 5,021
----------------- ------- ------- ------- ------- ------ -------- ------- ------- ---------- ---------- -------- -------- -------- ------
(1) Changes required as a result of the adoption of IFRS 9 from
1 October 2018. Refer to notes 1.9 and 5.4.
The notes on pages 48 to 105 form an integral part of these
financial statements.
Group financial statements
Consolidated statement of cash flows
2019 2018
for the year ended 30 September Note GBPm GBPm
----------------------------------------------------- ---- ------- -------
Operating activities
Loss on ordinary activities before tax (232) (164)
Adjustments for:
Non-cash or non-operating items included in
loss before tax 5.2 (1,035) (715)
Changes in operating assets 5.2 (2,211) (1,059)
Changes in operating liabilities 5.2 2,635 (122)
Interest received 2,320 1,108
Interest paid (745) (173)
Tax paid (8) -
----------------------------------------------------- ---- ------- -------
Net cash provided by/(used in) operating activities 724 (1,125)
----------------------------------------------------- ---- ------- -------
Cash flows from investing activities
Interest received 27 12
Cash acquired on acquisition of Virgin Money
Holdings (UK) PLC 4,106 -
Proceeds from maturity of financial assets
at FVOCI 659 -
Proceeds from maturity of available for sale
investments - 245
Proceeds from sale of financial assets at FVOCI 352 -
Proceeds from sale of available for sale investments - 822
Purchase of financial assets at FVOCI (1,647) -
Purchase of available for sale investments - (593)
Proceeds from sale of 50% (less one share)
consideration in UTM 45 -
Proceeds from sale of property, plant and equipment 3 9
Purchase of property, plant and equipment (20) (22)
Purchase and development of intangible assets (130) (144)
----------------------------------------------------- ---- ------- -------
Net cash provided by investing activities 3,395 329
----------------------------------------------------- ---- ------- -------
Cash flows from financing activities
Interest received - 1
Interest paid (81) (94)
Proceeds from issuance of other equity instruments 247 -
Repayment of AT1 classified as non-controlling
interest (160) -
Redemption and principal repayment on RMBS
and covered bonds (2,003) (1,372)
Issuance of RMBS and covered bonds 2,227 1,049
Issuance of medium-term notes/subordinated
debt 642 497
Amounts drawn down under the TFS - 1,250
Amounts repaid under the TFS (1,295) (900)
Ordinary dividends paid (45) (9)
AT1 distributions (41) (36)
Distributions to non-controlling interests (33) -
----------------------------------------------------- ---- ------- -------
Net cash (used in)/provided by financing activities (542) 386
----------------------------------------------------- ---- ------- -------
Net increase/(decrease) in cash and cash equivalents 3,577 (410)
Cash and cash equivalents at the beginning
of the year 6,542 6,952
----------------------------------------------------- ---- ------- -------
Cash and cash equivalents at the end of the
year 5.2 10,119 6,542
----------------------------------------------------- ---- ------- -------
Group financial statements
Consolidated statement of cash flows
Term Debt
funding securities
Reconciliation of movements to liabilities from scheme in issue Total
cash flows arising from financing activities GBPm GBPm GBPm
--------------------------------------------------- -------- ----------- -------
At 1 October 2018 2,254 4,973 7,227
Cash flows:
Issuances - 2,869 2,869
Redemptions - (2,003) (2,003)
Repayment (1,295) - (1,295)
Non-cash flows:
Acquisition of TFS and debt securities in issue 6,389 3,548 9,937
Fair value adjustments and associated unwind
on acquired TFS and debt securities in issue (48) 8 (40)
Movement in accrued interest 8 7 15
Unrealised foreign exchange movements - 45 45
Unamortised costs - 6 6
Other movements - 138 138
--------------------------------------------------- -------- ----------- -------
At 30 September 2019 7,308 9,591 16,899
--------------------------------------------------- -------- ----------- -------
The notes on pages 48 to 105 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 shows new accounting standards,
amendments and interpretations which are relevant to the Group, and
whether they are effective in 2019 or later years. We explain how these
changes are expected to impact the financial position and performance
of the Group.
========================================================================
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
The consolidated financial statements have been prepared in
accordance with IFRS as adopted by the EU and in accordance with
the provisions of the Companies Act 2006.
The financial information has been prepared under the historical
cost convention, as modified by the revaluation of land and
buildings, investment properties, and certain other 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 audited sections of the
Risk management report. Where information is marked as audited, it
is incorporated into these financial statements by this cross
reference and it is covered by the Independent auditor's report
contained within the Group's Annual report and accounts.
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 within the Group's
Annual report and accounts. In addition, the Risk report included
within the Group's Annual report and accounts includes the Group's
risk management objectives and the Group's objectives, policies and
processes for managing its capital.
In assessing the Group's going concern position as at 30
September 2019, the Directors have considered a number of factors,
including the current balance sheet position, the principal and
emerging risks which could impact the performance of the Group, the
Group's strategic and financial plan and the impact of the
acquisition of Virgin Money Holdings (UK) PLC. The assessment
concluded that, for the foreseeable future, the Group has
sufficient capital to support its operations; has a funding and
liquidity base which is strong, robust and well managed with future
capacity; and has expectations that performance will continue to
improve as the Group's strategy is executed.
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
therefore believe that the Group is well placed to manage its risks
successfully in line with its business model and strategic aims.
Accordingly, they continue to adopt the going concern basis in
preparing the consolidated financial statements.
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.
Post-acquisition, income received and expenses incurred by the
entity or entities acquired are included in the consolidated income
statement on a line-by-line basis in accordance with the accounting
policies set out herein. 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 joint venture entities are accounted
for using the equity method and then assessed for impairment in the
relevant company's 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 continued
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 (GBPm)
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 assets and liabilities
Recognition and derecognition
A financial asset or a financial liability is recognised on the
balance sheet when the Group becomes party to the contractual
provisions of the instrument. Purchases and sales of financial
assets classified within fair value through profit or loss or fair
value through other comprehensive income 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 fair value through profit or
loss, 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
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.
ii. Fair value through other comprehensive income
A financial asset is measured at fair value through other
comprehensive income (FVOCI) when (1) the asset is held within a
business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets; 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, unless the financial asset is designated at
fair value through profit or loss on initial recognition.
iii. Fair value through profit or loss
A financial asset is measured at fair value through profit or
loss (FVTPL) if it (1) does not fall into one of the business
models described above; (2) is specifically designated as FVTPL on
initial recognition in order to eliminate or significantly reduce a
measurement mismatch; or (3) 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.
Financial liabilities
All financial liabilities are measured at amortised cost, except
for financial liabilities at fair value through profit or loss.
Such liabilities include derivatives (other than derivatives that
are financial guarantee contracts or are designated and effective
hedging instruments), and liabilities designated at fair value
through profit or loss on initial recognition.
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 set off 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 continued
1.8 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. Assumptions
made at each balance sheet date are based on best estimates at that
date. Although the Group has internal control systems in place to
ensure that estimates can be reliably measured, actual amounts may
differ from those estimates. The Group considers the most
significant use of accounting estimates and judgements relate to
the following areas:
- impairment provisions on credit exposures (note 3.2);
- effective interest rate (note 2.2);
- deferred tax (note 3.11);
- PPI redress provision and other conduct related matters (note 3.16); and
- retirement benefit obligations (note 3.12).
The valuation of the Group's portfolio of loans and advances
held at fair value through profit or loss is no longer considered a
critical accounting estimate. While unobservable inputs such as the
future expectation of credit losses will continue to impact the
value of the portfolio, the balance has reduced to a level such
that these are no longer considered to be critical to the Group's
results.
1.9 New accounting standards and interpretations
The Group has adopted a number of International Accounting
Standards Board (IASB) pronouncements in the current financial
year.
IFRS 9 'Financial Instruments'
IFRS 9 'Financial Instruments' was issued in July 2014 and
effective for financial periods beginning on or after 1 January
2018. IFRS 9 replaces IAS 39 'Financial Instruments: Recognition
and Measurement' in accounting for financial instruments and
introduces changes to the classification and measurement of
financial instruments and the impairment of financial assets. IFRS
9 also introduces new requirements for hedge accounting but
includes an accounting policy choice for entities to continue to
follow the hedge accounting requirements under IAS 39 until the
IASB has an agreed strategy for macro hedge accounting.
Consequently, the Group has decided to exercise the available
accounting policy option and has chosen not to adopt the hedge
accounting requirements of IFRS 9 at this time. There is no change
to the Group's policy on financial liabilities, which are measured
at amortised cost, except for trading liabilities and other
financial liabilities designated at fair value through profit or
loss.
Financial assets are classified under IFRS 9 using a two-step
process: (i) a business model assessment, and (ii) an assessment of
whether the contractual terms of the financial asset give rise to
cash flows which are consistent with that of solely payments of
principal and interest.
The accounting policies for loans and advances to customers
(note 3.1), impairment provisions on credit exposures (note 3.2)
and financial assets at fair value through profit or loss (note
3.5), have been revised, and an accounting policy for the new
category of financial assets 'financial assets at fair value
through other comprehensive income' introduced (note 3.7).
The accounting policy for financial assets available for sale
(note 3.8) is no longer relevant as this financial asset category
has been removed with the introduction of IFRS 9. All accounting
policies for financial assets under IAS 39 that were applicable for
the Group up to and including 30 September 2018 have not been
replicated in this results announcement but can be found in the
Group's 2018 Annual Report and Accounts.
On transition and as permitted by IFRS 9, the Group has not
restated comparative figures, with the impact of adopting IFRS 9
adjusted through retained earnings. Further detail on the
transitional impact of IFRS 9 can be found in note 5.4.
IFRS 15 'Revenues from Contracts with Customers'
IFRS 15 'Revenue from Contracts with Customers' was issued in
May 2014 and effective for financial periods beginning on or after
1 January 2018. IFRS 15 replaces IAS 11 'Construction Contracts'
and IAS 18 'Revenue' as the accounting standard on revenue
recognition.
IFRS 15 requires revenue to be reflected as a transfer of goods
or services to customers in an amount that recognises the
consideration to which the Group expects to be entitled. This is
satisfied by following a principles based five-step model for
revenue recognition.
The majority of the Group's revenue is interest income generated
from financial instruments, with the recognition criteria covered
in IFRS 9 and not as part of IFRS 15. Interest income generated
from lease contracts is also out of scope for IFRS 15. Fees and
commissions together with certain elements of non-interest income
are in scope of IFRS 15, with the Group's existing accounting
policy materially consistent with the expectations under IFRS
15.
On transition and as permitted by IFRS 15, the Group has not
restated comparative figures, with the impact of adopting IFRS 15
adjusted through retained earnings. Further detail on the
transitional impact of IFRS 15 can be found in note 5.4.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation continued
1.9 New accounting standards and interpretations continued
Other accounting standards and interpretations
Except where otherwise stated, the following IASB pronouncements
did not have a material impact on the Group's consolidated
financial statements:
- amendments to IFRS 2: 'Classification and Measurement of
Share-based Payment Transactions' issued in June 2016 and effective
for financial years beginning on or after 1 January 2018. The
amendments provide guidance on the effects of vesting and
non-vesting conditions on the measurement of cash-settled
share-based payments; classification of share-based payments with a
net settlement feature for withholding tax obligations; and
accounting for modifications to a share-based payment that change
the classification from cash-settled to equity-settled;
- 'Annual Improvements to IFRS Standards 2014-2016 Cycle',
issued December 2016 and effective for financial years beginning on
or after 1 January 2018. The amendment relates to IAS 28:
'Investments in Associates and Joint Ventures' and the measurement
of an associate or joint venture at fair value;
- IFRIC interpretation 22: 'Foreign Currency Transactions and
Advance Consideration', issued December 2016 and effective for
financial years beginning on or after 1 January 2018. The new
interpretation provides requirements on which exchange rate to use
in reporting foreign currency transactions (such as revenue
transactions) when payment is made or received in advance; and
- amendments to IFRS 9: 'Prepayment Features with Negative
Compensation' issued in October 2017 and effective for financial
years beginning on or after 1 January 2019. The amendments allow
companies to measure particular prepayable financial assets with
negative compensation at amortised cost or fair value through other
comprehensive income if a specified condition is met, instead of
these being measured at fair value through profit or loss. The
Group early adopted this amendment with effect from 1 October 2018
in line with the adoption of IFRS 9.
New accounting standards and interpretations not yet adopted
IFRS 16 'Leases' was issued in January 2016 and is effective for
financial years beginning on or after 1 January 2019. A separate
update on the Group's implementation of this new standard can be
found at the end of this section.
There are a number of other standards, interpretations and
amendments that have not been applied by the Group in preparing
these financial statements as they are either not available for
adoption in the EU or are not mandatory for the Group as at 30
September 2019. The pronouncements, while relevant to the Group,
are not anticipated to have a material impact and include:
- IFRIC interpretation 23: 'Uncertainty over Income Tax
Treatments', issued June 2017 and effective for financial years
beginning on or after 1 January 2019. The new interpretation
applies to any situation in which there is uncertainty as to
whether an income tax treatment is acceptable under tax law and is
not limited to actual ongoing disputes;
- 'Annual Improvements to IFRS Standards 2015-2017 Cycle'(1) ,
issued December 2017 and effective for financial years beginning on
or after 1 January 2019. The IASB has made amendments to the
following standards: IFRS 3 'Business Combinations'; IFRS 11 'Joint
arrangements'; IAS 12 'Income Taxes'; and IAS 32 'Borrowing Costs'.
The amendment clarifies that the income tax consequences of
distributions on financial instruments classified as equity should
be recognised alongside the past transactions or events that
generated the distributable profits. The Group has assessed that,
on adoption of this amendment, the taxation impacts of
distributions relating to AT1 securities would be recognised within
'Tax expense' in the income statement. Currently these taxation
impacts are recognised directly in 'Retained earnings' within
equity. As the amendment impacts only the presentation of taxation
impacts but not their calculation, adoption will not result in any
change to the Group's net assets but will result in an increase in
'Profit for the year attributable to equity owners' compared to
existing practice. If the Group had applied the amendment in these
financial statements, the Profit for the year attributable to
equity owners would have been GBP15m (2018: GBP7m) higher than that
disclosed in the income statement, with an equivalent reduction in
'Tax expense';
- amendment to IAS 19: 'Plan amendment, curtailment or
settlement'(1) issued in February 2018 and effective prospectively
for financial years beginning on or after 1 January 2019. The
amendments clarify that after a plan event companies should use
these updated assumptions to measure current service cost and net
interest for the remainder of the reporting period;
- amendments to references to the 'Conceptual Framework in IFRS
Standards'(1) , issued in March 2018 and effective for financial
years beginning on or after 1 January 2020. The amendments were
issued following the IASB's publication of a revised version of its
Conceptual Framework for Financial Reporting and updates the
references in IFRS standards to previous versions of the Conceptual
Framework;
- amendment to IAS 28: 'Long-term Interests in Associates and
Joint Ventures' issued in October 2017 and effective for financial
years beginning on or after 1 January 2019. The amendment clarifies
that an entity applies IFRS 9 to long-term interests in an
associate or joint venture to which the equity method is not
applied but that, in substance, form part of the net investment in
the associate or joint venture (long-term interests);
- amendments to IAS 1: 'Presentation of Financial Statements'
and IAS 8: 'Accounting Policies, Changes in Accounting Estimates
and Errors'(1) issued in October 2018 and effective prospectively
for financial years beginning on or after 1 January 2020. The
amendments provide clarification on the definition of
'material';
- amendments to IFRS 3: 'Business Combinations'(1) issued in
October 2018 and effective prospectively for financial years
beginning on or after 1 January 2020. The amendment assists in the
determination of whether an acquired set of activities and assets
meets the test of being classed as a business; and
- Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39
and IFRS 7)(1) issued in September 2019 and effective for financial
years beginning on or after 1 January 2020. The amendments provide
temporary reliefs which enable hedge accounting to continue during
the period of uncertainty before the replacement of an existing
interest rate benchmark with an alternative nearly risk-free
interest rate (an RFR). The Group is working through the
implications of the amendment ahead of implementation from 1
October 2020.
(1) Not yet endorsed by the EU.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation continued
1.9 New accounting standards and interpretations continued
Update on IFRS 16: 'Leases'
IFRS 16 'Leases' was issued in January 2016 and replaces IAS 17
'Leases', IFRIC 4 'Determining whether an Arrangement contains a
Lease', SIC-15 'Operating Leases-Incentives' and SIC-27 'Evaluating
the Substance of Transactions Involving the Legal Form of a Lease'.
IFRS 16 is effective for annual periods beginning on or after 1
January 2019 and was EU endorsed on 31 October 2017. The Group will
apply the standard from 1 October 2019.
IFRS 16 sets out the principles for the recognition,
measurement, presentation and disclosure of leases and will result
in most leases for lessees being brought on to the balance sheet
under a single lease model, removing the distinction between
finance and operating leases. It requires a lessee to recognise a
'right-of-use' asset and a lease liability. Lessor accounting
remains largely unchanged.
The right-of-use asset is initially measured at cost, which
comprises the initial amount of the lease liability adjusted for
any lease payments made at or before the commencement date, plus
any initial direct costs incurred and an estimate of costs to
restore the underlying asset, 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 right-of-use asset or the end of
the lease term. In addition, the right-of-use asset is periodically
reduced by impairment losses, if any, and adjusted for certain
remeasurements of the lease liability.
The lease liability is initially measured at the present value
of the lease payments that are not paid at the commencement date,
discounted using the interest rate implicit in the lease or, if
that rate cannot be readily determined, the incremental borrowing
rate is used for the discount rate.
The lease liability is measured at amortised cost using the
effective interest method. It is remeasured when there is a change
in future lease payments arising from a change in an index or rate,
if there is a change in amount expected to be payable under a
residual value guarantee, or if there is a change in the assessment
of whether a purchase, extension or termination option will be
exercised.
When a lease liability is remeasured in this way, a
corresponding adjustment is made to the carrying amount of the
right-to-use asset or is recorded in the income statement if the
carrying amount of the right-of-use asset has been reduced to
zero.
Transition approach and use of practical expedients
The Group will elect to apply the practical expedient to
grandfather the assessment of which transactions are leases. It
will apply IFRS 16 only to contracts that were previously
identified as leases by IAS 17. Contracts that were not identified
as leases under IAS 17 and IFRIC 4 will not be reassessed.
Therefore, the definition of a lease under IFRS 16 will only be
applied to contracts entered into or changed on or after 1 October
2019.
The Group will also elect to apply the recognition exemptions
for short-term leases (with a remaining lease term of less than 12
months) and low value leases. Lease payments associated with these
leases will be recognised as an expense on a straight line basis
over the term of the lease.
The Group will apply IFRS 16 using the modified retrospective
approach, under which the cumulative effect of initial application
is recognised in retained earnings as at 1 October 2019 and
comparatives are not restated.
Under the modified approach, at transition, lease liabilities
will be measured at the present value of the remaining lease
payments, discounted at the Group's incremental borrowing rate as
at 1 October 2019.
For the purposes of applying the modified retrospective
approach, the Group will elect to:
-- measure the right-of-use asset at an amount equal to the
lease liability at the date of initial application adjusted by the
amount of any prepaid or accrued lease payments;
-- apply the exemption not to recognise right-of-use assets and
liabilities for leases with less than 12 months of lease term;
and
-- apply the practical expedient to rely on its assessment
whether the lease was onerous under IAS 37 and therefore adjust the
right-of-use asset at the date of initial application by the
onerous lease provision rather than conduct an impairment test.
Key accounting judgements
The Group undertook a technical assessment of IFRS 16. The two
key accounting judgements in relation to IFRS 16 are the
determination of the discount rates and lease term.
When measuring the lease liability, lease payments are
discounted using the interest rate implicit in the lease or, if
that rate cannot be readily determined, the incremental borrowing
rate is used for the discount rate. Under the modified
retrospective approach, the Group will use its incremental
borrowing rate at the date of initial application as the discount
rate. Judgement will be required to determine an appropriate
incremental borrowing rate.
When determining lease term, an assessment is required of
whether an extension or termination option will be exercised. This
is reassessed if there is a significant event or significant change
in circumstances within the Group's control. Judgement is required
when making this assessment.
Impact of transition to IFRS 16
On transition to IFRS 16, the Group estimates it will recognise
right-of-use assets of approximately GBP196m and lease liabilities
of approximately GBP207m, with no material impact to retained
earnings. The Group will not restate comparative periods.
The Group continues to refine, monitor and validate certain
elements of the IFRS 16 model and related controls ahead of full
reporting of IFRS 16 impacts later in 2020.
The standard is not expected to have any significant impact on
lessor accounting by the Group.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation continued
1.10 Prior period comparatives
The prior period comparatives in the balance sheet have been
restated in line with the current year presentation. GBP34m of
derivative collateral in relation to clearing houses has been
reclassified between other liabilities and due to other banks and
GBP143m has been reclassified between other assets and due from
other banks. In addition, certain line items within assets and
liabilities which are not material have been aggregated with other
similar line items.
Section 2: Results for the year continued
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.
Following the acquisition of Virgin Money Holdings (UK) PLC and
up until 30 September 2019, the business has been assessed and
reported to the Group's Chief Operating Decision Maker as a single
segment, with decisions being made on the performance of the Group
on that basis.
With effect from 1 October 2019, the business has been aligned
to a three operating segments model: Business, Personal and
Mortgages. Reporting on this segmental basis will be included in
the 2020 Interim Results.
Summary income statement
2019 2018
GBPm GBPm
-------------------------------------- ------- -------
Net interest income 1,514 851
Non-interest income 235 156
-------------------------------------- ------- -------
Total operating income 1,749 1,007
Operating and administrative expenses (1,729) (1,130)
Impairment losses on credit exposures (252) (41)
-------------------------------------- ------- -------
Segment loss before tax (232) (164)
-------------------------------------- ------- -------
Average interest earning assets 86,362 39,417
-------------------------------------- ------- -------
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.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year continued
2.2 Net interest income
Accounting policy
Interest income is reflected in the income statement using the effective
interest method which discounts the estimated future cash payments or
receipts over the expected life of the financial instrument to the gross
carrying amount of the non-credit impaired financial asset. Interest
expense is reflected in the income statement using the same effective
interest method on the amortised cost of the financial liability.
When calculating the effective interest rate, 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 effective interest rate 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 effective
interest rate calculation. Non-utilisation of a commitment fee is 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 unwind of the discount from the initial recognition
of the expected credit loss (ECL) using the original effective rate
of interest. 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 the ECL allowance) using
the asset's original effective interest rate. The interest income for
purchase or originated credit impaired financial assets is calculated
using the credit-adjusted effective interest rate applied to the amortised
cost of the financial asset from initial recognition. The Group recognises
and presents the reversal of expected credit losses following the curing
of a credit impaired financial asset as a reversal of impairment losses.
Interest income and interest expense on hedged assets and liabilities
and financial assets and liabilities designated as fair value through
profit or loss are also recognised as part of net interest income.
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 fair
value through profit or loss (either mandatory or by election) are also
recognised within net interest income. With effect from 1 October 2018,
IAS 1 'Presentation of financial statements' prohibits the inclusion
of such interest within 'Interest income'. Therefore interest income
or expense on these items is now presented within 'Other similar interest'.
Comparatives have been restated.
Critical accounting estimates and judgements
Effective interest rate (EIR)
Following the acquisition of Virgin Money Holdings (UK) PLC, the Group
considered the application of EIR in relation to its reported amounts
of assets, liabilities, revenues and expenses. The Group has concluded
that sufficient judgement is now exercised on EIR for it to be included
within its disclosures on critical accounting estimates and judgements.
The EIR is determined at initial recognition based upon management's
best estimate of the future cash flows of the financial instrument.
In the event these estimates are revised at a later date, a present
value adjustment to the carrying value of the EIR asset may be recognised
in profit or loss. Such adjustments can introduce income statement volatility
and consequently the EIR method introduces a source of estimation uncertainty.
Management considers that material risk of adjustments exists in relation
to the application of EIR to the Group's mortgage and credit card portfolios.
Mortgages
The main accounting judgement when assessing the cash flows within the
Group's secured lending EIR model is the product life (including assumptions
based on observed historic customer behaviour when in a standard variable
rate (SVR) period) and the early repayment charge income receivable.
The Group currently assumes that 83% of customers will have fully repaid
or re-mortgaged within two months of reverting to SVR. If this were
to increase to 90%, the loans and advances to customers balance would
reduce by GBP20m with the adjustment recognised in net interest income.
Credit cards
The Group measures credit card EIR by modelling expected cash flows
based on assumptions of future customer behaviour, which is supported
by observed experience. Key behavioural assumptions include an estimation
of utilisation of available credit, transaction and repayment activity
and the retention of the customer balance after the end of a promotional
period.
The EIR of new business written in the current year is 5.26% while that
on acquired portfolios nearing the end of their promotional periods
is 8.22% (this excludes those which were out of their promotional periods
at the date of acquisition and therefore do not form part of the EIR
modelling). Revisions to the estimates of future cash flows (compared
to the original assumptions) that would have resulted in the EIR across
all cohorts being reduced by 25bps, would lead to a GBP16m decrease
in the loans and advances to customers balance. This present value adjustment
would be recognised in interest income.
The Group holds an appropriate level of model risk reserve across both
asset classes to mitigate the risk of estimation uncertainty.
===============================================================================
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year continued
2.2 Net interest income continued
2019 2018
GBPm GBPm
----------------------------------------------------------- ----- -----
Interest income
Loans and advances to customers 2,320 1,057
Loans and advances to other banks 72 26
Financial assets at fair value through other comprehensive
income 27 -
Financial assets available for sale - 12
Other interest income 1 3
----------------------------------------------------------- ----- -----
Total interest income 2,420 1,098
----------------------------------------------------------- ----- -----
Other similar interest
Financial assets at fair value through profit or loss 21 29
Financial liabilities at fair value through profit
or loss - (1)
Derivatives economically hedging interest bearing assets (8) (13)
----------------------------------------------------------- ----- -----
Total other similar interest 13 15
----------------------------------------------------------- ----- -----
Less: interest expense and similar charges
Customer deposits (580) (148)
Debt securities in issue (185) (94)
Due to other banks (144) (18)
Other interest expense (10) (2)
----------------------------------------------------------- ----- -----
Total interest expense and similar charges (919) (262)
----------------------------------------------------------- ----- -----
Net interest income 1,514 851
----------------------------------------------------------- ----- -----
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year continued
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 and liabilities designated at
fair value through profit or loss - these relate
principally to the Group's fixed interest rate loan
portfolio and related term deposits (note 3.5), which
were designated at inception as fair value through
profit or loss. 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; and
* 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
effective interest rate 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 fees monthly; the fees are 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.
Income from insurance, protection and investments
This includes management fees generated from the sale of and management
of funds, Stocks and Shares Individual Savings Accounts ('ISAs') and
pensions to retail investors. The contractual performance obligations
to investors are aligned to the obligations required of UK authorised
fund managers.
In return for providing these continuous services, a management charge
(expressed on an annualised basis to customers) is levied on investors'
funds under management. This charge is accrued by the products via adjustment
to the closing unit prices of investors' holdings on a daily basis.
==============================================================================
2019 2018
GBPm GBPm
------------------------------------------------------------ ----- -----
Gains less losses on financial instruments at fair
value
Held for trading derivatives 16 16
Financial assets and liabilities at fair value(1) 3 (13)
Ineffectiveness arising from fair value hedges (note
3.6) (22) -
Ineffectiveness arising from cash flow hedges (note
3.6) (14) (6)
------------------------------------------------------------ ----- -----
(17) (3)
------------------------------------------------------------ ----- -----
Other operating income
Net fee and commission income 195 141
Margin on foreign exchange derivative brokerage 19 18
Gain on sale of financial assets at fair value through
other comprehensive income 3 -
Gain on sale of Virgin Money Unit Trust Managers Limited(2) 35 -
Share of joint venture results (1) -
Other income 1 -
------------------------------------------------------------ ----- -----
252 159
------------------------------------------------------------ ----- -----
Total non-interest income 235 156
------------------------------------------------------------ ----- -----
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year continued
2.3 Non-interest income continued
Non-interest income includes the following fee and commission
income disaggregated by income type:
2019 2018
GBPm GBPm
-------------------------------------- ----- -----
Current account and debit card fees 117 114
Credit cards 42 13
Insurance, protection and investments 37 13
Non-banking and other fees(3) 31 32
-------------------------------------- ----- -----
Total fee and commission income 227 172
Total fee and commission expense (32) (31)
-------------------------------------- ----- -----
Net fee and commission income 195 141
-------------------------------------- ----- -----
(1) A credit risk gain on other assets and liabilities at fair
value of GBP2m has been recognised in the current year (2018: GBP3m
gain).
(2) The Group ceased generating management fees directly from
the sale and management of funds products from 31 July 2019 when it
sold 50% (less one share) of its shareholding in Virgin Money Unit
Trust Managers Limited (UTM) to Aberdeen Standard Investments. A
gain on sale of GBP35m was recorded on the partial disposal.
Consequently, UTM became a joint venture and is accounted for under
the equity method from the date of disposal.
(3) Non-banking and other fees include mortgages, invoice and asset finance and ATM fees.
2.4 Operating and administrative expenses before impairment losses
Accounting policy
Personnel expenses 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 3.12 and 4.2 respectively.
============================================================================
2019 2018
GBPm GBPm
-------------------------------------------------------- ----- -----
Personnel expenses 421 223
Depreciation and amortisation expense (notes 3.9, 3.10) 108 89
Other operating and administration expenses 1,200 818
-------------------------------------------------------- ----- -----
Total operating and administrative expenses 1,729 1,130
-------------------------------------------------------- ----- -----
Personnel expenses comprise the following items:
2019 2018
GBPm GBPm
---------------------------------------------------------- ----- -----
Salaries, wages and non-cash benefits and social security
costs 256 139
Defined contribution pension expense 47 33
Defined benefit pension expense (note 3.12) 9 2
Equity based compensation (note 4.2) 4 9
Other personnel expenses 105 40
---------------------------------------------------------- ----- -----
Personnel expenses 421 223
---------------------------------------------------------- ----- -----
On 26 October 2018, the High Court delivered a judgement
confirming that defined benefit schemes should equalise pension
benefits for men and women in relation to GMP and concluded on the
methods that were appropriate. The estimated increase in the Scheme
liabilities at the date of the judgement was GBP11m, which was
based on a number of assumptions and the actual impact may be
different. This has been reflected as a past service cost within
the defined benefit pension expense above, and in the closing net
accounting surplus of the Scheme (note 3.12).
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year continued
2.4 Operating and administrative expenses before impairment losses continued
The average number of FTE employees of the Group during the year
was made up as follows:
2019 2018
Number number
--------------- ------- -------
Managers 2,989 2,161
Clerical staff 5,714 3,608
--------------- ------- -------
8,703 5,769
--------------- ------- -------
The average monthly number of employees was 9,787 (2018:
6,461).
All staff are contracted employees of the Group and its
subsidiary undertakings. The average figures above do not include
contractors.
Other items of significance to the Group which are included
within operating and administrative expenses are:
2019 2018
GBPm GBPm
------------------------------------------------- ----- -----
Restructuring costs 154 -
Consent solicitation 18 -
Legacy restructuring and separation 5 46
Virgin Money Holdings (UK) PLC transaction costs 11 37
SME transformation 30 16
Intangible asset write-off 127 -
PPI redress expense (note 3.16) 415 352
Other conduct expenses (note 3.16) 18 44
Operating lease charges 35 26
------------------------------------------------- ----- -----
Restructuring costs represents the Group's integration costs as
it embarks upon a three year programme to fully integrate both
banks. The legacy restructuring and separation costs relate to the
Sustain programme and demerger from NAB, both of which completed in
the current period.
Incidental to the integration programme, a GBP127m charge was
recognised in the year following a review of the Group's software
estate, which identified a number of core assets (including GBP70m
in relation to the Virgin Money Digital Bank asset) that are no
longer of value to the Group's future strategy and therefore
required to be written down.
Auditor's remuneration included within other operating and
administrative expenses:
2019 2018
GBP'000 GBP'000
---------------------------------------------------- -------- --------
Fees payable to the Company's auditor for the audit
of the Company's financial statements 21 21
Fees payable to the Company's auditor for the audit
of the Company's subsidiaries(1) 2,967 1,593
---------------------------------------------------- -------- --------
Total audit fees 2,988 1,614
Audit related assurance services 436 120
Other assurance services 289 700
---------------------------------------------------- -------- --------
Total non-audit fees 725 820
Fees payable to the Company's auditor in respect of
associated pension schemes 88 84
Total fees payable to the Company's auditor 3,801 2,518
---------------------------------------------------- -------- --------
(1) Includes the audit of the Group's structured entities, and
the audit of Virgin Money Holdings (UK) PLC subsidiaries for the
year ending 31 December 2019.
Non-audit services of GBP725k (2018: GBP820k) performed by the
auditor during the year included the review of the Interim
Financial Report; PRA Written Auditor Reporting; agreed upon
procedures under the Conduct Indemnity arrangement with NAB;
comfort letters for the global medium-term note programme and AT1
issuance; and client money reviews. The decrease in the year is
principally due to reporting accountant procedures in relation to
the acquisition of Virgin Money Holdings (UK) PLC.
In addition to the above, out of pocket expenses of GBP161k
(2018: GBP49k) were borne by the Group, principally related to
reimbursement of travel expenses incurred by staff when performing
the above services.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year continued
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.
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.
===============================================================================
2019 2018
GBPm GBPm
------------------------------------- ----- -----
Current tax
Current year 20 8
Adjustment in respect of prior years (5) 8
------------------------------------- ----- -----
15 16
------------------------------------- ----- -----
Deferred tax (note 3.11)
Current year (56) (1)
Adjustment in respect of prior years 3 (34)
------------------------------------- ----- -----
(53) (35)
------------------------------------- ----- -----
Tax credit for the year (38) (19)
------------------------------------- ----- -----
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 credit implied by the standard rate to the
actual tax credit is as follows:
2019 2018
GBPm GBPm
------------------------------------------------------- ----- -----
Loss on ordinary activities before tax (232) (164)
------------------------------------------------------- ----- -----
Tax credit based on the standard rate of corporation
tax in the UK of 19% (2018: 19%) (44) (31)
------------------------------------------------------- ----- -----
Effects of:
Disallowable expenses 50 42
Conduct indemnity adjustment 10 (5)
Deferred tax assets recognised (49) (8)
Non-taxable gain on partial disposal of UTM (note 2.3) (7) -
Bank levy 1 -
Impact of rate changes 3 9
Adjustments in respect of prior years (2) (26)
------------------------------------------------------- ----- -----
Tax credit for the year (38) (19)
------------------------------------------------------- ----- -----
Disallowable expenses represent, in the main, conduct charges
that are not deductible in computing taxable profits, and
non--deductible transaction costs predominantly in relation to the
acquisition of Virgin Money Holdings (UK) PLC.
The increase in the conduct indemnity adjustment reflects a
change in anticipated quantum and timing of the use of historic
indemnified losses, following the acquisition of Virgin Money
Holdings (UK) PLC.
Deferred tax assets recognised represent previously unrecognised
historic losses that are now brought onto the balance sheet in
accordance with the Group's established methodology.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year continued
2.6 Earnings per share (EPS)
Accounting policy
Basic earnings per share
Basic earnings per share is calculated by taking the profit attributable
to ordinary shareholders of the parent company, deducting the weighted-average
of the Group's holdings of its own shares, and then dividing this by
the weighted-average number of ordinary shares outstanding during the
period.
Diluted earnings per share
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.
2019 2018
GBPm GBPm
-------------------------------------------------------- ----- -----
Loss attributable to ordinary shareholders (268) (181)
Tax relief on AT1 distribution attributable to ordinary
equity holders 8 7
Tax relief on non-controlling interest distributions
attributable to ordinary equity holders 7 -
-------------------------------------------------------- ----- -----
Loss attributable to ordinary equity holders for the
purposes of basic and diluted EPS (253) (174)
-------------------------------------------------------- ----- -----
2019 2018
Number of Number of
shares shares
(million) (million)
---------------------------------------------------- ---------- ----------
Weighted-average number of ordinary shares in issue
- Basic 1,414 885
- Diluted 1,414 885
Basic loss per share (pence) (17.9) (19.7)
Diluted loss per share (pence) (17.9) (19.7)
---------------------------------------------------- ---------- ----------
Basic earnings per share has been calculated after deducting 1m
(2018: Nil) ordinary shares representing the weighted-average of
the Group's holdings of its own shares. The calculation of the
diluted earnings per share excludes conditional awards of over 1m
(2018: 1m) ordinary shares made under equity based compensation
schemes. These are considered anti-dilutive due to the Group making
a loss in both the current and the prior year.
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 expected credit losses
(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 periods
to reflect a constant periodic rate of return.
In certain limited circumstances, the Group has elected to apply the
fair value through profit or loss measurement option to some debt instruments
that would otherwise be classified at amortised cost (note 3.5).
==============================================================================
2019 2018(1)
GBPm GBPm
----------------------------------------------------- ------ -------
Gross loans and advances to customers 73,246 32,943
Impairment provisions on credit exposures (note 3.2) (362) (195)
Fair value hedge adjustment 211 -
----------------------------------------------------- ------ -------
73,095 32,748
----------------------------------------------------- ------ -------
(1) The prior year comparative has been restated in line with
the current year presentation (note 1.10).
The Group has a portfolio of fair valued business loans of
GBP253m (2018: GBP362m) which are classified separately as
financial assets at fair value through profit or loss on the
balance sheet (note 3.5). Combined with the above, this is
equivalent to total loans and advances of GBP73,348m (2018:
GBP33,110m).
The fair value hedge adjustment represents an offset to the fair
value movement on derivatives designated in hedge relationships 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 GBP38m (2018: GBP20m) and GBP408m
(2018: GBP399m) respectively.
Finance lease and hire purchase receivables
2019 2018
GBPm GBPm
-------------------------------------------------------------- ----- -----
Gross investment in finance lease and hire purchase
receivables
Due within 1 year 276 269
Due within 1 to 5 years 386 376
Due after more than 5 years 23 15
-------------------------------------------------------------- ----- -----
685 660
Unearned income (36) (32)
-------------------------------------------------------------- ----- -----
Net investment in finance lease and hire purchase receivables 649 628
-------------------------------------------------------------- ----- -----
The total receivables from finance leases and hire purchase
contracts were GBP60m (2018: GBP32m) and GBP589m (2018: GBP596m)
respectively.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
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 fair value through profit or loss, for impairment. The
impairment loss allowance is calculated using an expected credit loss
(ECL) methodology. The overarching objective is to calculate an impairment
loss allowance that 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
The 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 which have a direct bearing
on credit risk and consequently the required level of impairment loss
provisioning.
The future cash flows used within the ECL calculation are estimated
based on the contractual cash flows of the assets, adjusted for the
probability of default occurring and taking account of historical loss
experience. In addition, the Group uses reasonable and supportable forecasts
of future economic conditions to estimate the ECL allowance. The use
of such judgements and reasonable estimates is considered by management
to be an essential part of the process which does not impact reliability.
The methodology and assumptions are reviewed regularly and updated as
necessary.
The ECL assessment is performed on either a collective or individual
basis as follows:
Collectively assessed: these assets are assessed and provided for on
a group or a pooled basis due to the existence of shared risk characteristics.
Financial assets with shared risk characteristics are assessed in the
sense that assets with similar characteristics at a given point in time
will tend to display a similar PD profile but only for as long as they
retain those similar characteristics. In particular, movement between
stages will tend to occur when individual assets have deteriorated,
rather than because a proportion of a pool is presumed to have deteriorated.
Individually assessed: 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.
It is not possible for an asset to have both an individual and a collectively
assessed ECL provision. Regardless of the calculation basis, the Group
generates an allowance at the individual financial instrument level.
Significant increase in credit risk assessment
The impairment loss allowance is calculated as either a 12-month or
lifetime ECL depending on whether the financial asset has exhibited
a significant increase in credit risk (SICR) since origination or has
otherwise become credit impaired as at the reporting date.
The Group uses a PD threshold curve (distinct for each portfolio) to
assess for a SICR and also utilises the 30 days past due and 90 days
past due backstops for recognising SICR and credit impairment effectively.
The Group has not made use of the low credit risk option under IFRS
9 for loans and advances at amortised cost.
Impairment staging
Financial assets where a 12-month ECL is recognised are classified as
Stage 1; financial assets which are considered to have experienced a
SICR are classified as Stage 2; and financial assets which have defaulted
or are otherwise considered to be credit impaired are classified as
Stage 3. The Group adopts the backstop position that a financial asset
has experienced a SICR (and therefore falls into Stage 2) when it reaches
30 days past due, and that a financial asset becomes credit impaired
(and therefore falls into Stage 3) when it reaches 90 days past due.
In addition to the above stages, purchase or originated credit-impaired
(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 de-recognition irrespective of its credit
quality. 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.
Financial assets can move between stages when the relevant staging criteria
are no longer satisfied. If the level of impairment loss reduces in
a subsequent period, the previously recognised impairment loss allowance
is reversed and recognised in the income statement.
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 fair value through
other comprehensive income 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 is immaterial.
Critical accounting estimates and judgements
The use of an ECL methodology under IFRS 9 requires the Group to apply
estimates and exercise judgement when calculating an impairment allowance
for credit exposures. The most significant of these are detailed below.
===============================================================================
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.2 Impairment provisions on credit exposures continued
Accounting policy continued
Accounting estimates
Asset lifetimes
The calculation of the ECL allowance is also 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.
Shortening the Group's credit card portfolio lifetime assumption by
three months would equate to an ECL decrease of GBP1m.
Economic scenarios
The Group relies on three economic scenarios over a five-year forecast
period when calculating the ECL allowance: base case, mild upside and
severe downside. These contain a number of key economic assumptions
such as unemployment rates, base rates and inflation, which ensure that
non-linear relationships between different forward-looking scenarios
and their associated credit losses do not materially impact the ECL
calculation. The base case used by the Group for IFRS 9 modelling is
also used for the Group's internal planning purposes.
The Group sources forward-looking scenarios and a range of macroeconomic
conditions over the forecast period from a third-party provider. The
Group considers that the resulting 'mild upside' and 'severe downside'
scenarios provide a balance in reaching an ECL calculation that is free
from bias and addresses concerns around the potential for non-linearity
of the ECL calculation. The Group applied the following weightings to
the chosen scenarios: 30 september 1 october
2019 2018
---------------- ------------ ---------
Mild upside 20% 25%
Base case 60% 60%
Severe downside 20% 15%
---------------- ------------ ---------
The scenario weightings are considered and debated by an internal review
panel and then recommended and approved for use in the IFRS 9 models
by ALCO. The slight increase in the weightings towards the mild upside
scenario on adoption of IFRS 9 reflected the relative conservatism in
the Group's base case, which was closer to the chosen downside scenario.
The weightings applied at 30 September 2019 were revised to reflect
a general deterioration in future economic outlook relative to the base
case.
The calculation of the Group's impairment provision is sensitive to
changes in the chosen weightings, with the effect on the closing impairment
allowance of GBP362m as a result of applying a 100% weighting separately
to each scenario producing the following: Base case - an ECL reduction
of GBP11m; Mild upside - an ECL reduction of GBP27m; and Severe downside
- an ECL increase of GBP65m.
Accounting judgements
Significant increase in credit risk
Considerable management judgement is required in determining the point
at which a SICR has occurred, as this is the point at which a 12-month
ECL is replaced by a lifetime ECL. Management 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 enable management
to make an assessment based on the quantitative and qualitative information
available. This includes the impact of forward-looking macroeconomic
factors but excludes the existence of any collateral implications.
Indicators of a significant increase in credit risk include deterioration
of the residual lifetime PD by set thresholds which are unique to each
product portfolio, non-default forbearance programmes, and watch list
status. The Group adopts the backstop position that a significant increase
in credit risk will have taken place when the financial asset reaches
30 days past due.
Changes to these set thresholds can impact staging, driving accounts
into higher stages. If a further 10% of the business population in Stage
1 were to move Stage leading to an increase in ECL held by approximately
GBP13m. In contrast, if a further 10% of the credit card population
in Stage 1 were to experience a non-default related forbearance issue
and migrate to Stage 2, the level of ECL held would increase by GBP52m.
In mortgages this would increase by GBP7m. Introducing a PD stress,
which increased PDs upwards by 20% for all portfolios, would result
in an overall increase in ECLs of GBP54m.
Definition of default
The PD of a credit exposure is a key input to the measurement of the
ECL allowance. Default 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 days
past due backstop for default purposes.
Post Model Adjustments (PMAs)
The ECL provision is further impacted by management judgements in the
form of PMAs, which were also a feature of impairment provisioning under
IAS 39. These are judgements that increase the collectively assessed
modelled output where management consider that not all of the risks
identified in a particular product segment have been, or are capable
of being, accurately reflected within those models. This can be the
case when modelled inputs are not sufficiently sensitive to sudden changes
in economic conditions e.g. Brexit. PMAs can also be applied when assessing
potential recoveries on individually assessed provisions where factors
such as customer and economic specific conditions need to be considered.
=============================================================================
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.2 Impairment provisions on credit exposures continued
Movement in impairment provisions on credit exposures
2019 2018
GBPm GBPm
---------------------------------------------------- ----- -----
Opening balance at 30 September 195 210
IAS 39 restatement (195) -
IFRS 9 adoption 224 -
Charge for the year 252 41
Amounts written off (142) (68)
Recoveries of amounts written off in previous years 28 13
Other - (1)
---------------------------------------------------- ----- -----
Closing balance 362 195
---------------------------------------------------- ----- -----
Following the adoption of IFRS 9 on 1 October 2018, the Group
impairment provision is classified by stage allocation as
follows:
2019 2018
GBPm GBPm
-------- ----- -----
Stage 1 79 -
Stage 2 168 -
Stage 3 118 -
POCI (3) -
-------- ----- -----
362 -
-------- ----- -----
The transitional stage allocation on adoption date of 1 October
2018 is presented in the Risk management section on page 27.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
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 & 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 3.14). 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 bankruptcy remote limited liability partnerships, Clydesdale
Covered Bond No 2 LLP and Eagle Place LLP, to provide a guarantee for
the obligations payable on the covered bonds issued by the Group.
The covered bond partnerships are consolidated with the mortgage loans
retained on the consolidated balance sheet and the covered bonds issued
included within debt securities in issue (note 3.14). The covered bond
holders have dual recourse: firstly, to the bond issuer on an unsecured
basis; and secondly, to the appropriate 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 balance sheet 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. In the mortgage originator a deemed loan liability is
recognised for the proceeds of the funding transaction.
Significant restrictions
Where the Group uses its financial assets to raise finance through securitisations
and the sale of securities subject to repurchase agreements, the assets
become encumbered and are not available for transfer around the Group.
===================================================================================
The assets and liabilities in relation to securitisation and
covered bonds in issue at 30 September are as follows:
2019 2018
--------------------------------- ----------------------- -----------------------
Loans and Loans and
advances notes advances notes
securitised in issue securitised in issue
GBPm GBPm GBPm GBPm
--------------------------------- ------------ --------- ------------ ---------
Securitisation Programmes
Lanark Master Issuer 5,009 4,597 5,479 4,536
Lannraig Master Issuer 1,032 838 933 899
Gosforth 2014-1 372 385 - -
Gosforth 2015-1 707 630 - -
Gosforth 2016-1 1,142 1,048 - -
Gosforth 2016-2 701 579 - -
Gosforth 2017-1 934 852 - -
Gosforth 2018-1 1,353 1,267 - -
--------------------------------- ------------ --------- ------------ ---------
11,250 10,196 6,412 5,435
Less held by the Group (5,154) (2,486)
--------- ---------
5,042 2,949
--------- ---------
Covered Bond Programmes
Clydesdale Covered Bond No 2 LLP 1,253 776 1,389 732
Eagle Place LLP 2,622 1,126 - -
--------------------------------- ------------ --------- ------------ ---------
3,875 1,902 1,389 732
--------------------------------- ------------ --------- ------------ ---------
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.3 Securitisation and covered bond programmes continued
The fair values of financial assets and associated liabilities
relating to the securitisation programmes where the counterparty to
the liabilities has recourse only to the financial assets were
GBP11,329m and GBP5,085m respectively (2018: GBP6,284m and
GBP2,948m).
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 totalled
GBP100m in subordinated debt (2018: GBP23m) and GBP1,722m in junior
notes held (2018: GBP971m). The Group has a beneficial interest in
the securitised mortgage portfolio held by the structured entities
of GBP1,467m (2018: GBP1,074m).
Looking forward through future reporting periods 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 GBP699m (2018:
GBP860m) in Clydesdale Covered Bond No 2 LLP and GBP1,490m in Eagle
Place LLP. 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.
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, adjusted for expected credit losses,
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 are generally of a short-term nature, and
repayable on demand or within a short timescale, generally three months.
==========================================================================
2019 2018
GBPm GBPm
----------------------------------------------------------- ------ -----
Cash assets 1,574 1,656
Balances with central banks (including EU payment systems) 8,722 4,917
----------------------------------------------------------- ------ -----
10,296 6,573
Less mandatory deposits with central banks(1) (183) (75)
----------------------------------------------------------- ------ -----
Included in cash and cash equivalents (note 5.2) 10,113 6,498
----------------------------------------------------------- ------ -----
(1) Mandatory deposits are not available for use in the Group's
day-to-day business and are non-interest bearing.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.5 Financial assets and liabilities at fair value through profit or loss
Accounting policy
Financial assets and liabilities are designated at fair value through
profit or loss, with gains and losses recognised in the income statement
as they arise (note 2.3), when this reduces measurement or recognition
inconsistencies (e.g. an accounting mismatch) or where the performance
is evaluated on a fair value basis in accordance with risk management
and investment strategies.
The Group's unlisted securities and other financial assets which were
held under IAS 39 as 'available for sale' have been classified as FVTPL
on adoption of IFRS 9, with the business model they are held under assessed
as neither to hold and collect contractual cash flows nor to hold and
collect contractual cash flows and to sell.
============================================================================
2019 2018
GBPm GBPm
------------------------------------------------------ ----- -----
Financial assets at fair value through profit or loss
Loans and advances 253 362
Other financial assets(1) 14 -
------------------------------------------------------ ----- -----
267 362
------------------------------------------------------ ----- -----
Financial liabilities at fair value through profit
or loss
Customer deposits - term deposits 4 15
------------------------------------------------------ ----- -----
(1) Included within other financial assets is GBP8m (2018:
GBPNil) of unlisted securities.
Loans and advances
Included in financial assets at fair value through profit or
loss 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 GBP253m (2018: GBP362m) including accrued
interest receivable of GBP1m (2018: GBP2m). The cumulative loss in
the fair value of the loans attributable to changes in credit risk
amounts to GBP4m (2018: GBP8m) and the change for the current year
is a decrease of GBP4m (2018: decrease of GBP3m), of which GBP2m
(2018: GBP3m) has been recognised in the income statement.
Other financial assets
This represents deferred consideration receivable and consists
of the rights to future income.
Note 5.4 provides the transitional disclosures for IFRS 9.
Refer to note 3.18 for further information on the valuation
methodology applied to financial assets held at fair value through
profit or loss and their classification within the fair value
hierarchy. Details of the credit quality of financial assets is
provided in the Risk management section.
Customer deposits - term deposits
Included in other financial liabilities at fair value through
profit or loss are fixed rate deposits, the interest rate risk on
which is hedged using interest rate derivative contracts. The
deposits are recorded at fair value to avoid an accounting
mismatch.
The change in fair value attributable to changes in the Group's
credit risk is GBPNil (2018: GBPNil). The Group is contractually
obligated to pay GBPNil (2018: GBP0.3m) less than the carrying
amount at maturity to the deposit holder.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.6 Derivative financial instruments
Accounting policy
The Group uses derivative financial instruments to manage exposure to
interest rate and foreign currency risk. Interest rate risk arises when
there is a mismatch between fixed interest rate and floating interest
rates, and different repricing characteristics between assets and liabilities.
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 due to and
from other banks 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.
IFRS 9 replaces IAS 39 for annual periods beginning on or after 1 January
2018. 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 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
The carrying value of the hedged item on initial designation is adjusted
for the fair value attributable to the hedged risk. Subsequently, 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.
Hedge effectiveness
The Group documents, at the inception of a transaction, the relationship
between hedging instruments and the hedged items, and the Group's risk
management objective and strategy for undertaking these hedge transactions.
The documentation covers how effectiveness will be measured throughout
the life of the hedge relationship and its assessment, both at hedge
inception and on an ongoing basis, of whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items. A hedge is expected to
be highly effective if the changes in fair value or cash flows attributable
to the hedged risk during the period for which the hedge is designated
are expected to offset in a range of 80% to 125%.
Derivatives held for trading
Changes in value of held for trading derivatives are immediately recognised
in the income statement (note 2.3).
===============================================================================
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.6 Derivative financial instruments continued
The tables below analyse derivatives between those designated as
hedging instruments and those classified as held for trading:
2019 2018
GBPm GBPm
----------------------------------------------- ----- -----
Fair value of derivative financial assets
Designated as hedging instruments 315 203
Designated as held for trading 51 59
----------------------------------------------- ----- -----
366 262
----------------------------------------------- ----- -----
Fair value of derivative financial liabilities
Designated as hedging instruments 191 259
Designated as held for trading 82 102
----------------------------------------------- ----- -----
273 361
----------------------------------------------- ----- -----
Cash collateral on derivatives placed with banks totalled GBP55m
(2018: GBP306m). Cash collateral received on derivatives totalled
GBP149m (2018: GBP37m). These amounts are included within due from
and due to other banks respectively. Collateral placed with
clearing houses, which did not meet offsetting criteria, totalled
GBP55m (30 September 2018: GBP143m) and is included within other
assets. Similarly, collateral received from clearing houses is
included in other liabilities and totalled GBPNil (30 September
2018: GBP34m).
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 2019 2018
------------------------------------ -------------------------------------- --------------------------------------
Notional Notional
contract Fair value Fair value contract Fair value Fair value
amount of assets of liabilities amount of assets of liabilities
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ --------- ---------- --------------- --------- ---------- ---------------
Derivatives designated as hedging
instruments
Cash flow hedges
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps (gross) 25,023 105 121 24,570 88 111
Less: net settled interest rate
swaps(1) (14,513) (47) (75) - - -
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps (net)(2) 10,510 58 46 24,570 88 111
Cross currency swaps(2) 1,446 162 - 690 70 -
------------------------------------ --------- ---------- --------------- --------- ---------- ---------------
11,956 220 46 25,260 158 111
Fair value hedges
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps (gross) 25,492 146 526 2,180 45 148
Less: net settled interest rate
swaps(1) (23,872) (60) (389) - - -
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps (net)(2) 1,620 86 137 2,180 45 148
Cross currency swaps(2) 808 9 8 - - -
------------------------------------ --------- ---------- --------------- --------- ---------- ---------------
2,428 95 145 2,180 45 148
------------------------------------ --------- ---------- --------------- --------- ---------- ---------------
Total derivatives designated as
hedging instruments 14,384 315 191 27,440 203 259
------------------------------------ --------- ---------- --------------- --------- ---------- ---------------
Derivatives designated as held
for trading
Foreign exchange rate related
contracts
Spot and forward foreign exchange(2) 728 16 15 1,788 26 23
Cross currency swaps(2) 1,123 11 9 455 10 10
Options(2) 2 - - 11 - -
------------------------------------ --------- ---------- --------------- --------- ---------- ---------------
1,853 27 24 2,254 36 33
------------------------------------ --------- ---------- --------------- --------- ---------- ---------------
Interest rate related contracts
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps (gross) 1,159 24 53 811 15 59
Less: net settled interest rate
swaps(1) (363) (5) (2) - - -
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps (net)(2) 796 19 51 811 15 59
Swaptions(2) 11 - 2 33 - -
Options(2) 465 2 3 501 1 3
------------------------------------ --------- ---------- --------------- --------- ---------- ---------------
1,272 21 56 1,345 16 62
------------------------------------ --------- ---------- --------------- --------- ---------- ---------------
Commodity related contracts 55 2 2 53 7 7
------------------------------------ --------- ---------- --------------- --------- ---------- ---------------
Equity related contracts 3 1 -
------------------------------------ --------- ---------- --------------- --------- ---------- ---------------
Total derivatives designated as
held for trading 3,183 51 82 3,652 59 102
------------------------------------ --------- ---------- --------------- --------- ---------- ---------------
(1) Presented within other assets.
(2) Presented within derivative financial instruments.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
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 and 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 LIBOR component;
- exchange rate risk for foreign currency financial assets and financial liabilities; 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 fair value hedges
The Group applies macro fair value hedging to its fixed rate
mortgages and fixed rate customer deposits. The Group determines
hedged items by identifying portfolios of homogeneous loans or
deposits based on their contractual maturity and other risk
characteristics. Loans or deposits within the identified portfolios
are allocated to repricing time buckets based on expected, rather
than contractual, repricing dates. The hedging instruments are
designated appropriately 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, to ensure that they are within an 80% to 125%
range.
The aggregated fair value changes in the hedged loans and
deposits are recognised on the Group's balance sheet as an asset
and liability respectively. 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. At
de-designation, the fair value hedge accounting adjustments are
amortised on a straight line basis over the original hedged life.
The Group has elected to commence amortisation at the date of
de-designation.
Micro fair value hedges
The Group uses this hedging strategy on GBP and foreign currency
denominated fixed rate assets held at fair value through other
comprehensive income (or available-for-sale fixed rate assets in
the year to 30 September 2018) and GBP and foreign currency
denominated fixed rate debt issuances by the Group.
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 are 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.
Hedge ineffectiveness
Hedge ineffectiveness can arise from:
- differences in timing of cash flows of hedged items and hedging instruments;
- changes in expected timings and amounts of forecast future cash flows;
- different interest rate curves applied to discount the hedged
items and hedging instruments; 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 prepayments (prepayment
risk).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.6 Derivative financial instruments continued
The below table discloses the impact derivatives held in micro
hedging relationships are expected to have on the timing and
uncertainty of future cash flows. All notional principal amounts
and carrying values are presented gross, prior to any netting
permitted for balance sheet presentation as this reflects the
derivative position used for risk management and the impact on
future cash flows.
30 September 2019
3 months 3 to 12
or less months 1 to 5 years Total
----------------------------- -------- ------- ------------ -----
Cash flow hedges
Foreign exchange risk
Cross currency swap
Notional principal (GBPm) 107 445 894 1,446
Average GBP/EUR rate 1.3459 1.3423 1.3680 n/a
Average GBP/USD rate 1.3263 1.3228 1.3089 n/a
----------------------------- -------- ------- ------------ -----
Summary of hedging instruments in designated hedge
relationships
In the below table, 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.
30 September 2019 Carrying amount
------------------------------ --------- ------------------- -------------------------------
Change in fair value
of hedging
Notional instrument in the
contract year used for
amount Assets Liabilities ineffectiveness measurement(2)
GBPm GBPm GBPm GBPm
------------------------------ --------- ------ ----------- -------------------------------
Cash flow hedges
Interest rate risk
Interest rate swaps(1) 25,023 105 (121) -
Foreign exchange risk
Cross currency swaps 1,446 162 - 59
------------------------------ --------- ------ ----------- -------------------------------
Total derivatives designated
as cash flow hedges 26,469 267 (121) 59
------------------------------ --------- ------ ----------- -------------------------------
Fair value hedges
Interest rate risk
Interest rate swaps(1) 25,492 146 (526) (264)
Foreign exchange and interest
rate risk
Cross currency swaps 808 9 (8) 1
------------------------------ --------- ------ ----------- -------------------------------
Total derivatives designated
as fair value hedges 26,300 155 (534) (263)
------------------------------ --------- ------ ----------- -------------------------------
(1) As shown in the total derivatives contracts table on page
69, 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.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.6 Derivative financial instruments continued
Summary of hedged items in designated hedge relationships
In the below table, 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.
30 September 2019
Carrying amount Cash flow hedge
of hedged items reserve
--------------------------------------- ------------------- ------------ ---------------- ------------------------
Change
in fair
Accumulated value of
amoUnt hedged
of item
fair value in the
adjustments year
on the used for
hedged ineffectiveness Continuing Discontinued
Assets Liabilities item(6) measurement hedges hedges
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------- ------ ----------- ------------ ---------------- ---------- ------------
Cash flow hedges
Interest rate risk
Gross floating rate assets
and gross floating rate
liabilities(1) (14) (15) (20)
Foreign exchange risk
Floating rate currency issuances(2) (59) - -
--------------------------------------- ------ ----------- ------------ ---------------- ---------- ------------
Total (73) (15) (20)
--------------------------------------- ------ ----------- ------------ ---------------- ---------- ------------
Fair value hedges
Interest rate risk
Fixed rate mortgages(3) 16,436 - 211 209
Fixed rate customer deposits(4) - (4,769) (10) (9)
Fixed rate FVOCI debt instruments(5) 2,940 - 166 133
Fixed rate issuances(2) - (2,368) 122 (92)
Foreign exchange and interest
rate risk
Fixed rate currency FVOCI debt
instruments(5) 82 - 3 4
Fixed rate currency issuances(2) - (530) 1 (4)
--------------------------------------- ------ ----------- ------------ ---------------- ---------- ------------
Total 19,458 (7,667) 493 241
--------------------------------------- ------ ----------- ------------ ---------------- ---------- ------------
(1) Future highly probable 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) Hedged item and the cumulative fair value changes, are
recorded in loans and advances to customers.
(4) Hedged item and the cumulative fair value changes, are
recorded in due to customers.
(5) Hedged item is recorded in financial assets at fair value
through other comprehensive income.
(6) Includes cumulative unamortised fair value hedge adjustments
relating to hedges that have been discontinued and are being
amortised to the income statement over the remaining life of the
asset or liability.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.6 Derivative financial instruments continued
Gains and losses from hedge accounting
30 September 2019 Reclassified into
income statement
as
---------------------------------------------- ---------------- -------------- --------------------------
Effective
Hedge portion
ineffectiveness recognised
recognised in other
in income comprehensive Net interest Non-interest
statement(1) income income income
GBPm GBPm GBPm GBPm
---------------------------------------------- ---------------- -------------- ------------ ------------
Cash flow hedges
Interest rate risk
Gross floating rate assets and gross
floating rate liabilities (14) 14 - -
Foreign exchange risk
Floating rate currency issuances - 59 - (57)
---------------------------------------------- ---------------- -------------- ------------ ------------
Total (losses)/gains on cash flow
hedges (14) 73 - (57)
---------------------------------------------- ---------------- -------------- ------------ ------------
Fair value hedges
Interest rate risk
Fixed rate mortgages (24)
Fixed rate customer deposits 4
Fixed rate FVOCI debt instruments (2)
Fixed rate issuances (1)
Foreign exchange and interest rate
risk
Fixed rate currency FVOCI debt instruments -
Fixed rate currency issuances 1
---------------------------------------------- ---------------- -------------- ------------ ------------
Total losses on fair value hedges (22)
---------------------------------------------- ---------------- -------------- ------------ ------------
(1) Recognised in gains less losses on financial assets at fair
value.
The ineffectiveness arising from cash flow and fair value hedges
was:
2019 2018
GBPm GBPm
-------------------------------------------------------- ----- -----
Loss arising from cash flow hedges
Loss from cash flow hedges due to hedge ineffectiveness (14) (6)
-------------------------------------------------------- ----- -----
(14) (6)
(Loss)/gain arising from fair value hedges
Hedging instrument (263) 14
Hedged item attributable to the hedged risk 241 (14)
-------------------------------------------------------- ----- -----
(22) -
Ineffectiveness arising from cash flow and fair value
hedges (36) (6)
-------------------------------------------------------- ----- -----
Below is a schedule indicating, as at 30 September 2018, the
periods when the hedged cash flows are expected to occur and when
they are expected to affect profit or loss:
Forecast Forecast
receivable payable
cash flows cash flows
2018 2018
GBPm GBPm
---------------------- ----------- -----------
Within 1 year 109 283
Between 1 and 2 years 130 366
Between 2 and 3 years 108 160
Between 3 and 4 years 63 5
Between 4 and 5 years 37 3
Greater than 5 years 60 10
---------------------- ----------- -----------
507 827
---------------------- ----------- -----------
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.7 Financial assets at fair value through other comprehensive income
Accounting policy
Fair value through other comprehensive income (FVOCI) is a new financial
asset classification category introduced by IFRS 9 'Financial Instruments'.
As permitted by IFRS 9, the Group has not restated its comparative financial
statements, consequently no comparative is presented as at 30 September
2018. The Group's listed securities previously classified as 'available
for sale' under IAS 39 (note 3.8) have been assessed as meeting the
criteria to be classified as FVOCI.
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 period 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 expected credit
loss (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.
The Group exercises the low credit risk option for debt instruments
classified as FVOCI, recognising the high credit quality of the instruments,
accordingly a 12-month ECL is calculated on the assets.
=============================================================================
2019 2018
GBPm GBPm
--------------------------------------------------- ----- -----
Listed securities 4,328 -
--------------------------------------------------- ----- -----
Total financial assets at fair value through other
comprehensive income 4,328 -
--------------------------------------------------- ----- -----
Refer to note 3.18 for further information on the valuation
methodology applied to financial assets at FVOCI at 30 September
2019 and their classification within the fair value hierarchy.
Details of the credit quality of financial assets is provided in
the Risk management section.
Note 5.4 provides the transitional disclosures for IFRS 9.
3.8 Financial assets available for sale
Accounting policy
The available for sale classification category for financial assets
ceased to apply from 1 October 2018 on the adoption of IFRS 9.
The Group's listed securities have been assessed as meeting the criteria
to be classified as fair value through other comprehensive income under
IFRS 9 (note 3.7). Unlisted securities and other financial assets have
been classified as fair value through profit or loss (note 3.5).
=========================================================================
2019 2018
GBPm GBPm
------------------------------------------ ----- -----
Listed securities - 1,551
Unlisted securities - 5
Other financial assets - 6
------------------------------------------ ----- -----
Total financial assets available for sale - 1,562
------------------------------------------ ----- -----
Refer to note 3.18 for further information on the valuation
methodology applied to financial assets available for sale at 30
September 2018 and their classification within the fair value
hierarchy. Details of the credit quality of financial assets is
provided in the Risk management section.
Note 5.4 provides the transitional disclosures for IFRS 9.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.9 Property, plant and equipment
Accounting policy
The Group's freehold and long-term leasehold land and buildings are
carried at their fair value as determined by the Directors, taking account
of advice received from independent valuers. Fair values are determined
in accordance with guidance published by the Royal Institution of Chartered
Surveyors, including adjustments to observable market inputs reflecting
any specific characteristics of the land and buildings. Directors' valuations
are performed annually in July, with the independent valuations carried
out on a three-year cycle on an open market basis.
All other items of property, plant and equipment are 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.
With the exception of freehold and long-term leasehold land, 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.
===============================================================================
Long-term
Freehold leasehold Fixtures
land land Building and
and buildings and buildings improvements equipment Total
GBPm GBPm GBPm GBPm GBPm
---------------------------- -------------- -------------- ------------- ---------- -----
Cost or valuation
At 1 October 2017 5 3 143 102 253
Additions - - 9 13 22
Disposals (2) - (3) (1) (6)
---------------------------- -------------- -------------- ------------- ---------- -----
At 30 September 2018 3 3 149 114 269
Acquisition of Virgin Money
Holdings (UK) PLC 36 3 11 15 65
Additions - - 12 8 20
Disposals (1) - (4) - (5)
---------------------------- -------------- -------------- ------------- ---------- -----
At 30 September 2019 38 6 168 137 349
---------------------------- -------------- -------------- ------------- ---------- -----
Accumulated depreciation
At 1 October 2017 1 - 88 78 167
Charge for the year - - 10 8 18
Disposals - - (3) (1) (4)
---------------------------- -------------- -------------- ------------- ---------- -----
At 30 September 2018 1 - 95 85 181
Charge for the year (note
2.4) 3 - 11 11 25
Disposals - - (2) - (2)
---------------------------- -------------- -------------- ------------- ---------- -----
At 30 September 2019 4 - 104 96 204
---------------------------- -------------- -------------- ------------- ---------- -----
Net book value
At 30 September 2019 34 6 64 41 145
---------------------------- -------------- -------------- ------------- ---------- -----
At 30 September 2018 2 3 54 29 88
---------------------------- -------------- -------------- ------------- ---------- -----
Valuations
A comparison of the carrying value between the revaluation basis
and the historical cost basis, for freehold and long-term leasehold
land and buildings, is shown below:
2019 2018
GBPm GBPm
------------------------------------------------------- ----- -----
Carrying value as included under the revaluation basis 40 5
Carrying value if the historical cost basis had been
used 40 5
------------------------------------------------------- ----- -----
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.10 Intangible assets and goodwill
Accounting policy
Capitalised software costs are 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 Core deposit
software Goodwill intangible Total
GBPm GBPm GBPM GBPm
------------------------------------- ----------- -------- ------------ -----
Cost
At 1 October 2017 589 - - 589
Additions 144 - - 144
------------------------------------- ----------- -------- ------------ -----
At 30 September 2018 733 - - 733
Acquisition of Virgin Money Holdings
(UK) PLC 172 11 6 189
Additions 130 - - 130
Write-off (85) - - (85)
------------------------------------- ----------- -------- ------------ -----
At 30 September 2019 950 11 6 967
------------------------------------- ----------- -------- ------------ -----
Accumulated amortisation
At 1 October 2017 250 - - 250
Charge for the year 71 - - 71
------------------------------------- ----------- -------- ------------ -----
At 30 September 2018 321 - - 321
Charge for the year (note 2.4) 82 - 1 83
Impairment (note 2.4) 115 - - 115
Write-off (68) - - (68)
------------------------------------- ----------- -------- ------------ -----
At 30 September 2019 450 - 1 451
------------------------------------- ----------- -------- ------------ -----
Net book value
------------------------------------- ----------- -------- ------------ -----
At 30 September 2019 500 11 5 516
------------------------------------- ----------- -------- ------------ -----
At 30 September 2018 412 - - 412
------------------------------------- ----------- -------- ------------ -----
GBP31m (2018: GBP1m) of the GBP130m (2018: GBP144m) software
additions do not form part of internally generated software
projects.
A GBP127m charge (comprising impairment of GBP115m and
write-offs with a net book value of GBP12m) was recognised in the
year following a review of the Group's software estate following
the acquisition of Virgin Money Holdings (UK) PLC, which identified
a number of core assets (including GBP70m in relation to the Virgin
Money Digital Bank asset) that are no longer of value to the
Group's future strategy and therefore required to be written down
(note 2.4).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.11 Deferred tax
Accounting policy
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 consolidated financial statements. 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
The Group has deferred tax assets of GBP322m (2018: GBP206m), the principal
components of which are tax losses, capital allowances and acquisition
accounting adjustments.
Tax losses carried forward of GBP146m (2018: GBP99m) have increased
due to the recognition of historic losses and a re-evaluation of the
rate at which they are expected to unwind.
The Group has assessed the recoverability of these deferred tax assets
at 30 September 2019 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.
At 30 September 2019, the Group had an unrecognised deferred tax asset
of GBP114m (2018: GBP157m) representing trading losses with a gross
value of GBP668m (2018: GBP926m). Although there is no prescribed period
after which losses expire, a deferred tax asset has not been recognised
in respect of these losses as the Directors have insufficient certainty
over their recoverability in the foreseeable future.
============================================================================
Movement in net deferred tax asset
2019 2018
GBPm GBPm
-------------------------------------------------- ----- -----
At 30 September 129 79
IFRS 9 adjustment recognised in equity (note 5.4) 7 -
-------------------------------------------------- ----- -----
At 1 October 136 79
Recognised in the income statement (note 2.5) 53 35
Recognised directly in equity (68) 15
-------------------------------------------------- ----- -----
At 30 September 121 129
-------------------------------------------------- ----- -----
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.11 Deferred tax continued
The Group has recognised deferred tax in relation to the
following items:
2019 2018
GBPm GBPm
------------------------------------------------------ ----- -----
Deferred tax assets
Tax losses carried forward 146 99
Capital allowances 91 88
Cash flow hedge reserve 3 12
Acquisition accounting adjustments 44 -
Transitional adjustment - IFRS 9 16 -
Transitional adjustment - available for sale reserve 1 1
Employee equity based compensation 5 3
Unamortised issue costs 4 -
Pension spreading 11 -
Other 1 3
------------------------------------------------------ ----- -----
322 206
------------------------------------------------------ ----- -----
Deferred tax liabilities
Defined benefit pension scheme surplus (139) (74)
Acquisition accounting adjustments (51) -
Gains on unlisted financial instruments at fair value
through other comprehensive income (6) (3)
Intangible assets (4) -
Other (1) -
------------------------------------------------------ ----- -----
(201) (77)
------------------------------------------------------ ----- -----
Net deferred tax asset 121 129
------------------------------------------------------ ----- -----
Payments to the pension scheme were greater than 210% of 2018
contributions and therefore in accordance with the legislation, tax
relief is spread over four years giving rise to the pension
spreading deferred tax asset of GBP11m. The current and deferred
tax impact of pension contributions, and pension spreading, are
reflected in the consolidated statement of comprehensive
income.
The accounting adjustments relating to the acquisition of Virgin
Money Holdings (UK) PLC (note 3.19) resulted in a net deferred tax
liability of GBP22m on the date of acquisition, which has
subsequently unwound in line with the related unwind of the fair
value adjustments to a net deferred tax liability of GBP7m at 30
September 2019. The constituent parts of the net liability have
been shown as deferred tax assets of GBP44m and deferred tax
liabilities of GBP51m as they are not expected to unwind at the
same time.
In accordance with legislation, the tax relief on the IFRS 9
opening adjustment (note 5.4) is spread evenly over 10 years and
will unwind through entity corporation tax computations across the
Group. The IFRS 9 deferred tax asset balance of GBP16m represents
the combination of the Group's transitional position as presented
in note 5.4 and the IFRS 9 transitional element remaining of the
Virgin Money Holdings (UK) PLC adoption of IFRS 9 on 1 January
2018.
The European Securities and Markets Authority (ESMA) issued a
Public Statement relating to IAS 12 'Income Taxes' in July 2019.
The publication covered considerations on the recognition of
deferred tax assets arising from the carry-forward of unused tax
losses. As the Group's deferred tax asset, including the element
relating to tax losses carried forward, is material, the Group has
assessed the content of the ESMA Public Statement and will look to
incorporate any potential further disclosure requirements arising
from the statement in the financial statements in future reporting
periods.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.12 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 be ultimately recovered.
Pension expense attributable to the Group's defined benefit scheme comprises
current service cost, net interest on the net defined benefit obligation/asset,
past service cost resulting from a scheme amendment or curtailment,
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 period
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 following table summarises the present value of the defined
benefit obligation and fair value of plan assets for the Scheme as
at 30 September:
2019 2018
GBPm GBPm
------------------------------------------------------------- ------- -------
Active members' defined benefit obligation (30) (24)
Deferred members' defined benefit obligation (2,537) (2,131)
Pensioner and dependant members' defined benefit obligations (1,744) (1,591)
------------------------------------------------------------- ------- -------
Total defined benefit obligation (4,311) (3,746)
Fair value of Scheme assets 4,707 3,958
------------------------------------------------------------- ------- -------
Net defined benefit pension asset 396 212
------------------------------------------------------------- ------- -------
Post-retirement medical benefits obligations(1) (3) (3)
------------------------------------------------------------- ------- -------
(1) Post-retirement medical benefits obligations are included
within other liabilities (note 3.17).
The Group's pension arrangements
The Group operates both defined benefit and defined contribution
arrangements. The Group's principal trading subsidiary, Clydesdale
Bank PLC, is the sponsoring employer in one funded defined benefit
pension scheme, the Yorkshire and Clydesdale Bank Pension Scheme
('the Scheme'). 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 a number of reforms to the Scheme to
manage the obligation. It closed the Scheme to new members in 2004
and since April 2006 has determined 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 affected employees' future pension benefits being
provided through the Group's existing defined contribution scheme,
'Total Pension'. The income statement charge for this is separately
disclosed in note 2.4.
The Group also provides post-retirement health care under a
defined benefit scheme for 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 GBP3m at 30 September 2019 (2018: GBP3m) and is included
within other liabilities in note 3.17.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.12 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(1) . 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, taking into account 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.
The last Scheme funding valuation was conducted in accordance
with Scheme data and market conditions as at 30 September 2016 and
resulted in a reported deficit of GBP290m(2) . The Group agreed to
eliminate this deficit through making contributions as agreed in
the recovery plan dated 31 July 2017 and a revised schedule of
contributions dated 31 January 2018. The following scheduled
contributions of GBP184m remain to be made over the period to March
2023:
- equal monthly contributions totalling GBP50m per annum until 31 March 2022; and
- GBP55m in the year to 31 March 2023.
The next triennial funding valuation is currently in progress
and will be calculated with reference to the Scheme data and market
conditions as at 30 September 2019. The Group expects this
valuation to be agreed with the Trustee of the Scheme by the end of
2020.
Scheme assets are not subject to the same valuation differences
as Scheme obligations and are consistently valued at current market
value.
(1) This is where the Scheme is essentially self-funded and does
not need to call on the Group for any additional funding.
(2) The IAS 19 valuation as at 30 September 2016 reported a
Scheme deficit of GBP75m.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.12 Retirement benefit obligations continued
IAS 19 position
The Scheme movements in the year are as follows:
2019 2018
----------------------------- ------------------------------------------ ------------------------------------------
Present Present
value Fair value Cumulative value Fair value Cumulative
of of plan loss of of plan loss in
obligation assets Total in OCI obligation assets Total OCI
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- ----------- ---------- ----- ---------- ----------- ---------- ----- ----------
Balance sheet surplus
at 1 October (3,746) 3,958 212 (3,974) 4,181 207
(704) (695)
Total expense
Current service cost - - - (1) - (1)
Past service cost (11) - (11) (2) - (2)
Interest (expense)/income (100) 107 7 (104) 109 5
Administrative costs - (5) (5) - (6) (6)
----------------------------- ----------- ---------- ----- ---------- ----------- ---------- ----- ----------
Total (expense)/income
recognised in the
consolidated income
statement (111) 102 (9) (107) 103 (4)
Remeasurements
Return on Scheme
assets greater than
discount rate - 772 772 772 - 27 27 27
Actuarial:
Loss - experience
adjustments (9) - (9) (9) (35) - (35) (35)
Gain - demographic
assumptions 30 - 30 30 19 - 19 19
Loss - financial
assumptions (683) - (683) (683) (20) - (20) (20)
----------------------------- ----------- ---------- ----- ---------- ----------- ---------- ----- ----------
Remeasurement (losses)/gains
recognised in other
comprehensive income (662) 772 110 110 (36) 27 (9) (9)
Contributions and
payments
Employer contributions - 83 83 - 18 18
Benefit payments 96 (96) - 93 (93) -
Transfer payments 112 (112) - 278 (278) -
----------------------------- ----------- ---------- ----- ---------- ----------- ---------- ----- ----------
208 (125) 83 371 (353) 18
----------------------------- ----------- ---------- ----- ---------- ----------- ---------- ----- ----------
Balance sheet surplus
at 30 September (4,311) 4,707 396 (3,746) 3,958 212
----------------------------- ----------- ---------- ----- ---------- ----------- ---------- ----- ----------
(594) (704)
----------------------------- ----------- ---------- ----- ---------- ----------- ---------- ----- ----------
The past service cost included within the income statement
charge for the current year of GBP11m relates to GMP equalisation,
which is detailed further below. In the prior year, the Group
incurred a past service cost of GBP2m in relation to enhanced early
retirement entitlements on redundancy, which was fully offset in
the income statement by a corresponding release from the
restructuring provision.
The expected contributions and benefit payments for the year
ending 30 September 2020 are GBP56m (2019: GBP77m) and GBP108m
(2019: GBP98m) respectively.
The Group and Trustee have entered into a contingent security
arrangement (the 'Security Arrangement') (note 5.3).
GMP equalisation
On 26 October 2018, the High Court handed down a judgement
concluding that defined benefit schemes should equalise pension
benefits for men and women in relation to GMP and concluded on the
methods that were appropriate. The estimated increase in the Scheme
obligations at the date of the judgement was GBP11m which is based
on a number of assumptions, therefore the actual impact may be
different. An allowance for GMP equalisation has been reflected in
the income statement and in the closing net accounting surplus of
the Scheme.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.12 Retirement benefit obligations continued
Maturity of Scheme liabilities
The estimated maturity period of Scheme obligations on an IAS 19
accounting basis is provided within the Group annual report and
accounts.
The discounted mean term of the defined benefit obligation at 30
September 2019 is 20 years (2018: 19 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 2019, both the interest rate and inflation
rate hedge ratios were around 85% and 75% respectively (2018: 81%
and 71%) 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; and
- return seeking assets - a range of investments designed to
provide specific, planned and consistent returns.
The major categories of plan assets for the Scheme, stated at
fair value, are as follows:
2019 2018
---------------------------- ------------------------------ ------------------------------------
Quoted Unquoted Total Quoted(3) Unquoted(3) Total
GBPm GBPm GBPm % GBPm GBPm GBPm %
---------------------------- ------ -------- ------ ---- --------- ----------- ------ ----
Bonds
Fixed government 569 - 569 478 - 478
Index linked government 1,757 - 1,757 1,539 - 1,539
Global sovereign 20 1 21 23 1 24
Corporate and other 531 305 836 412 294 706
---------------------------- ------ -------- ------ ---- --------- ----------- ------ ----
2,877 306 3,183 68% 2,452 295 2,747 70%
Equities(1)
Global equities - 503 503 - 555 555
Emerging market equities - 50 50 - 58 58
UK equities - 32 32 - 37 37
---------------------------- ------ -------- ------ ---- --------- ----------- ------ ----
- 585 585 12% - 650 650 16%
Other
Secured income alternatives - 358 358 - 336 336
Derivatives(2) - 219 219 - 172 172
Repurchase agreements - (534) (534) - (836) (836)
Property - 129 129 - 132 132
Alternative credit - 409 409 - 260 260
Infrastructure - 352 352 - 255 255
Cash - 1 1 - 238 238
Equity options 5 - 5 4 - 4
---------------------------- ------ -------- ------ ---- --------- ----------- ------ ----
5 934 939 20% 4 557 561 14%
Total Scheme assets 2,882 1,825 4,707 100% 2,456 1,502 3,958 100%
---------------------------- ------ -------- ------ ---- --------- ----------- ------ ----
(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.
(3) The split of plan assets between quoted and unquoted in the
prior year has been restated to reflect their nature.
At 30 September 2019, the Scheme had employer-related
investments within the meaning of Section 40 (2) of the Pensions
Act 1995 totalling GBP2m
(2018: nil).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.12 Retirement benefit obligations continued
Actuarial assumptions
The following assumptions were used in arriving at the IAS 19
defined benefit obligation:
2019 2018
% p.a. % p.a.
--------------------------------------------------------- ------- --------
Financial assumptions
Discount rate 1.77 2.75
Inflation (RPI) 3.20 3.30
Inflation (CPI) 2.20 2.30
Career average revalued earnings (CARE) revaluations:
Pre 31 March 2012 benefits (RPI) 3.20 3.30
Post 31 March 2012 benefits (CPI capped at 5% per annum) 2.20 2.30
Pension increases (capped at 2.5% per annum) 2.10 2.13
Pension increases (capped at 5% per annum) 3.07 3.15
Rate of increase for pensions in deferment 2.20 2.30
--------------------------------------------------------- ------- --------
Demographic assumptions
2019 2018
years years
---------------------------------- ------ ------
Post-retirement mortality:
Current pensioners at 60 - male 28.0 28.2
Current pensioners at 60 - female 29.6 29.8
Future pensioners at 60 - male 29.1 29.3
Future pensioners at 60 - female 30.8 31.0
---------------------------------- ------ ------
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 period 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: Balance Pension
sheet surplus Obligation cost
Assumption change GBPm GBPm GBPm
------------------- -------- --------------- ----------- --------
Discount rate + 0.25% (6) (205) (5)
- 0.25% 8 220 4
Inflation + 0.25% (9) 145 3
- 0.25% (9) (137) (2)
Life expectancy +1 year (169) 169 3
-1 year 164 (164) (3)
------------------- -------- --------------- ----------- --------
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 continued
3.13 Customer deposits
2019 2018
GBPm GBPm
------------------------------------- ------ ------
Interest bearing demand deposits 38,551 19,895
Term deposits 22,239 6,192
Non-interest bearing demand deposits 3,002 2,756
Other wholesale deposits 1 1
------------------------------------- ------ ------
63,793 28,844
Accrued interest payable 207 60
------------------------------------- ------ ------
64,000 28,904
------------------------------------- ------ ------
3.14 Debt securities in issue
Accounting policy
Debt securities comprise short and long-term debt issued by the Group
including commercial paper, medium-term notes, term loans, 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.
================================================================================
The breakdown of debt securities in issue is shown below:
2019 Medium-term Subordinated Covered
notes debt Securitisation bonds Total
GBPm GBPm GBPm GBPm GBPm
----------------------------- ----------- ------------ -------------- -------- -----
Carrying value 1,838 722 5,040 1,828 9,428
Fair value hedge adjustments 47 - 2 74 123
----------------------------- ----------- ------------ -------------- -------- -----
Total debt securities 1,885 722 5,042 1,902 9,551
Accrued interest payable 12 9 9 10 40
----------------------------- ----------- ------------ -------------- -------- -----
1,897 731 5,051 1,912 9,591
----------------------------- ----------- ------------ -------------- -------- -----
2018 Medium-term Subordinated Covered
notes debt Securitisation bonds Total
GBPm GBPm GBPm GBPm GBPm
----------------------------- ----------- ------------ -------------- ------- -------
Carrying value 794 476 2,949 698 4,917
Fair value hedge adjustments (1) - - 34 33
----------------------------- ----------- ------------ -------------- ------- -------
Total debt securities 793 476 2,949 732 4,950
Accrued interest payable 3 3 7 10 23
----------------------------- ----------- ------------ -------------- ------- -------
796 479 2,956 742 4,973
----------------------------- ----------- ------------ -------------- ------- -------
The acquisition of Virgin Money Holdings (UK) PLC on 15 October
2018 resulted in recognition of the following debt securities
(excluding accrued interest), which are included within the above
balances as at 30 September 2019:
Medium-term Subordinated Covered
notes debt Securitisation bonds Total
GBPm GBPm GBPm GBPm GBPm
-------------------------------- ----------- ------------ -------------- ------- -----
Fair value of acquired balances 647 - 2,909 - 3,556
-------------------------------- ----------- ------------ -------------- ------- -----
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.14 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)
2019 2018
GBPm GBPm
--------------------------------------------------- ----- -----
CYBG 3.125% fixed-to-floating rate callable senior
notes due 2025 298 298
CYBG 4% fixed rate reset callable senior notes due
2026 523 495
CYBG 3.375% fixed rate reset callable senior notes
due 2025 366 -
CYBG 4% fixed rate reset callable senior notes due
2027 397 -
VM PLC 2.25% fixed rate senior notes due 2020 301 -
--------------------------------------------------- ----- -----
1,885 793
--------------------------------------------------- ----- -----
Subordinated debt (excluding accrued interest)
2019 2018
GBPm GBPm
----------------------------------------------------- ----- -----
CYBG 5% fixed rate reset callable subordinated notes
due 2026 476 476
CYBG 7.875% fixed rate reset callable subordinated
notes due 2028 246 -
----------------------------------------------------- ----- -----
722 476
----------------------------------------------------- ----- -----
Details of securitisation and covered bond issuances are
included in note 3.3.
During the year, the Group issued GBP400m of medium-term notes
and GBP250m of subordinated notes. The Group also issued GBP1,102m
in Sterling and US Dollar denominations and redeemed GBP769m in
Sterling denominations from the securitisation programmes, and
issued GBP1,132m in Sterling and Euro denominations from the Eagle
Place covered bond programme.
3.15 Due to other banks
Accounting policy
Repurchase agreements
Securities sold subject to sale and repurchase agreements ('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.
============================================================================
2019 2018(1)
GBPm GBPm
-------------------------------------------------- ----- -------
Secured loans 7,308 2,254
Securities sold under agreements to repurchase(2) 1,554 802
Transaction balances with other banks 12 29
Deposits from other banks 42 3
-------------------------------------------------- ----- -------
8,916 3,088
-------------------------------------------------- ----- -------
(1) The prior year comparative has been restated in line with
the current year presentation. GBP34m of derivative collateral in
relation to clearing houses has been reclassified between other
liabilities and due to other banks (note 1.10).
(2) The underlying securities sold under agreements to
repurchase have a carrying value of GBP2,324m (2018:
GBP1,172m).
Secured loans comprise amounts drawn under the TFS (including
accrued interest).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.16 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.
Critical accounting estimates and judgements
PPI redress provision and other conduct related matters
With the FCA's deadline on PPI complaints now passed the level of uncertainty
in determining the quantum of PPI related liability has reduced. However,
owing to the significant volumes received in the weeks preceding the
time bar there continues to be significant judgement required to determine
the key assumptions used to estimate the quantum of the provision, including
the level of conversion rate if information requests convert into complaints,
uphold rates (how many claims are, or may be, upheld in the customer's
favour), and redress costs (the average payment made to customers).
The provision, therefore, continues to be subject to inherent uncertainties
as a result of the subjective nature of the assumptions used in quantifying
the overall estimated position at 30 September 2019, consequently the
provision calculated may be subject to change in the future if outcomes
differ to those currently assumed. Sensitivity analysis indicating the
impact of reasonably possible changes in key assumptions on the PPI
provision is presented within this note.
There are similar uncertainties and judgements for other conduct risk
related matters, however the level of liability is materially lower.
==============================================================================
2019 2018
GBPm GBPm
-------------------------------------------------------- ----- -----
PPI redress provision
Opening balance 275 422
Charge to the income statement (note 2.4) 415 352
Charge reimbursed under Conduct Indemnity - 148
Utilised (311) (647)
-------------------------------------------------------- ----- -----
Closing balance 379 275
-------------------------------------------------------- ----- -----
Customer redress and other provisions
Opening balance 41 109
Virgin Money Holdings (UK) PLC provision on acquisition 11 -
Charge to the income statement (note 2.4) 18 44
Utilised (45) (112)
-------------------------------------------------------- ----- -----
Closing balance 25 41
-------------------------------------------------------- ----- -----
Restructuring provision
Opening balance 15 23
Virgin Money Holdings (UK) PLC provision on acquisition 2 -
Charge to the income statement 64 15
Utilised (26) (23)
-------------------------------------------------------- ----- -----
Closing balance 55 15
-------------------------------------------------------- ----- -----
Total provisions for liabilities and charges 459 331
-------------------------------------------------------- ----- -----
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.16 Provisions for liabilities and charges continued
PPI redress
In common with the wider UK retail banking sector, the Group has
continued to deal with complaints and redress issues arising out of
historic sales of PPI. During the year, the Group reassessed the
level of provision that was considered appropriate to meet current
and future expectations in relation to the mis-selling of PPI
policies and concluded that a further charge of GBP415m was
required due to the significant volume of information requests
received, mainly from claims management companies ahead of the
August 2019 industry deadline. It also incorporates a reassessment
of the costs of processing cases and the impact of experience
adjustments. The total provision raised to date in respect of PPI
is GBP3,055m (30 September 2018: GBP2,640m), with GBP379m of this
remaining (30 September 2018: GBP275m) for closing out the
remaining stock of complaints and information requests including
costs of administration.
To 30 September 2019, the Group has received 629,000 complaints
(30 September 2018: 483,000) and has allowed for 86,000 further
complaints converted from information requests received prior to
the time bar (30 September 2018: 83,000).
The overall provision is based on a number of assumptions
derived from a combination of past experience, estimated future
experience, industry comparison and the exercise of judgement in
the key areas identified. There remain risks and uncertainties in
relation to these assumptions and consequently in relation to the
ultimate costs of redress and related costs, including: (i) the
number of PPI claims arising from the volume of information
requests submitted prior to the time bar; (ii) the number of those
claims that ultimately will be upheld; (iii) the amount that will
be paid in respect of those claims; and (iv) the costs of
administration.
As such, the factors discussed above mean there is a risk that
existing provisions for PPI customer redress may not cover all
potential costs. In light of this, the eventual costs of PPI
redress and complaint handling may therefore differ materially from
that estimated and further provision could be required.
The table below sets out the key assumptions and the effect on
the provision at 30 September 2019 of future, potential, changes in
key assumptions:
Assumptions
Change in
assumption Sensitivity(1)
-------------------------------------------------------- ----------- --------------
Number of expected complaints converted from the stock
of information requests at 30 September 2019 +/-5% GBP44m
Uphold rate on stock of complaints at 30 September
2019 and expected converted complaints from information
requests +/-1% GBP5m
Average redress costs(2) +/-1% GBP2m
-------------------------------------------------------- ----------- --------------
(1) There are inter-dependencies between several of 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 above
assume all other assumptions remain unchanged.
(2) Sensitivity to a change in average redress across customer
initiated complaints.
Customer redress and other provisions
Other provisions include amounts in respect of a number of
non-PPI conduct related matters, legal proceedings, and claims
arising in the ordinary course of the Group's business. Over the
course of the year, the Group has raised further provisions of
GBP18m in relation to non-PPI conduct matters (note 2.4). The
ultimate cost to the Group of these customer redress matters is
driven by a number of factors relating to offers of redress,
compensation, offers of alternative products, consequential loss
claims and administrative costs. The matters are at varying stages
of their life cycle and in certain circumstances, usually early in
the life of a potential issue, elements of the potential exposure
are contingent. These factors could result in the total cost of
review and redress varying materially from the Group's estimate.
The final amount required to settle the Group's potential
liabilities in these matters is therefore uncertain and further
provision could be required.
Conduct Indemnity Deed
The Group's economic exposure to the impact of historic conduct
related liabilities was mitigated by a Capped Indemnity of GBP1.7bn
from NAB. The full amount of the Capped Indemnity was drawn down in
the year to 30 September 2018. Details of this matter can be found
in note 3.14 of the 2018 Annual Report and Accounts.
To the extent that tax relief is expected in relation to
provisions for which reimbursement income is applicable, amounts
may become repayable to NAB. In the consolidated financial
statements, deferred tax assets are only recognised in respect of
the loss share proportion (9.7%) of unused tax losses on Relevant
Conduct Matters, on the basis that the Group does not obtain the
economic benefit of the future tax relief which is repayable to
NAB.
3.16 Provisions for liabilities and charges continued
Restructuring provision
Restructuring of the business is currently ongoing and a
provision is held to cover redundancy payments, property vacation
costs and associated enablement costs. During the year GBP64m
(2018: GBP15m) was provided for in accordance with the requirements
of IAS 37. GBP26m (2018: GBP23m) of the total provision was
utilised in the year.
Included within the restructuring provision is an amount for
committed rental expense on surplus lease space consistent with the
expected exposure on individual leases where the property is
unoccupied. This element of the provision will be utilised over the
remaining life of the leases, or until the leases are assigned, and
is measured at present values by discounting anticipated future
cash flows.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.17 Other liabilities
2019 2018(1)
GBPm GBPm
----------------------------- ----- -------
Notes in circulation 2,277 2,254
Accruals and deferred income 130 125
Other(2) 127 142
----------------------------- ----- -------
2,534 2,521
----------------------------- ----- -------
(1) The prior year comparative has been restated in line with
the current year presentation. GBP34m of derivative collateral in
relation to clearing houses has been reclassified between other
liabilities and due to other banks (note 1.10).
(2) Other includes GBP3m (2018: GBP3m) of post retirement
medical benefit obligations (note 3.12).
3.18 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 an 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 fair value through profit or loss 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 expected
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); and
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
period in which they occur.
===============================================================================
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.18 Fair value of financial instruments continued
(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, 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.
30 September 2019 30 September 2018
----------------------------------- -------------------- --------------------
Carrying Carrying
value Fair value value Fair value
GBPm GBPm GBPm GBPm
----------------------------------- -------- ---------- -------- ----------
Financial assets
Loans and advances to customers(1) 73,095 73,119 32,748 32,307
Financial liabilities
Due to other banks(2) 8,916 8,874 3,122 3,057
Customer deposits(2) 64,000 64,166 28,904 28,968
Debt securities in issue(3) 9,591 9,667 4,973 5,052
----------------------------------- -------- ---------- -------- ----------
(1) Loans and advances to customers are categorised as Level 3
in the fair value hierarchy with the exception of GBP1,513m (2018:
GBP1,110m) 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 GBP2,606m of listed debt (2018: GBP1,279m) which is
categorised as Level 1.
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 of similar characteristics. Contractual cash flows are
then adjusted for expected credit losses and expectations of
customer behaviour based on observed historic data. The cash flows
are then discounted using current market rates for instruments of
similar terms and maturity to arrive at an estimate of their fair
value.
(b) 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.
(c) 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.
(d) 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.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.18 Fair value of financial instruments continued
(b) Fair value of financial instruments recognised on the
balance sheet at fair value
The following tables provide an analysis of financial
instruments that are measured subsequent to initial recognition at
fair value, using the fair value hierarchy described above.
Fair value measurement as Fair value measurement as
at at
30 September 2019 30 September 2018
---------------------------- ------------------------------- -------------------------------
Level Level Level Level Level Level
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ------- ------ ------ ------ ------- ------ ------ ------
Financial assets
Financial assets
at fair value through
other comprehensive
income(1) 4,328 - - 4,328 - - - -
AFS investments(1) - - - - 1,551 - 11 1,562
Financial assets
at fair value through
profit or loss - 253 - 253 - 362 - 362
Other financial assets - - 14 14 - - - -
Derivative financial
assets - 366 - 366 - 262 - 262
---------------------------- ------- ------ ------ ------ ------- ------ ------ ------
Total financial assets
at fair value 4,328 619 14 4,961 1,551 624 11 2,186
---------------------------- ------- ------ ------ ------ ------- ------ ------ ------
Financial liabilities
Financial liabilities
at fair value - 4 - 4 - 15 - 15
Derivative financial
liabilities - 273 - 273 - 361 - 361
---------------------------- ------- ------ ------ ------ ------- ------ ------ ------
Total financial liabilities
at fair value - 277 - 277 - 376 - 376
---------------------------- ------- ------ ------ ------ ------- ------ ------ ------
(1) Changes required as a result of the adoption of IFRS 9 from
1 October 2018. Refer to notes 1.9 and 5.4.
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) Derivative financial assets and liabilities - 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.
(b) Fair value through other comprehensive income - The fair
values of listed investments are based on quoted closing market
prices(1) .
(c) Financial assets and liabilities at fair value through
profit or loss:
- Loans and advances to customers and term deposits (Level 2) -
The fair values are 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.
- Financial assets at fair value through profit or loss (Equity
investment, Level 3) - Primarily represents GBP6m of Visa Inc.
preferred stock received as partial consideration for the sale of
the Group's share in Visa Europe (note 2.3). 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 period 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(1) .
- Financial assets at fair value through profit or loss (Debt
investment, Level 3) - Primarily represents GBP5m of deferred
consideration receivable and consists of the rights to future
commission. The valuation is determined from a discounted cash flow
model incorporating estimated attrition rates and investment growth
rates appropriate to the underlying funds under management(1) . For
other unlisted debt investments, the transaction price is
considered the best estimate of the exit price and is the Group's
best estimate of fair value.
(1) These balances were disclosed under available for sale in
2018 and were reclassified as a result of IFRS 9 (note 1.9).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.18 Fair value of financial instruments continued
Level 3 movement analysis:
2019 2018
-------------------------- ------------------------------------- -------------------------------------
Financial Financial
assets assets
at at
Financial fair value Financial Financial fair value Financial
assets through liabilities assets through liabilities
available profit at available profit at
for sale or loss fair value for sale or loss fair value
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- ---------- ----------- ------------ ---------- ----------- ------------
Balance at the beginning
of the year 11 - - 10 477 (26)
Transfer to Level
2(1) - - - - (477) 26
Reclassification
on adoption of IFRS
9(2) (11) 11 - - - -
Fair value gains/(losses)
recognised(3)
In profit or loss
- unrealised - 1 - 1 - -
In profit or loss
- realised - 3 - (1) - -
In available for
sale - unrealised - - - 1 - -
Purchases - 3 - - - -
Settlements - (4) - - - -
-------------------------- ---------- ----------- ------------ ---------- ----------- ------------
Balance at the end
of the year - 14 - 11 - -
-------------------------- ---------- ----------- ------------ ---------- ----------- ------------
(1) The financial assets at fair value comprise a portfolio of
loans which are no longer on sale. The continued run-off of these
loans has resulted in the unobservable credit risk inputs no longer
being significant to their fair value. As such, in the prior year,
the loans (and associated liabilities) were reclassified to Level 2
in the fair value hierarchy. In accordance with the Group's
accounting policy, the transfer was deemed to have occurred at the
beginning of the reporting period.
(2) Changes required as a result of the adoption of IFRS 9 from
1 October 2018. Refer to notes 1.9 and 5.4.
(3) Net gains or losses were recorded in non-interest income, or
available for sale reserve as appropriate.
Quantitative information about significant unobservable inputs
in Level 3 valuations
The table below lists key unobservable inputs to Level 3
financial instruments and provides the range of those inputs as at
30 September 2019.
Fair value
GBPm Valuation technique Unobservable inputs Low range High range
------------------- ---------- -------------------- ----------------------- --------- ----------
other Financial
assets
at FVTPL
Discounted cash Contingent litigation
Equity investments 8 flow risk 0% 100%
Discounted cash Funds under management
Debt investments 6 flow attrition rate 10% 20%
------------------- ---------- -------------------- ----------------------- --------- ----------
Sensitivity of Level 3 fair value measurements to reasonably
possible alternative assumptions
Where valuation techniques use non-observable inputs that are
significant to a fair value measurement in its entirety, changing
these inputs will change the resultant fair value measurement.
The most significant input impacting the carrying value of the
FVTPL-debt investment is the 'Funds Under Management attrition'
rate. The Group currently assumes an annual 15% attrition rate. If
this rate was 20% the fair value would reduce by GBP1m; if it was
10% the fair value would increase by GBP2m.
Other than these significant Level 3 measurements, the Group has
a limited remaining exposure to Level 3 fair value measurements and
changing one or more of the inputs for fair value measurements in
Level 3 to reasonable alternative assumptions would not change the
fair value significantly with respect to profit or loss, total
assets, total liabilities or equity on these remaining Level 3
measurements.
3.19 Acquisition of Virgin Money Holdings (UK) PLC
On 15 October 2018, the Group acquired all the voting rights in
Virgin Money Holdings (UK) PLC by means of a scheme of arrangement
under Part 26 of the UK Companies Act 2006 for a purchase
consideration of GBP1,532m. This comprised the fair value of
approximately 541m new CYBG PLC ordinary shares in exchange for all
Virgin Money Holdings (UK) PLC shares at a ratio of 1.2125 CYBG
shares for each Virgin Money Holdings (UK) PLC share. Immediately
following completion, Virgin Money Holdings (UK) PLC shareholders
owned approximately 38% of the Combined Group (on a fully diluted
basis).
The fair value of the shares issued was calculated using the
CYBG PLC market price of 286.4 pence per share, on the London Stock
Exchange at its close of business on 12 October 2018.
In seeking to address the underlying trends of scale and
adaptability within the banking industry, the combination brings
together the two banks to create a national competitor to the large
incumbent banks. The combination offers retail and business
customers an alternative to the status quo.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.19 Acquisition of Virgin Money Holdings (UK) PLC continued
The table below sets out the fair values of the identifiable net
assets and liabilities acquired.
Book value Fair value
at at
15 October Fair value 15 October
2018 adjustments 2018
GBPm GBPm GBPm
--------------------------------------------- ----------- ------------ -----------
Assets
Cash and balances with central banks 4,146 - 4,146
Due from other banks 598 - 598
Financial assets at fair value through other
comprehensive income(1)(2) 2,028 - 2,028
Other financial assets at fair value through
profit or loss 1 - 1
Derivative financial instruments 71 - 71
Loans and advances to customers(3) 37,840 34 37,874
Property, plant and equipment 73 (7) 66
Intangible assets 172 6 178
Deferred tax assets 23 22 45
Other assets 93 - 93
--------------------------------------------- ----------- ------------ -----------
Total assets 45,045 55 45,100
--------------------------------------------- ----------- ------------ -----------
Liabilities
Due to other banks(3) 7,171 (114) 7,057
Derivative financial instruments 41 - 41
Customer deposits 32,111 10 32,121
Debt securities in issue 3,548 8 3,556
Deferred tax liabilities - 44 44
Other liabilities 337 1 338
--------------------------------------------- ----------- ------------ -----------
Total liabilities 43,208 (51) 43,157
--------------------------------------------- ----------- ------------ -----------
Net assets 1,837 106 1,943
Fair value of net assets acquired 1,943
Fair value of non-controlling interests(4) (422)
Goodwill arising on acquisition 11
Total consideration(2)(5) 1,532
--------------------------------------------- ----------- ------------ -----------
(1) Under IFRS 9 'Financial Instruments', debt investments which
would previously have been classified in the available for sale
category are reclassified to the new fair value through other
comprehensive income category.
(2) Adjusted to remove the CYBG debt securities held by Virgin
Money Holdings (UK) PLC.
(3) Included within Loans and advances to customers and Due to
other banks is cGBP300m of fair value assets which will unwind
through the income statement over the next 3 to 5 years.
(4) At the acquisition date, Virgin Money Holdings (UK) PLC had
in issue Fixed Rate Resettable AT1 securities issued on the
Luxembourg Stock Exchange. In accordance with IAS 32 these were
classified as equity instruments. The Group did not acquire the AT1
securities which remained in issue to third parties, consequently
these represented a non-controlling interest. As the AT1
instruments were actively traded, the fair value of GBP422m was
calculated based on the market price on the Luxembourg Stock
Exchange at its close of business on 12 October 2018.
(5) Includes 'shares to be issued' in the future relating to
employee share plans in regard to the settlement of the outstanding
Virgin Money Holdings (UK) PLC share awards partially offset by the
purchase of 'own shares' (note 4.1.5).
At acquisition date, the contractual amount of loans and
advances receivable from customers was GBP37,664m. The best
estimate of the amounts not expected to be collected was GBP123m.
The goodwill arising on the acquisition of Virgin Money Holdings
(UK) PLC is mainly attributable to expected cash flows from new
customers and significant synergies which are expected to be
realised. The goodwill arising on acquisition is not expected to be
deductible for tax purposes.
The amounts of net interest income and profit before tax
contributed to the Group's consolidated income statement for the
year ended 30 September 2019 from the acquired Virgin Money
Holdings (UK) PLC business were GBP559m and GBP149m respectively.
If the acquisition had occurred on 1 October 2018, the Group's
total net interest income for the year would have increased by
GBP22m to GBP1,536m and the loss before tax would have increased by
GBP33m to GBP265m.
Transaction costs of GBP48m were incurred by CYBG PLC in
relation to the acquisition.
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 include 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; and
(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.
Proposed final dividends for the year are disclosed as an event after
the balance sheet date.
==============================================================================
4.1.1 Share capital and share premium
2019 2018
GBPm GBPm
-------------------------------- ----- -----
Share capital 143 89
Share premium 3 -
-------------------------------- ----- -----
Share capital and share premium 146 89
-------------------------------- ----- -----
2019 2018
Number Number 2019 2018
of shares of shares GBPm GBPm
------------------------------------ ------------- ----------- ----- -----
Ordinary shares of GBP0.10 each -
allotted, called up and fully paid
Opening ordinary share capital 886,079,959 883,606,066 89 88
Share for share exchange 540,856,644 - 54 -
Issued under employee share schemes 7,549,086 2,473,893 - 1
------------------------------------ ------------- ----------- ----- -----
Closing ordinary share capital 1,434,485,689 886,079,959 143 89
------------------------------------ ------------- ----------- ----- -----
Acquisition of Virgin Money Holdings (UK) PLC
On 15 October 2018, CYBG PLC issued 540,856,644 GBP0.10 ordinary
shares in exchange for the acquisition of the entire share capital
of Virgin Money Holdings (UK) PLC by means of a scheme of
arrangement under Part 26 of the UK Companies Act 2006 for a
purchase consideration of GBP1.5bn. The nominal value of the shares
issued was GBP54m and the balance of GBP1,495m was transferred to a
merger reserve in accordance with Section 612 of the Companies
Act.
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 2019 rank equally with regard to the Company's
residual assets.
During the year 7,549,086 (2018: 2,473,893) ordinary shares were
issued under employee share schemes with a nominal value of GBP0.7m
(2018: GBP0.2m).
A final dividend in respect of the year ended 30 September 2018
of 3.1p (2017: 1p) per ordinary share amounting to GBP45m (2017:
GBP9m), was paid in February 2019. This dividend was deducted from
retained profits in the current year. The Directors have
recommended that no dividend will be paid in respect of the year
ended 30 September 2019.
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.
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital continued
4.1 Equity continued
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 consist 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 GBP450m and
optional redemption on 8 December 2022.
- Perpetual securities (fixed 8.75% up to the first reset date)
issued on 10 November 2016 with a nominal value of GBP230m and
optional redemption on 10 November 2021. This was held by Virgin
Money Holdings (UK) PLC on the date of acquisition and was
originally recognised as a non-controlling interest (note 4.1.6).
Following a change in obligor from Virgin Money Holdings (UK) PLC
to CYBG PLC on 20 August 2019, this has been recognised within
other equity.
- Perpetual securities (fixed 9.25% up to the first reset date)
issued on 13 March 2019 with a nominal value of GBP250m and
optional redemption on 8 June 2024.
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 GBP15m (2018:
GBPNil). AT1 distributions of GBP41m were made in the year, GBP33m
net of tax (2018: GBP36m paid, GBP29m net of tax).
4.1.3 Capital reorganisation reserve
The capital reorganisation reserve of GBP839m was recognised on
the issuance of CYBG PLC 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 CYBG PLC shares and CYBI's share capital and share
premium.
4.1.4 Merger reserve
A merger reserve of GBP633m was recognised on the issuance of
CYBG PLC ordinary shares in February 2016 in exchange for the
acquisition of the entire share capital of CYBI. An additional
GBP1,495m was recognised on the issuance of CYBG PLC ordinary
shares in October 2018 in exchange for the acquisition of the
entire share capital of Virgin Money Holdings (UK) PLC. The merger
reserve reflects the difference between the consideration for the
issuance of CYBG PLC shares and the nominal value of the shares
issued.
4.1.5 Other reserves
Own shares held
Virgin Money Holdings (UK) PLC established an Employee Benefit
Trust (EBT) in 2011 in connection with the operation of its share
plans. On the date of acquisition by CYBG PLC, the shares held in
the EBT were converted to CYBG shares at a ratio of 1.2125 CYBG
shares for each Virgin Money Holdings (UK) PLC share. The
investment in own shares as at 30 September 2019 is GBP1m (2018:
GBPNil). The market value of the shares held in the EBT at 30
September 2019 was GBP1m (2018: GBPNil).
Deferred shares reserve
The deferred share 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) PLC share awards, which
will be settled through the issuance of Virgin Money UK PLC 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.
Asset revaluation reserve
The asset revaluation reserve includes the gross revaluation
increments and decrements arising from the revaluation of land and
buildings.
Available for sale (AFS) reserve
The AFS reserve recorded the gains and losses arising from
changes in the fair value of AFS financial assets prior to 1
October 2018. On adoption of IFRS 9 'Financial Instruments' with
the removal of the AFS category for financial assets, part of the
balance on the reserve was transferred to the FVOCI reserve with
GBP3m released to retained earnings (note 5.4).
Fair value through other comprehensive income (FVOCI )
reserve
The FVOCI reserve records the unrealised gains and losses
arising from changes in the fair value of financial assets at fair
value through other comprehensive income. The movements in this
reserve are detailed in the consolidated statement of comprehensive
income. On adoption of IFRS 9 'Financial Instruments' with the
removal of the AFS category for financial assets, GBP4m of the
balance on the AFS reserve was transferred to the FVOCI reserve
(note 5.4).
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital continued
4.1.5 Other reserves 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.
2019 2018
GBPm GBPm
------------------------------------------------------- ----- -----
At 1 October (39) (1)
Amounts recognised in other comprehensive income:
Cash flow hedge - interest rate risk
Effective portion of changes in fair value of interest
rate swaps 14 (58)
Amounts transferred to the income statement - 9
Taxation (3) 11
Cash flow hedge - Foreign exchange risk
Effective portion of changes in fair value of cross
currency swaps 59 -
Amounts transferred to the income statement (57) -
Taxation - -
------------------------------------------------------- ----- -----
At 30 September (26) (39)
------------------------------------------------------- ----- -----
4.1.6 Non-controlling interests
At the acquisition date, Virgin Money Holdings (UK) PLC had in
issue Fixed Rate Resettable AT1 securities issued on the Luxembourg
Stock Exchange. In accordance with IAS 32 these are classified as
equity instruments. The Group did not acquire the AT1 securities
which remained in issue to third parties, consequently these
represented a non-controlling interest. As the AT1 instruments are
actively traded, the fair value on acquisition of GBP422m was
calculated based on the market price on the Luxembourg Stock
Exchange at its close of business on 12 October 2018. Following the
change in obligor from Virgin Money Holdings (UK) PLC to CYBG PLC
on 20 August 2019, this has been recognised within other equity
(note 4.1.2).
Distributions to non-controlling interests of GBP33m were made
in the year, GBP26m net of tax (2018: GBPNil).
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 period, 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
GBP4m (2018: GBP9m).
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital continued
4.2 Equity based compensation continued
CYBG awards
The Group made a number of awards under its share plans:
Plan Eligible employees Nature of award Vesting conditions(1) Grant dates(2)
------ ------------------ ------------------ ------------------------ --------------
DEP(3) Selected employees Conditional rights Continuing employment 2016, 2017
to shares or leaving in certain and 2018
limited circumstances
------ ------------------ ------------------ ------------------------ --------------
LTIP Selected senior Conditional rights Continuing employment 2017 and 2018
employees to shares or leaving in certain
limited circumstances
and achievement of
delivery of the Group's
strategic goals and
growth in shareholder
value
------ ------------------ ------------------ ------------------------ --------------
SIP All employees Non-conditional Continuing employment 2016 and 2017
share award
------ ------------------ ------------------ ------------------------ --------------
(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.
Further detail on each plan is provided below:
DEP
Under the plan employees were awarded conditional rights to CYBG
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;
- buyout of equity from previous employment for senior new hires; and
- Demerger awards which are also subject to the achievement of
performance conditions over a three-year period. Details of the
performance conditions are set out in the Directors' remuneration
report contained in the Group's Annual Report and Accounts.
LTIP
Under the plan, employees were awarded conditional rights to
CYBG 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 period. The measures reflect a balanced approach between
financial and non-financial performance and are aligned to the
organisation's strategic goals. Measures, relative weightings and
the quantum for assessing performance are outlined in the
Directors' remuneration report section contained in the Group's
Annual Report and Accounts.
SIP
Eligible employees at the date of the award, were awarded Group
shares, which are held in the Share Incentive Plan Trust (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. For the 2015 Demerger award, leavers (with the
exception of gross misconduct) retain their awards but they must
withdraw their shares from the SIP Trust.
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital continued
4.2 Equity based compensation continued
Awards/rights made during the year
Average
Number Number fair
outstanding outstanding value of
at at awards
1 October Number Number Number 30 September at grant
Plan 2018 awarded forfeited released 2019 pence
------------------ ------------ --------- ---------- ------------ ------------- ---------
DEP
2015 Demerger 2,038,052 - (223,829) (1,785,999) 28,224 196.96
2015 Bonus 54,953 - - (54,953) - 195.17
2015 Commencement 25,685 - - (25,685) - 194.67
2016 Bonus 21,403 - - (10,700) 10,703 266.03
2016 Commencement 57,271 - - (36,867) 20,404 266.03
2017 Bonus 592,807 - (31,943) (329,794) 231,070 313.20
2017 Commencement 68,167 - (34,324) (28,734) 5,109 313.20
2018 Bonus - 1,634,582 - (1,462,777) 171,805 192.35
------------------ ------------ --------- ---------- ------------ ------------- ---------
LTIP
2016 LTIP 2,232,391 - (203,923) - 2,028,468 266.03
2017 LTIP 2,314,487 - (207,534) - 2,106,953 313.20
2018 LTIP - 5,857,259 (61,455) - 5,795,804 190,47
------------------ ------------ --------- ---------- ------------ ------------- ---------
SIP
2015 Demerger 1,297,152 - (512) (270,148)(1) 1,026,492 194.67
2017 Free Share 906,141 - (477) (68,688) 836,976 313.20
2019 Free Share - 2,343,888 (84,870) (48,216) 2,210,802 202.53
------------------ ------------ --------- ---------- ------------ ------------- ---------
(1) Shares withdrawn from SIP Trust on leaving the Group.
Determination of grant date fair values
Participants of the DEP and LTIP plans are not entitled to
dividends until the awards vest, but the number of shares which
vest may be increased to reflect the value of dividends that would
have been paid up to the end of the holding period for the awards,
subject to the extent permitted under the relevant remuneration
regulation. Accordingly, the grant date fair value of the awards
with only service conditions and/or non-market performance
conditions 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.
The Group has not issued awards under any CYBG 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. Financial
guarantee contracts are initially recorded at fair value which is equal
to the premium received, unless there is evidence to the contrary.
The expected credit loss requirements of IFRS 9 as set out in note 3.2
are equally applicable to loan commitments and financial guarantee contracts.
Operating lease commitments
The leases entered into by the Group are primarily operating leases,
with operating lease rentals charged to the income statement on a straight
line basis over the period of the lease. The Group discloses its obligations
for future minimum payments under non-cancellable leases.
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 defaults.
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
2019 2018
GBPm GBPm
------------------------------------------------------ ------ -----
Guarantees and assets pledged as collateral security:
Due in less than 3 months 24 26
Due between 3 months and 1 year 24 36
Due between 1 year and 3 years 6 10
Due between 3 years and 5 years 11 2
Due after 5 years 48 45
------------------------------------------------------ ------ -----
113 119
------------------------------------------------------ ------ -----
Other credit commitments
Undrawn formal standby facilities, credit lines and
other commitments to lend at call 15,158 7,016
------------------------------------------------------ ------ -----
The Group's loan commitments and financial guarantee contracts
attracted expected credit losses of GBP5m at 30 September 2019. The
balance calculated on adoption of IFRS 9 is disclosed in note
5.4.
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes continued
5.1 Contingent liabilities and commitments continued
Capital commitments
The Group had future capital expenditure which had been
contracted for, but not provided for, at 30 September 2019 of
GBP0.2m (2018: GBP1m).
Operating lease commitments
2019 2018
GBPm GBPm
---------------------------------------------------- ----- -----
Leases as lessor
Future minimum lease payments under non-cancellable
operating leases:
Within 1 year 2 1
Between 1 year and 5 years 4 4
Over 5 years 1 1
---------------------------------------------------- ----- -----
7 6
---------------------------------------------------- ----- -----
Leases as lessee
Future minimum lease payments under non-cancellable
operating leases:
Within 1 year 35 29
Between 1 year and 5 years 135 96
Over 5 years 244 124
---------------------------------------------------- ----- -----
414 249
---------------------------------------------------- ----- -----
Other contingent liabilities
Conduct risk related matters
There continues to be significant uncertainty and thus judgement
is required in determining the quantum of conduct risk related
liabilities, with note 3.16 reflecting the Group's current position
in relation to redress provisions including those for PPI. The
final amount required to settle the Group's potential liabilities
for these, and other conduct related matters, is materially
uncertain. Contingent liabilities include those matters where
redress is likely to be paid and costs incurred but the amounts
cannot currently be estimated.
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 continued
5.2 Notes to the statement of cash flows
2019 2018
GBPm GBPm
------------------------------------------------------------------- ------- -------
Adjustments included in the loss before tax
Interest receivable (2,432) (1,113)
Interest payable 918 262
Depreciation and amortisation (note 2.4) 108 89
Derivative financial instruments fair value movements 17 (3)
Impairment losses on credit exposures (note 3.2) 252 41
Software impairments and write-offs 132 -
Other non-cash movements 1 -
Gain on sale of 50% (less one share) consideration
in Virgin Money UTM (35) -
Equity based compensation 4 9
------------------------------------------------------------------- ------- -------
(1,035) (715)
------------------------------------------------------------------- ------- -------
Changes in operating assets
Net (increase)/decrease in:
Balances with supervisory central banks (20) (31)
Due from other banks 274 339
Derivative financial instruments 64 18
Financial instruments at fair value through other comprehensive
income (33) -
Financial assets at fair value through profit or loss 103 117
Loans and advances to customers (2,663) (1,488)
Defined benefit pension assets (74) -
Other assets 138 (14)
------------------------------------------------------------------- ------- -------
(2,211) (1,059)
------------------------------------------------------------------- ------- -------
Changes in operating liabilities
Net increase/(decrease) in:
Due to other banks (20) (1,053)
Derivative financial instruments (128) (16)
Financial liabilities at fair value through profit
or loss (11) (11)
Customer deposits 2,837 1,186
Provisions for liabilities and charges 128 (223)
Defined benefit pension obligations - (14)
Other liabilities (171) 9
------------------------------------------------------------------- ------- -------
2,635 (122)
------------------------------------------------------------------- ------- -------
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes continued
5.2 Notes to the statement of cash flows continued
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).
2019 2018
GBPm GBPm
------------------------------------------------ ------ -----
Cash and balances with central banks (note 3.4) 10,113 6,498
Other assets 43 86
Due to other banks (20) (12)
Other liabilities (17) (30)
------------------------------------------------ ------ -----
10,119 6,542
------------------------------------------------ ------ -----
5.3 Related party transactions
Following the acquisition of Virgin Money Holdings (UK) PLC, the
Group has a number of additional related entities. No comparative
information is required where the entity only became a related
party during the period.
Assets with related entities
2019 2018
GBPm GBPm
------------------------------------------------------------- ----- -----
Investments in joint ventures and associates
Virgin Money Unit Trust Managers Limited(1) 8 -
Other assets
Amounts due from Virgin Money Unit Trust Managers Limited(1) 2 -
------------------------------------------------------------- ----- -----
Total assets with related entities 10 -
------------------------------------------------------------- ----- -----
Liabilities with related entities
Customer deposits
The Virgin Money Foundation 1 -
Other liabilities
Group pension deposits(2) 17 36
Commissions and charges due to Virgin Atlantic Airways
Limited(3) 6 -
Trademark licence fees due to Virgin Enterprises Limited(4) 4 -
Total liabilities with related entities 28 36
------------------------------------------------------------- ----- -----
Non-interest income
Net fees and commissions to Virgin Atlantic Airways
Limited (15) -
Share of post-tax result of Virgin Money Unit Trust
Managers Limited(1) (1) -
Gain on sale of 50% (less one share) consideration
in Virgin Money Unit Trust Managers Limited to Aberdeen
Standard Investments(1) 35 -
Operating and administrative expenses
Trademark licence fees to Virgin Enterprises Limited(4) (11) -
Costs recharged to Virgin Money Unit Trust Managers
Limited(1) 2 -
Donations to the Virgin Money Foundation(5) (2) -
Total income statement 8 -
------------------------------------------------------------- ----- -----
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes continued
5.3 Related party transactions continued
(1) The Group entered into a joint venture with Aberdeen
Standard Investments (ASI), under the terms of which ASI acquired
50% (less one share) of the Group's investments and pensions
business. This new joint venture is Virgin Money Unit Trust
Managers Limited.
(2) The Group and the Trustee to the pension scheme 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. The Group incurred costs in
relation to pension scheme administration. These costs, which
amounted to GBP0.1m (2018: GBP0.3m), were charged to the Group
sponsored scheme. Information on the pension schemes operated by
the Group is provided in note 3.12. Pension contributions of GBP83m
(2018: GBP18m) were made to the Scheme (note 3.12).
(3) 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. GBP4m of cash costs payable to
VAA have been deferred on the balance sheet.
(4) Licence Fees of GBP11m were payable to Virgin Enterprises
Limited for the use of the Virgin Money brand trademark. This
contract was previously held by Virgin Money Holdings (UK) plc.
However, following the acquisition of Virgin Money Holdings (UK)
PLC, the contract was renewed directly between CYBG plc and Virgin
Enterprises Ltd.
(5) The Group has made donations to the Virgin Money Foundation
to enable it to pursue its charitable objectives. The Group has
also provided a number of support services to the Virgin Money
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 GBP0.6m and is included in the total
value disclosed above.
The Group paid GBP0.2m of ordinary dividends to Virgin Group
Holdings Ltd.
Compensation of key management personnel (KMP)
KMP comprises Directors of the Company and members of the
Executive Leadership Team.
2019 2018
GBPm GBPm
---------------------------------- ----- -----
Salaries and short-term benefits 14 9
Other long-term employee benefits - -
Termination benefits 5 -
Equity based compensation(1) 2 1
---------------------------------- ----- -----
21 10
---------------------------------- ----- -----
(1) Basis of the expense recognised in the year in accordance
with IFRS 2 'Equity based compensations', including associated
employers' NIC.
The following information regarding Directors' remuneration is
presented in accordance with the Companies Act 2006.
2019 2018
GBPm GBPm
----------------------- ----- -----
Aggregate remuneration 5 5
----------------------- ----- -----
In addition to the above, GBP0.5m (2018: GBP0.4m) was expensed
relating to LTIP. None of the Directors were members of the Group's
defined contribution pension scheme during 2019 (2018: none). None
of the Directors were members of the Group's defined benefit
pension scheme during 2019 (2018: none). None of the Directors hold
share options and none were exercised during the year (2018:
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.
2019 2018
GBPm GBPm
------------------- ----- -----
Loans and advances 4 2
Deposits 3 3
------------------- ----- -----
No provisions have been recognised in respect of loans provided
to the KMP (2018: GBPNil). There were no debts written-off or
forgiven during the year to 30 September 2019 (2018: GBPNil).
Included in the above are four (2018: six) loans totalling GBP1m
(2018: GBP2m) made to Directors. In addition to the above, there
are guarantees of GBPNil (2018: GBPNil) made to Directors and their
related parties.
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes continued
5.4 Transition to IFRS 9 'Financial Instruments' from IAS 39
'Financial Instruments: Recognition and Measurement' and the
adoption of IFRS 15 'Revenue from Contracts with Customers'
IFRS 9
IFRS 9 replaced IAS 39 as the accounting standard for financial
instruments and was adopted (except for the hedge accounting
requirements) by the Group with effect from 1 October 2018. The
requirements of IFRS 9 allow for the transitional adjustments to be
reflected through the opening retained earnings line, without the
need to produce comparative information on an IFRS 9 basis.
The following table summarises the locations of the policies and
key judgement areas and impact on the Group's financial position of
adopting IFRS 9 on 1 October 2018(1) :
Detail Location
-------------------------------------------- ------------------------------------
New accounting standards Note 1.9
Loans and advances to customers Note 3.1
Impairment provisions on credit exposures Note 3.2
Critical accounting estimates and judgements Note 3.2
in relation to expected credit losses
(ECL)
Financial assets and liabilities at Note 3.5
fair value through profit or loss (FVTPL)
Financial assets at fair value through Note 3.7
other comprehensive income (FVOCI)
Financial assets available for sale Note 3.8 - and only applicable
(AFS) for the year ended 30 September
2018 as this category for financial
assets was removed with the
introduction of IFRS 9
Other relevant credit risk disclosures Pages 144 to 157 of the Risk
report contained in the Group's
Annual Report and Accounts
-------------------------------------------- ------------------------------------
The carrying amount of the Group's financial assets and
financial liabilities at 30 September 2018 under IAS 39 and at 1
October 2018 under IFRS 9 are as follows:
IAS 39 carrying
Measurement under Measurement under amount IFRS 9 carrying
IAS 39 IFRS 9 GBPm(2) amount GBPm
---------------------------- ------------------- --------------------- --------------- ---------------
Financial assets
Cash and balances
with central banks Amortised cost Amortised cost 6,573 6,573
Due from other banks Amortised cost Amortised cost 693 693
Financial assets available Available for Fair value through
for sale(3) sale profit or loss 1,562 11
Fair value through
other comprehensive
income n/a 1,551
Loans and advances
to customers at fair
value through profit Fair value through Fair value through
or loss profit or loss profit or loss 362 362
Derivative financial Fair value through Fair value through
instruments profit or loss profit or loss 262 262
Loans and advances
to customers Amortised cost Amortised cost 32,748 32,719
Financial liabilities
Other financial liabilities Fair value through Fair value through
at fair value profit or loss profit or loss 15 15
---------------------------- ------------------- --------------------- --------------- ---------------
(1) The acquisition of Virgin Money Holdings (UK) PLC on 15
October 2018 has no impact or effect on the Group's disclosures on
the transition to IFRS 9, which is based on the Group balance sheet
position as at 30 September 2018 which was prior to the
acquisition.
(2) The prior year comparative has been restated in line with
the current year presentation (note 1.10).
(3) The Group's listed securities, comprising of UK Government
Securities, and other listed securities (e.g. bonds issued by
supra-nationals and AAA rated covered bonds), are held in a
business model that is 'to hold to collect and sell' and classified
at fair value through other comprehensive income. The Group's
unlisted securities, and other financial assets held as available
for sale have been classified at fair value through profit or
loss.
The changes required (net of deferred tax) to the Group's
financial assets and liabilities on adoption of IFRS 9 have been
adjusted through the Group's retained earnings figure for 30
September 2018.
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes continued
5.4 Transition to IFRS 9 'Financial Instruments' from IAS 39
'Financial Instruments: Recognition and Measurement' and the
adoption of IFRS 15 'Revenue from Contracts with Customers'
continued
Initial adoption approach
The methodology and nature of the key judgements applied on the
initial adoption of IFRS 9 were consistent with the Group policy as
outlined in detail in note 3.2, and are therefore not repeated
here.
Consistent with the Group's approach to the application of
economic scenarios to the ECL calculation at 30 September 2019,
similar scenarios fed into the ECL calculation at 1 October 2018.
The Group applied the following weightings to the chosen scenarios
at 1 October 2018:
Mild upside 25%
Base case 60%
Severe downside 15%
Refer to note 3.2 for further detail regarding the approach and
comparison of the weightings applied at 1 October 2018 and 30
September 2019.
Future macroeconomic conditions
A range of future macroeconomic conditions is used in the
scenarios over a five-year forecast period and reflects the best
estimates of future conditions under each scenario. The Group has
identified the following key macroeconomic conditions as the most
significant inputs for IFRS 9 modelling purposes: UK GDP growth,
CPI inflation, house prices, bank rates, unemployment rates and CRE
capital values. These are assessed and reviewed by an internal
panel on a six-monthly basis to ensure appropriateness and
relevance to the ECL calculation. Where model inputs are not
reflective of the current market conditions at the date of the
financial statements, the Group may reflect these through the use
of temporary adjustments to the ECL calculation using expert credit
judgement.
The simple forward-looking five-year averages for the key model
inputs used in the ECL calculations at 1 October 2018 are:
uk gdp growth cpi inflation house prices bank rate ilo unemployment
% % % % %
---------------- ------------- ------------- ------------ --------- -----------------
1 October 2018
Mild upside 2.6 2.4 4.9 2.5 3.3
Base case 2.1 1.9 4.3 1.1 4.2
Severe downside 0.6 0.8 (1.7) 0.1 6.2
---------------- ------------- ------------- ------------ --------- -----------------
The revised simple forward-looking five-year averages for the
key model inputs used in the ECL calculations at 30 September 2019
are:
uk gdp growth cpi inflation house prices bank rate ilo unemployment
% % % % %
------------------ ------------- ------------- ------------ --------- ----------------
30 September 2019
Mild upside 2.7 2.3 5.8 2.0 3.4
Base case 1.8 1.7 2.9 0.9 3.8
Severe downside 0.2 0.8 (4.6) 0.4 5.8
------------------ ------------- ------------- ------------ --------- ----------------
IFRS 15
The Group also adopted IFRS 15 'Revenue from Contracts with
Customers' with effect from 1 October 2018.
The requirements of IFRS 15 allow for the transitional
adjustments to be reflected through the opening retained earnings
line, without the need to produce comparative information on an
IFRS 15 basis.
The majority of the Group's income was either not in scope for
IFRS 15 or was being recognised in a way that was consistent with
the requirements of the new standard. The limited exception to this
was income recognised in relation to the Group's rights to future
commission on the deferred consideration receivable. This was held
as an 'other' available for sale financial asset under IAS 39 and
reclassified to FVTPL on transition to IFRS 9 as detailed in this
note. As a result of this remeasurement, a further GBP1m of future
commission income was recognised on transition to IFRS 15, which
has been reflected in increases to both other assets and retained
earnings on transition.
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes continued
5.4 Transition to IFRS 9 'Financial Instruments' from IAS 39
'Financial Instruments: Recognition and Measurement' and the
adoption of IFRS 15 'Revenue from Contracts with Customers'
continued
Quantitative impact of IFRS 9 and IFRS 15 on adoption at 1
October 2018
The change to the carrying amounts of the Group's assets,
liabilities, reserves and retained earnings as at 30 September 2018
as a result of the IFRS 9 and IFRS 15 reclassifications and
remeasurements required on 1 October 2018 are as follows:
IAS 39 IFRS 9 -
carrying release
amount of Carrying
as at IFRS 9 - Available amount as
30 Sept IFRS 9 - remeasurement for IFRS 15 at
2018(1) reclassifications in ECL sale reserve remeasurement 1 Oct 2019
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- --------- ------------------ -------------- ------------- -------------- ------------
Assets
Financial assets
available for sale 1,562 (1,562) - - - -
Financial assets
at fair value through
other comprehensive
income - 1,551 - - - 1,551
Other financial assets
at fair value 362 11 - - - 373
Loans and advances
to customers 32,748 - (29) - - 32,719
Deferred tax 206 - 7 - - 213
Other assets 338 - - - 1 339
----------------------- --------- ------------------ -------------- ------------- -------------- ------------
Equity
Available for sale
reserve (7) 4 - 3 - -
FVOCI reserve - (4) - - - (4)
Retained earnings (2,873) - 22 (3) (1) (2,855)
----------------------- --------- ------------------ -------------- ------------- -------------- ------------
(1) The prior year comparative has been restated in line with
the current year presentation (note 1.10).
The move to IFRS 9 has resulted in a net GBP19m decrease in
retained earnings at 1 October 2018 primarily due to the change in
the measurement in impairment losses, which are now calculated on
an ECL basis as opposed to the incurred loss methodology used in
IAS 39. The gross impairment loss adjustment of GBP29m as at 1
October 2018 includes GBP5m of ECLs calculated on the Group's loan
commitments and financial guarantee contracts. In addition, while
an ECL calculation is also performed on the Group's financial
assets held at FVOCI, the resultant impairment provision is not
material enough to be reported separately in the above tables.
5.5 Pillar 3 disclosures
Basel III Capital Requirements Directive IV
Pillar 3 disclosure requirements are set out in Part Eight of
the CRR. The consolidated disclosures of the Group, for the 2019
financial year, will be issued concurrently with the Annual Report
and Accounts and will be found at
www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/.
5.6 Post balance sheet events
FSMA Part VII transfer of trade and assets from Virgin Money PLC
to Clydesdale Bank PLC
On 26 September 2019, at a hearing in the Court of Session in
Edinburgh, the Court approved a banking business transfer scheme
under Part VII of the Financial Services and Markets Act 2000. The
scheme effective date was 21 October 2019, and in accordance with
the court approval, on this date the business of Virgin Money PLC
was transferred to Clydesdale Bank PLC for a cash consideration of
GBP10m. The transfer of the trade and assets is a business transfer
under common control and has no impact on the consolidated Group
financial results.
Change in Company name
CYBG PLC changed its name to Virgin Money UK PLC on 30 October
2019. The registered office address of the Company has changed from
Merrion Way to Jubilee House, Gosforth, Newcastle upon Tyne, NE3
4PL.
Additional information
Measuring financial performance - glossary
Financial performance measures
As highlighted in the Annual Report and Accounts, the Group
utilises a range of performance measures(1) to assess the Group's
performance. These can be grouped under the following headings:
- profitability;
- asset quality; and
- capital optimisation.
The performance measures used are a combination of statutory,
regulatory and alternative performance measures; with the type of
performance measure used dependent on the component elements and
source of what is being measured.
Statutory performance measures (S)
These are used when the basis of the calculation is derived from
a measure that is required under generally accepted accounting
principles (GAAP). An example of this would be references to
earnings per share.
Regulatory performance measures (R)
These are used when the basis of the calculation is required and
specified by the Group's regulators. Examples of this would be the
leverage ratio and the Tier 1 ratio.
Alternative performance measures (A)
These are used when the basis of the calculation is derived from
a non-GAAP measure - also referred to as APMs. Examples of this
would be the statutory cost to income ratio and the statutory
return on tangible equity.
Where a performance measure refers to an 'underlying' metric,
the detail on how this measure is arrived at, along with
management's reasoning for excluding the item from the Group's
current underlying performance rationale, can be found on page 108,
directly following this section. These adjustments to the Group's
statutory results made by management are designed to provide a more
meaningful underlying basis.
Descriptions of the performance measures used, including the
basis of calculation where appropriate, are set out below:
Profitability:
Term Type Definition
------------------------ ---- ----------------------------------------------------------
Net interest margin A Underlying net interest income as a percentage
(NIM) of average interest earning assets for a given
period. Underlying net interest income of GBP1,433m
(2018: GBP1,457m) is divided by average interest
earning assets for a given period of GBP86,362m
(2018: GBP81,934m) (which is then adjusted to exclude
short-term repos used for liquidity management
purposes, fair value adjustments, amounts received
under the Conduct Indemnity and not yet utilised,
and any associated income). As a result of the
exclusions noted above, average interest earning
assets used as the denominator have reduced by
GBPNil (2018: GBP187m) and the net interest income
numerator has reduced by GBPNil (2018: GBP3m).
------------------------ ---- ----------------------------------------------------------
Statutory return A Statutory profit/(loss) after tax attributable
on tangible equity to ordinary equity holders as a percentage of average
(RoTE) tangible equity (total equity less intangible assets,
AT1 and non-controlling interests) for a given
period.
------------------------ ---- ----------------------------------------------------------
Statutory return A Statutory profit/(loss) after tax as a percentage
on assets of average total assets for a given period.
------------------------ ---- ----------------------------------------------------------
Statutory basic earnings S Statutory profit/(loss) after tax attributable
per share (EPS) to ordinary equity shareholders including tax relief
on any distributions made to other equity holders
and non-controlling interests, divided by the weighted
average number of ordinary shares in issue for
a given period (excluding own shares held).
------------------------ ---- ----------------------------------------------------------
Underlying RoTE A Underlying profit after tax attributable to ordinary
equity holders, including tax relief on any distributions
made to other equity holders and non-controlling
interests, as a percentage of average tangible
equity (total equity less intangible assets, AT1
and non-controlling interests) for a given period.
------------------------ ---- ----------------------------------------------------------
Underlying CIR A Underlying operating and administrative expenses
as a percentage of underlying total operating income
for a given period.
------------------------ ---- ----------------------------------------------------------
Underlying return A Underlying profit after tax as a percentage of
on assets average total assets for a given period.
------------------------ ---- ----------------------------------------------------------
Underlying basic A Underlying profit after tax attributable to ordinary
EPS equity holders divided by the weighted average
number of ordinary shares in issue for a given
period.
------------------------ ---- ----------------------------------------------------------
Underlying profit A Underlying profit before tax of GBP539m (2018:
after tax attributable GBP581m) less tax charge of GBP77m (2018: GBP101m),
to ordinary equity less AT1 distributions (net of tax relief) of GBP33m
holders (2018: GBP29m), less distributions to non-controlling
interests (net of tax relief) of GBP26m (2018:GBP25m)
and was equal to GBP403m (2018: GBP426m). The underlying
tax charge is calculated by applying the statutory
tax rate for the relevant period to the taxable
items adjusted on the underlying basis.
------------------------ ---- ----------------------------------------------------------
(1) The term 'financial performance measure' covers all metrics,
ratios and percentage calculations used to assess the Group's
performance and is interchangeable with similar terminology used in
the Annual Report and Accounts such as highlights, key metrics, key
performance indicators (KPIs) and key credit metrics.
Additional information
Measuring financial performance - glossary
Asset quality:
Term Type Definition
---------------------- ---- ---------------------------------------------------
Impairment charge A Impairment losses on credit exposures plus credit
to average customer risk adjustment on fair value loans to average
loans (cost of risk) customer loans (defined as loans and advances to
customers, other financial assets at fair value
and due from customers on acceptances).
---------------------- ---- ---------------------------------------------------
Total provision to A Total impairment provision on credit exposures
customer loans as a percentage of total customer loans at a given
date.
---------------------- ---- ---------------------------------------------------
Indexed loan to value A The mortgage portfolio weighted by balance and
(LTV) of the mortgage indexed using the MIAC Acadametrics indices for
portfolio the Clydesdale Bank PLC portfolio while the Virgin
Money Holdings (UK) PLC portfolio is indexed using
the Markit indices.
---------------------- ---- ---------------------------------------------------
Capital optimisation:
Term Type Definition
----------------------- ---- ------------------------------------------------------------
Common Equity Tier R CET1 capital divided by RWAs at a given date.
1 (CET1) ratio
----------------------- ---- ------------------------------------------------------------
Tier 1 ratio R Tier 1 capital as a percentage of RWAs.
----------------------- ---- ------------------------------------------------------------
Total capital ratio R Total capital resources divided by RWAs at a given
date.
----------------------- ---- ------------------------------------------------------------
CRD IV leverage ratio R This is a regulatory standard ratio proposed by
Basel III as a supplementary measure to the risk-based
capital requirements. It is intended to constrain
the build-up of excess leverage in the banking
sector and is calculated by dividing Tier 1 capital
resources by a defined measure of on and off-balance
sheet items plus derivatives.
----------------------- ---- ------------------------------------------------------------
UK leverage ratio R The Group's leverage ratio on a modified basis,
excluding qualifying central bank claims from the
exposure measure in accordance with the policy
statement issued by the PRA in October 2017.
----------------------- ---- ------------------------------------------------------------
Tangible net asset A Tangible equity (total equity less intangible assets,
value (TNAV) per AT1 and non-controlling interests) as at the period
share end divided by the number of ordinary shares in
issue at the year end (excluding own shares held).
----------------------- ---- ------------------------------------------------------------
Pro forma tangible A Tangible equity (total equity less intangible assets,
net asset value (TNAV) AT1 and non-controlling interests) as at the period
per share end divided by the number of ordinary shares in
issue at the period end. For comparative periods,
the number of ordinary shares in issue used in
the calculation is the number of ordinary shares
in issue on 15 October 2018 following the acquisition
of Virgin Money Holdings (UK) PLC (excluding own
shares held).
----------------------- ---- ------------------------------------------------------------
Pro forma underlying A Underlying profit after tax attributable to ordinary
basic earnings per equity shareholders, including tax relief on any
share distributions made to other equity holders and
non-controlling interests, divided by the weighted
average number of ordinary shares in issue for
a given period (excluding own shares held). The
weighted average number of ordinary shares in issue
assumes that the 540,856,644 shares issued on the
acquisition of Virgin Money Holdings (UK) PLC,
was completed on 1 October 2017.
----------------------- ---- ------------------------------------------------------------
Loan to deposit ratio R Customer loans as a percentage of customer deposits
(LDR) at a given date.
----------------------- ---- ------------------------------------------------------------
Liquidity coverage R Measures the surplus (or deficit) of the Group's
ratio (LCR) high quality liquid assets relative to weighted
net stressed cash outflows over a 30-day period.
It assesses whether the Group has sufficient liquid
assets to withstand a short-term liquidity stress
based on cash outflow assumptions provided by regulators.
----------------------- ---- ------------------------------------------------------------
Net stable funding R The total amount of available stable funding divided
ratio (NSFR) by the total amount of required stable funding,
expressed as a percentage. The Group monitors the
NSFR, based on its own interpretations of current
guidance available for CRD IV NSFR reporting. Therefore,
the reported NSFR may change over time with regulatory
developments. Due to possible differences in interpretation
of the rules, the Group's ratio may not be directly
comparable with those of other financial institutions.
----------------------- ---- ------------------------------------------------------------
Additional information
Measuring financial performance - glossary
Underlying adjustments to the pro forma view of performance
On arriving at an underlying basis, the effects of certain items
that do not promote an understanding of historical or future trends
of earnings or cash flows are removed, as management consider that
this presents more comparable results year-on-year. These items are
all significant and are typically one-off in nature. Additional
detail is provided below where considered necessary to further
explain the rationale for their exclusion from underlying
performance, in particular for new items in the current year or
recurring non-underlying items:
2019 2018 Reason for exclusion from the Group's current
Item GBPm GBPm underlying performance
------------------------- ----- ----- -------------------------------------------------------
Restructuring costs (156) - These are part of the Group's publicised
three-year integration plan following the
acquisition of Virgin Money Holdings (UK)
PLC and comprise a number of one-off expenses
that are required to realise the anticipated
cost synergies.
------------------------- ----- ----- -------------------------------------------------------
Acquisition costs: All costs incurred as a direct result of
the acquisition of Virgin Money Holdings
(UK) PLC have been removed from underlying
performance due to the scale and nature of
the transaction. Further information on the
items is provided below to aid understanding.
------------------------- ----- ----- -------------------------------------------------------
Acquisition accounting (87) - 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 (GBP23m gain) and
the IFRS 9 impairment impact on acquired
assets (GBP103m charge) with other smaller
items amounting to GBP7m. 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.
------------------------- ----- ----- -------------------------------------------------------
Intangible asset (127) - The charge for the software write-off is
write-off significant and has arisen in respect of
software assets which are no longer considered
to be of value relative to the Group's strategy
following the acquisition of Virgin Money
Holdings (UK) PLC.
------------------------- ----- ----- -------------------------------------------------------
Mortgage EIR adjustments 80 - The alignment of accounting practices is
a one-off exercise arising from the acquisition.
------------------------- ----- ----- -------------------------------------------------------
Virgin Money Holdings (55) (39) These costs related directly to the transaction
(UK) PLC transaction and comprised legal, advisory and other associated
costs costs required to complete the transaction.
------------------------- ----- ----- -------------------------------------------------------
Total acquisition
costs (189) (39)
------------------------- ----- ----- -------------------------------------------------------
Legacy conduct (433) (396) These costs are historical in nature and
are not indicative of the Group's current
practices.
------------------------- ----- ----- -------------------------------------------------------
Other:
------------------------- ----- ----- -------------------------------------------------------
Consent solicitation (18) - One-off costs relating to the change in obligor
of senior debt from Virgin Money Holdings
(UK) PLC to CYBG on 20 August 2019.
------------------------- ----- ----- -------------------------------------------------------
SME transformation (30) (16) These costs are significant and considered
to be one-off due to the unique growth opportunities
currently available to the Group in respect
of its Business lending.
------------------------- ----- ----- -------------------------------------------------------
Gain on sale of UTM 35 - A one-off gain recognised on the disposal
of 50% (less one share) of Virgin Money Unit
Trust Managers Limited.
------------------------- ----- ----- -------------------------------------------------------
UTM transition costs (1) -
------------------------- ----- ----- -------------------------------------------------------
GMP equalisation (11) - A one-off charge for GMP equalisation in
cost the Group's defined benefit scheme.
------------------------- ----- ----- -------------------------------------------------------
Legacy restructuring (5) (46) These legacy costs were significant in prior
and separation periods and related to the Sustain programme,
and demerger from NAB, both of which completed
in the current period.
------------------------- ----- ----- -------------------------------------------------------
Virgin Money digital
bank termination
costs - (3)
------------------------- ----- ----- -------------------------------------------------------
Gain on disposal
of VocaLink 4 -
------------------------- ----- ----- -------------------------------------------------------
Gain on disposal
of Visa C shares - 3
------------------------- ----- ----- -------------------------------------------------------
Total other (26) (62)
------------------------- ----- ----- -------------------------------------------------------
Additional information
Glossary
Term Definition
------------------------- -----------------------------------------------------------------
Additional Tier 1 Securities that are considered Additional Tier 1 capital
(AT1) in the context of CRD IV.
------------------------- -----------------------------------------------------------------
arrears A customer is in arrears when they fail to adhere to
their contractual payment obligations resulting in an
outstanding loan that is unpaid or overdue.
------------------------- -----------------------------------------------------------------
average assets Represents the average of assets over the year adjusted
for any disposed operations.
------------------------- -----------------------------------------------------------------
B The Group's digital application suite, offering retail
customers money management capabilities across Web,
Android and Apple platforms.
------------------------- -----------------------------------------------------------------
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.
------------------------- -----------------------------------------------------------------
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.
------------------------- -----------------------------------------------------------------
Capped Indemnity The indemnity from NAB in favour of the Group in respect
of certain qualifying conduct costs incurred by the
Group under the terms of the Conduct Indemnity Deed.
------------------------- -----------------------------------------------------------------
carrying value (also The value of an asset or a liability in the balance
referred to as carrying sheet based on either amortised cost or fair value principles.
amount)
------------------------- -----------------------------------------------------------------
collateral The assets of a borrower that are used as security against
a loan facility.
------------------------- -----------------------------------------------------------------
collective impairment Impairment assessment on a collective basis for homogeneous
provision groups of loans that are not considered individually
significant and to cover losses which have been incurred
but have not yet been identified on loans subject to
individual assessment.
------------------------- -----------------------------------------------------------------
Combined Group CYBG, now Virgin Money UK PLC, and its controlled entities
following the acquisition of Virgin Money Holdings (UK)
PLC.
------------------------- -----------------------------------------------------------------
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 The highest quality form of regulatory capital that
1 capital (CET1) comprises total shareholders' equity and related non-controlling
interests, less goodwill and intangible assets and certain
other regulatory adjustments.
------------------------- -----------------------------------------------------------------
Company/CYBG CYBG PLC up until 31 October 2019 and thereafter Virgin
Money UK PLC.
------------------------- -----------------------------------------------------------------
Conduct Indemnity The deed between NAB and CYBG setting out the terms
Deed of:
the Capped Indemnity; and
certain arrangements for the treatment and management
of Relevant Conduct Matters.
------------------------- -----------------------------------------------------------------
conduct risk The risk of treating customers unfairly and/or delivering
inappropriate outcomes resulting in customer detriment,
regulatory fines, compensation, redress costs and reputational
damage.
------------------------- -----------------------------------------------------------------
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 period end shown as a
percentage of gross loans and advances as at the period
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 capital requirements directives with
a revised package consisting of a new Capital Requirements
Directive and a new Capital Requirements Regulation.
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 Credit conversion factors are used in determining the
factor (CCF) exposure at default 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 Financial assets that are in default or have an individually
assets assessed provision. This is also referred to as a 'Stage
3' impairment loss and subject to a lifetime expected
credit loss calculation. The Group considers 90 days
past due as a backstop in determining whether a financial
asset is credit impaired.
------------------------- -----------------------------------------------------------------
Credit risk mitigation Techniques to reduce the potential loss in the event
(CRM) 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.
------------------------- -----------------------------------------------------------------
Additional information
Glossary
Term Definition
----------------------------- --------------------------------------------------------------
credit risk adjustment/credit An adjustment to the valuation of financial instruments
valuation adjustment held at fair value to reflect the creditworthiness of
the counterparty.
----------------------------- --------------------------------------------------------------
customer deposits Money deposited by individuals and corporate entities
that are not credit institutions, and can be either
interest bearing, non-interest bearing or term deposits.
----------------------------- --------------------------------------------------------------
CYBI CYB Investments Limited.
----------------------------- --------------------------------------------------------------
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 pursuant to which
all of the issued share capital of CYBI was transferred
to CYBG by NAB in consideration for the issue and transfer
of CYBG shares to NAB in part for the benefit of NAB
(which NAB subsequently sold pursuant to the IPO) and
in part for the benefit of NAB shareholders under a
scheme of arrangement under part 5.1 of the Australian
Corporations Act.
----------------------------- --------------------------------------------------------------
Demerger date 8 February 2016.
----------------------------- --------------------------------------------------------------
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.
----------------------------- --------------------------------------------------------------
earnings at risk (EaR) A measure of the quantity by which net interest income
might change in the event of an adverse change in interest
rates.
----------------------------- --------------------------------------------------------------
effective interest The carrying value of certain financial instruments
rate (EIR) which amortises the relevant fees over the expected
life of the instrument.
----------------------------- --------------------------------------------------------------
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 The estimate of the amount that the customer will owe
(EAD) 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.
----------------------------- --------------------------------------------------------------
Financial Ombudsman An independent body set up by the UK Parliament to resolve
Service individual complaints between financial businesses and
their customers.
----------------------------- --------------------------------------------------------------
Financial Services The UK's compensation fund of last resort for customers
Compensation Scheme of authorised financial services firms and is funded
(FSCS) by the financial services industry. The FSCS may pay
compensation if a firm is unable, or likely to be unable,
to pay claims against it. This is usually because it
has stopped trading or has been declared in default.
----------------------------- --------------------------------------------------------------
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.
----------------------------- --------------------------------------------------------------
funding risk A form of liquidity risk arising when the liquidity
needed to fund illiquid asset positions cannot be obtained
at the expected terms and when required.
----------------------------- --------------------------------------------------------------
Group CYBG, now 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 new financial instrument accounting standard which
was adopted by the Group with effect from 1 October
2018.
----------------------------- --------------------------------------------------------------
impairment allowances An expected credit loss 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 expected credit loss.
----------------------------- --------------------------------------------------------------
impairment losses The expected credit losses 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 expected
credit loss.
----------------------------- --------------------------------------------------------------
interest rate hedging This incorporates: (i) standalone hedging products identified
products (IRHP) in the Financial Services Authority (FSA) 2012 notice;
(ii) the voluntary inclusion of certain of the Group's
more complex tailored business loan (TBL) products;
and (iii) the Group's secondary review of all fixed-rate
tailored business loans (FRTBLs) complaints which were
not in scope for the FSA notice.
----------------------------- --------------------------------------------------------------
Internal Capital Adequacy The Group's assessment of the levels of capital that
Assessment Process it needs to hold through an examination of its risk
(ICAAP) profile from regulatory and economic capital viewpoints.
----------------------------- --------------------------------------------------------------
Internal Liquidity The Group's assessment and management of balance sheet
Adequacy Assessment risks relating to funding and liquidity.
Process (ILAAP)
----------------------------- --------------------------------------------------------------
Additional information
Glossary
Term Definition
--------------------------- ---------------------------------------------------------------
Internal Ratings-Based A method of calculating credit risk capital requirements
approach (IRB) 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 Financial instruments whose fair value is derived from
measurements unadjusted quoted prices for identical instruments in
active markets.
--------------------------- ---------------------------------------------------------------
Level 2 fair value Financial instruments whose fair value is derived from
measurements quoted prices for similar instruments in active markets
and financial instruments valued using models where
all significant inputs are observable.
--------------------------- ---------------------------------------------------------------
Level 3 fair value Financial instruments whose fair value is derived from
measurements valuation techniques where one or more significant inputs
are unobservable.
--------------------------- ---------------------------------------------------------------
Lifetime expected The expected credit loss calculation performed on financial
credit loss assets where a significant increase in credit risk 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 United
Kingdom 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 A ratio that expresses the amount of a loan as a percentage
(LTV) of the value of the property on which it is secured.
--------------------------- ---------------------------------------------------------------
Loss given default The estimate of the loss that the Group will suffer
(LGD) if the customer defaults (incorporating the effect of
any collateral held).
--------------------------- ---------------------------------------------------------------
medium-term notes Debt instruments issued by corporates, including financial
institutions, across a range of maturities.
--------------------------- ---------------------------------------------------------------
Minimum Requirement MREL is a minimum requirement for institutions to maintain
for Own Funds and equity and eligible debt liabilities, to help ensure
Eligible Liabilities that when an institution fails the resolution authority
(MREL) can use these financial resources to absorb losses and
recapitalise the continuing business.
--------------------------- ---------------------------------------------------------------
net interest income The amount of interest received or receivable on assets,
net of interest paid or payable on liabilities.
--------------------------- ---------------------------------------------------------------
Net Promoter Score This is an externally collated customer loyalty metric
(NPS) that measures loyalty between a provider, who in this
context is the Group, and a consumer.
--------------------------- ---------------------------------------------------------------
operational risk The risk of loss resulting from inadequate or failed
internal processes, people strategies and systems or
from external events.
--------------------------- ---------------------------------------------------------------
Overall Liquidity An FCA and PRA rule that firms must at all times maintain
Adequacy Rule (OLAR) liquidity resources which are adequate both as to amount
and quality, to ensure that there is no significant
risk that its liabilities cannot be met as they fall
due. This is included in the Group's risk appetite and
subject to approval by the Board as part of the ILAAP.
--------------------------- ---------------------------------------------------------------
pension risk The risk that, at any point in time, the available assets
to meet pension liabilities are at a value below current
and future scheme obligations.
--------------------------- ---------------------------------------------------------------
Personal lending Lending to individuals rather than institutions and
excludes mortgage lending which is reported separately.
--------------------------- ---------------------------------------------------------------
PPI redress Includes PPI customer redress and all associated costs
excluding fines.
--------------------------- ---------------------------------------------------------------
probability of default The probability that a customer will default over either
(PD) the next 12 months or lifetime of the account.
--------------------------- ---------------------------------------------------------------
regulatory capital The capital which the Group holds, determined in accordance
with rules established by the PRA.
--------------------------- ---------------------------------------------------------------
Relevant Conduct Matters The legacy conduct issues covered by the Capped Indemnity,
including certain conduct issues relating to PPI, standalone
IRHP, voluntary scope TBLs and FRTBLs and other conduct
matters in the period prior to the Demerger date whether
or not known at the Demerger date.
--------------------------- ---------------------------------------------------------------
residential mortgage-backed Securities that represent interests in groups or pools
securities (RMBS) of underlying mortgages. Investors in these securities
have the right to cash received from future mortgage
payments (interest and principal).
--------------------------- ---------------------------------------------------------------
ring-fencing A new 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 assets On and off-balance sheet assets of the Group are allocated
(RWA) a risk weighting based on the amount of capital required
to support the asset.
--------------------------- ---------------------------------------------------------------
sale and repurchase A short-term funding agreement that allows a borrower
agreement ('repo') 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.
--------------------------- ---------------------------------------------------------------
Additional information
Glossary
Term Definition
--------------------- --------------------------------------------------------------
Scheme The Group's defined benefit pension scheme, the Yorkshire
and Clydesdale Bank Pension Scheme.
--------------------- --------------------------------------------------------------
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 than can achieve a
reduction in funding costs by offering typically 'AAA'
rated securities secured by the underlying financial
asset.
--------------------- --------------------------------------------------------------
Significant increase The assessment performed on financial assets at the
in credit risk reporting date to determine whether a 12-month or lifetime
expected credit loss calculation is required. Qualitative
and quantitative triggers are assessed in determining
whether there has been a significant increase in credit
risk since origination. The Group considers 30 days
past due as a backstop in determining whether a significant
increase in credit risk since origination has occurred.
--------------------- --------------------------------------------------------------
specific impairment A specific provision relates to a specific loan, and
provision represents the estimated shortfall between the carrying
value of the asset and the estimated future cash flows,
including the estimated realisable value of securities
after meeting securities realisation costs.
--------------------- --------------------------------------------------------------
standardised approach In relation to credit risk, a method for calculating
credit risk capital requirements using External Credit
Assessment Institutions (ECAI) 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 entities An entity created to accomplish a narrow well-defined
(SE) 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 Launched in 2016 by the BoE to allow banks and building
(TFS) 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
in issue, subject to deductions.
--------------------- --------------------------------------------------------------
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.
--------------------- --------------------------------------------------------------
unaudited Financial information that has not been subject to validation
by the Group's external auditor.
--------------------- --------------------------------------------------------------
underlying capital The amount of capital generated by the business in basis
generation points over a given period, before non--underlying items
are included.
--------------------- --------------------------------------------------------------
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.
--------------------- --------------------------------------------------------------
Virgin Money Virgin Money UK PLC
--------------------- --------------------------------------------------------------
Virgin Money Holdings Virgin Money Holdings (UK) PLC
--------------------- --------------------------------------------------------------
Additional information
Abbreviations
AIRB Advanced internal
ratings-based
----- ---------------------------
ALCO Asset and Liability
Committee
----- ---------------------------
API Application programming
interface
----- ---------------------------
ASX Australian Securities
Exchange
----- ---------------------------
AT1 Additional Tier
1
----- ---------------------------
BCAs Business current
accounts
----- ---------------------------
BCBS Basel Committee
on Banking Supervision
----- ---------------------------
BoE Bank of England
----- ---------------------------
bps Basis points
----- ---------------------------
BTL Buy-to-let
----- ---------------------------
CAGR Compound Annual
Growth Rate
----- ---------------------------
CCB Capital Conservation
Buffer
----- ---------------------------
CCF Credit conversion
factor
----- ---------------------------
CCyB Countercyclical
Capital Buffer
----- ---------------------------
CET1 Common Equity Tier
1 Capital
----- ---------------------------
CIR Cost to income ratio
----- ---------------------------
CMA Competition and
Markets Authority
----- ---------------------------
CPI Consumer Price Index
----- ---------------------------
CRD Capital Requirements
IV Directive IV
----- ---------------------------
CRM Credit risk mitigation
----- ---------------------------
CRR Capital Requirements
Regulation
----- ---------------------------
CSR Corporate Social
Responsibility
----- ---------------------------
DEP Deferred Equity
Plan
----- ---------------------------
DPD Days past due
----- ---------------------------
DTR Disclosure and Transparency
Rules
----- ---------------------------
EAD Exposure at default
----- ---------------------------
EaR Earnings at risk
----- ---------------------------
EBA European Banking
Authority
----- ---------------------------
ECL Expected credit
loss
----- ---------------------------
EIR Effective interest
rate
----- ---------------------------
EPS Earnings per share
----- ---------------------------
FCA Financial Conduct
Authority
----- ---------------------------
FIRB Foundation internal
ratings-based
----- ---------------------------
FPC Financial Policy
Committee
----- ---------------------------
FRC Financial Reporting
Council
----- ---------------------------
FSCS Financial Services
Compensation Scheme
----- ---------------------------
FSMA Financial Services
and Markets Act
2000
----- ---------------------------
FTE Full time equivalent
----- ---------------------------
FVOCI Fair value through
other comprehensive
income
----- ---------------------------
FVTPL Fair value through
profit or loss
----- ---------------------------
GDPR General Data Protection
Regulation
----- ---------------------------
GHG Greenhouse Gases
----- ---------------------------
GMP Guaranteed Minimum
Pension
----- ---------------------------
HMRC Her Majesty's Revenue
and Customs
----- ---------------------------
HQLA High Quality Liquid
Assets
----- ---------------------------
IAS International Accounting
Standard
----- ---------------------------
IASB International Accounting
Standards Board
----- ---------------------------
ICAAP Internal Capital
Adequacy Assessment
Process
----- ---------------------------
IFRS International Financial
Reporting Standard
----- ---------------------------
ILAAP Internal Liquidity
Adequacy Assessment
Process
----- ---------------------------
ILO International Labour
Organisation
----- ---------------------------
IPO Initial Public Offering
----- ---------------------------
IRB Internal ratings-based
----- ---------------------------
IRHP Interest rate hedging
products
----- ---------------------------
IRRBB Interest rate risk
in the banking book
----- ---------------------------
ISDA International Swaps
and Derivatives
Association
----- ---------------------------
JV Joint venture
----- ---------------------------
LCR Liquidity coverage
ratio
----- ---------------------------
LDR Loan to deposit
ratio
----- ---------------------------
LGD Loss Given Default
----- ---------------------------
LIBOR London Interbank
Offered Rate
----- ---------------------------
LSE London Stock Exchange
----- ---------------------------
LTIP Long-term incentive
plan
----- ---------------------------
LTV Loan to value ratio
----- ---------------------------
MREL Minimum Requirement
for Own Funds and
Eligible Liabilities
----- ---------------------------
MRT Material Risk Takers
----- ---------------------------
NAB National Australia
Bank Limited
----- ---------------------------
NIM Net interest margin
----- ---------------------------
NPS Net promoter score
----- ---------------------------
NSFR Net stable funding
ratio
----- ---------------------------
OLAR Overall liquidity
adequacy rule
----- ---------------------------
PBT Profit before tax
----- ---------------------------
PCA Personal current
accounts
----- ---------------------------
PD Probability of Default
----- ---------------------------
PILON Payment in lieu
of notice
----- ---------------------------
POCI Purchased or originated
credit impaired
----- ---------------------------
PPI Payment protection
insurance
----- ---------------------------
PRA Prudential Regulation
Authority
----- ---------------------------
RAS Risk Appetite Statement
----- ---------------------------
RMBS Residential mortgage-backed
securities
----- ---------------------------
RMF Risk Management
Framework
----- ---------------------------
RoTE Return on Tangible
Equity
----- ---------------------------
RPI Retail Price Index
----- ---------------------------
RWA Risk weighted assets
----- ---------------------------
SICR Significant increase
in credit risk
----- ---------------------------
SIP Share Incentive
Plan
----- ---------------------------
SME Small or medium
sized enterprises
----- ---------------------------
SRB Systemic Risk Buffer
----- ---------------------------
SVR Standard variable
rate
----- ---------------------------
TCC Transactional Credit
Committee
----- ---------------------------
TFS Term Funding Scheme
----- ---------------------------
TNAV Tangible net asset
value
----- ---------------------------
TSA Transitional Services
Agreement
----- ---------------------------
TSR Total Shareholder
Return
----- ---------------------------
VAA Virgin Atlantic
Airways
----- ---------------------------
VaR Value at risk
----- ---------------------------
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 and Accounts.
2019
UK
------------------------------- ------
Average FTE employees (number) 8,703
Total operating income (GBPm) 1,749
Loss before tax (GBPm) 232
Corporation tax paid (GBPm) 7
Public subsidies received
(GBPm) -
------------------------------- ------
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.
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 2019 were approved by the directors on 27
November 2019 and will be delivered to the Registrar of Companies
following publication in December 2019. 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.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR CKFDKABDKQDB
(END) Dow Jones Newswires
November 28, 2019 02:01 ET (07:01 GMT)
Ve Bionic Etf (LSE:CYBG)
Historical Stock Chart
Von Jun 2024 bis Jul 2024
Ve Bionic Etf (LSE:CYBG)
Historical Stock Chart
Von Jul 2023 bis Jul 2024
