TIDMVMUK TIDM91XR
RNS Number : 0365M
Virgin Money UK PLC
06 May 2020
VIRGIN MONEY UK PLC
INTERIM FINANCIAL REPORT
SIX MONTHS TO 31 MARCH 2020
Virgin Money UK PLC is registered in England and Wales (company number:
09595911) and as a foreign company in Australia (ARBN 609 948 281) and
has its registered office at Jubilee House, Gosforth, Newcastle upon
Tyne, NE3 4PL.
BASIS OF PRESENTATION
Virgin Money UK PLC ('Virgin Money' or 'the Company'), together with
its subsidiary undertakings (which together comprise the 'Group'), operate
under the Clydesdale Bank, Yorkshire Bank, B and Virgin Money brands.
It offers a range of banking services for both retail and business customers
through retail branches, lounges, business banking centres, direct and
online channels, and brokers. This release covers the results of the
Group for the six months ended 31 March 2020.
Statutory basis: Statutory information is set out on page 18 and within
the interim condensed consolidated financial statements.
Pro forma comparative 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 provide additional
information which is more readily comparable with the current year results
of the combined businesses. Therefore we have prepared pro forma comparative
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. A reconciliation between the results
on a comparative pro forma basis and a statutory basis is included on
page 17. The pro forma comparative results are also presented on an
underlying basis as there were a number of factors which had a significant
effect on the comparability of the Group's financial position and results.
Any reference to pro forma results relates to the prior period only
as the pro forma basis is not applicable in the current period due to
the combined group being in operation for the entire six months to 31
March 2020.
Underlying basis: The results are adjusted to remove certain items
that do not promote an understanding of historical or future trends
of earnings or cash flows, and therefore allows a more meaningful comparison
of the Group's underlying performance. A reconciliation from the underlying
results to the statutory basis is shown on page 17 and management's
rationale for the adjustments is shown on page 80.
Alternative performance measures: the financial key performance indicators
(KPIs) used by management in monitoring the Group's performance and
reflected throughout this report are determined on a combination of
bases (including statutory, regulatory and alternative performance measures),
as detailed at 'Measuring financial performance - glossary' on pages
278 to 279 of the Group Annual Report and Accounts for the year ended
30 September 2019.
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,
macro-economic and/or geopolitical factors, the repercussions of
the outbreak of coronavirus (including but not limited to the
COVID-19 outbreak), changes to its board and/or employee
composition, exposures to terrorist activity, IT system failures,
cyber -- crime, fraud and pension scheme liabilities, changes to
law and/or the policies and practices of the Bank of England (BoE),
the Financial Conduct Authority (FCA) and/or other regulatory and
governmental bodies, inflation, deflation, interest rates, exchange
rates, changes in the liquidity, capital, funding and/or asset
position and/or credit ratings of the Group and future capital
expenditures and acquisitions.
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.
Interim financial report
For the six months ended 31 March 2020
Contents
Virgin Money UK PLC Interim Results 2020 1
Business and financial review 3
Risk management 19
Statement of Directors' responsibilities 48
Independent review report to Virgin Money UK PLC 49
Financial statements 50
Interim condensed consolidated income statement 50
Interim condensed consolidated statement of comprehensive income 51
Interim condensed consolidated balance sheet 52
Interim condensed consolidated statement of changes in equity 53
Interim condensed consolidated statement of cash flows 54
Notes to the interim condensed consolidated financial statements 55
Additional information 80
Virgin Money UK PLC Interim Results 2020
David Duffy, Chief Executive Officer:
"The COVID-19 outbreak and its impact on the nation's businesses
and consumers has markedly changed the operating environment,
driving an increased impairment charge of GBP232m against future
loan losses and a reduction in underlying profitability. While we
delivered a resilient performance and continued to make good
progress on our self-help strategy in the first half of the year,
our primary objective now is safeguarding the health and well-being
of our colleagues, customers and communities while also protecting
the bank.
We enter this period from a position of strength, with a
defensive loan book and resilient capital position, meaning we are
well-placed to help our customers and colleagues through the
crisis. We have rapidly adapted our operations, products and
services and I am extremely proud of how our colleagues have risen
to the challenge and continued to provide the very best support and
advice to our customers. To date we've directly supported over
100,000 retail customers and around 4,500 businesses. We continue
to work closely with Government, regulators and the industry to
ensure we maximise our support to customers and the UK economy.
Amid the uncertainty, it is clear that the pandemic will have
long-lasting and wide-ranging effects on how companies do business
and on what customers will expect from the organisations they
choose to interact with. Although the full impacts from the
COVID-19 outbreak will take time to emerge, I'm confident that our
agility, digital capabilities and focus on disrupting the status
quo will make us stronger and well-equipped to support changing
customer needs and play our part in the UK's economic
recovery."
H1 financial highlights
-- Balance sheet mix optimisation continued with loan growth of
0.3% to GBP73.2bn and deposit growth of 1.4% to GBP64.7bn:
o Business lending growth of 5.7% in H1 to GBP8.3bn and Personal
lending growth of 6.2% to GBP5.3bn
o Mortgage lending declined 0.9% to GBP59.5bn as we maintained
our disciplined approach to margin management
o Relationship deposits grew 4.3% to GBP22.3bn as we
successfully implemented our strategy
-- Pre-provision operating profit of GBP352m is 3% lower
year-on-year due to the expected NIM compression:
o H1 NIM of 1.62% within guidance range (Q2: 1.63%); asset mix
benefits more than offset mortgage impact in H1
o Non-interest income stable; GBP16m gilts sale gain offset
absence of investment fee income now recorded in ASI JV
o Operating costs of GBP465m down 3% YoY; cost:income ratio of
57%; GBP76m of net run-rate cost savings now delivered
-- Total impairment charge of GBP232m (63bps cost of risk);
pre-COVID-19 credit quality robust at 23bps cost of risk
o COVID-19 balance sheet impairment provision of GBP164m derived
through three-stage approach: (1) re-weighted our IFRS 9 models
100% to existing multi-year "severe downside" scenario; (2) applied
expert credit risk judgement overlays; (3) modelled a "pandemic
shock" scenario for Business & Credit Card portfolios
incorporating a 10% GDP decline and peak unemployment of 9.7%
o COVID-19 impairment provision divisional split of: GBP110m
Business, GBP39m Personal and GBP15m Mortgages
o Considerable on balance sheet provision reserves of GBP542m;
coverage ratio of 75bps
-- Underlying profit of GBP120m (H119: GBP286m) is down 58% YoY
primarily due to the COVID-19 impairment charge
-- Statutory profit after tax of GBP22m reflects GBP127m of
exceptional items, including GBP61m of integration &
transformation costs
-- Good progress on PPI processing with no provision required in
the period; current uphold rates much lower than planned
-- CET1 ratio of 13.0% reduced 0.3%pts primarily due to higher
RWAs from a planned mortgage model change
o COVID-19 impairment P&L charge was fully absorbed with no
CET1 capital impact due to an offset against the Group's existing
Excess Expected Loss (EEL) capital deduction of c.GBP90m and IFRS 9
transitional relief
-- Guidance: FY20 NIM of 155-160bps and costs of <GBP920m
reflecting lower interest rate environment and COVID-19 impacts
Supporting our customers, colleagues & communities
-- Working with Government, regulators and the industry to
introduce new measures to support customers impacted by COVID-19,
while implementing additional flexibility and product changes to
bring further relief to customers in need:
o Supported c.4.5k businesses with lending support facilities
including c.GBP135m of CBILS loans approved to date
o c.40k Personal lending payment holidays granted to date;
<2% of our cards customers & c.6% of personal loans
o Mortgage payment holidays granted to c.60k customers; c.15% of
our mortgage customers
-- Re-phasing of Transformation programmes helps ensure we can
maximise support for our customers; Virgin Money re-launch,
re-branding and customer proposition developments delayed to
maximise impact and defer associated costs
-- No colleagues furloughed and no plans to do so; previously
announced redundancies now on hold
-- c.6k of our c.9k colleagues enabled to work from home, with support available for caring responsibilities and well-being
-- >GBP850k being distributed to local charities supporting
the COVID-19 effort by the Virgin Money Foundation; Virgin Money
covering the Virgin Money Giving platform fee until the end of the
current lockdown period
Well positioned for an uncertain outlook
-- Defensive loan book: 82% in high-quality mortgages, 11% in
diversified Business lending with no material exposures to the more
immediately impacted sectors and 7% Personal lending, primarily in
prime, high-quality credit cards
-- Resilient capital base heading into an uncertain environment:
CET1 ratio of 13.0% with c.GBP800m of management buffer:
o Additional RWA optimisation initiatives include credit card
IRB accreditation, hybrid mortgage models and Business
improvements; c.5-10% reduction in current RWAs potentially
available (excluding impact of future RWA migration)
o Further capital resilience levers with deferred integration
& transformation costs and potential PPI provision surplus
-- Strong liquidity: LCR of 139% and high-quality liquid asset
portfolio comprised mainly of cash and gilts.
-- Prudent funding: no wholesale funding requirement for 9-12
months if required and no short-term wholesale funding reliance
Contact details
For further information, please contact:
Investors and Analysts
Andrew Downey +44 7823 443150
Head of Investor Relations andrew.downey@virginmoneyukplc.com
Richard Smith +44 7483 399 303
Senior Manager, Investor Relations richard.smith@virginmoneyukplc.com
Martin Pollard +44 7894 814 195
Investor Relations Manager martin.pollard@virginmoneyukplc.com
Media (UK)
Matt Magee +44 7411 299477
Head of Media Relations matthew.magee@virginmoneyukplc.com
Christina Kelly +44 7484 905 358
Senior Media Relations Manager christina.kelly@virginmoneyukplc.com
Simon Hall +44 7855 257 081
Senior Media Relations Manager simon.hall@virginmoney.com
Press Office +44 800 066 5998
press.office@virginmoneyukplc.com
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 today be hosting a presentation for
analysts and investors covering the 2020 interim financial results
starting at 08:30 BST (17:30 AEST) and this will be webcast live
and is available at:
https://webcast.openbriefing.com/virginmoney-ir/
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
Financial Performance - underlying basis
Summary income statement - underlying basis
Pro forma
6 months 6 months 6 months
to to to
31 Mar 31 Mar 2019 Change 30 Sep 2019 Change
2020
GBPm GBPm % GBPm %
Underlying net interest income 702 728 (4) 705 -
Underlying non-interest income 115 115 - 91 26
Total underlying operating income 817 843 (3) 796 3
Underlying operating and administrative
expenses (465) (480) (3) (467) -
Underlying operating profit before
impairment losses 352 363 (3) 329 7
-------- ----------- -----------
Impairment losses on credit exposures
(pre COVID-19) (86) (77) 12 (76) 13
Impairment charge for COVID-19 (146) - -
-------- ----------- -----------
Total impairment losses on credit
exposures (232) (77) 201 (76) 205
------------------------------------------ -------- ----------- ------ ----------- ------
Underlying profit on ordinary activities
before tax 120 286 (58) 253 (53)
- Integration and transformation
costs (61) (45) 36 (111) (45)
- Acquisition accounting unwinds (57) (67) (15) (20) 185
- Legacy conduct costs - (33) (100) (400) (100)
- Other items (9) (132) (93) 4 (325)
------------------------------------------ -------- ----------- ------ ----------- ------
Statutory/pro forma (loss)/profit
on ordinary activities before tax (7) 9 n/a (274) (97)
Tax credit 29 - 58 (50)
------------------------------------------ -------- ----------- ------ ----------- ------
Statutory/pro forma profit/(loss)
after tax 22 9 144 (216) n/a
------------------------------------------ -------- ----------- ------ ----------- ------
Key performance indicators(1)
Pro forma
6 months 6 months 6 months
to to to
31 Mar
2020 31 Mar 2019 Change 30 Sep 2019 Change
Profitability:
Net interest margin 1.62% 1.71% (9)bps 1.61% 1bps
Underlying return on tangible
equity (RoTE) 4.6% 10.4% (5.8)%pts 11.2% (6.6)%pts
Underlying cost to income
ratio (CIR) 57% 57% - 59 % (2)%pts
Underlying return
on assets 0.25% 0.49% (24)bps 0.54% (29)bps
Underlying earnings per share (EPS) 5.7p 13.4p (7.7)p 14.7p (9.0)p
(1) For a definition of each of the KPIs, refer to 'Measuring financial
performance - glossary' on pages 278 to 279 of the Group Annual Report
and Accounts for the year ended 30 September 2019. The KPIs include statutory,
regulatory and alternative performance measures. Where applicable certain
KPIs are calculated on an annualised basis for the periods to 31 March.
Business and financial review
Financial Performance - underlying basis
Key performance indicators (continued)
31 Mar 31 Mar 30 Sep
As at: 2020 2019 Change 2019 Change
Asset quality
Cost of risk pre
COVID-19(1) 0.23% 0.21% 2bps 0.21% 2bps
Cost of risk post
COVID-19(1) 0.63% n/a n/a n/a n/a
Total provision to
customer loans
pre COVID-19 0.55% 0.52% 3bps 0.53% 2bps
Total provision to
customer loans
post COVID-19 0.75% n/a n/a n/a n/a
Indexed loan to value
ratio (LTV)
of mortgage portfolio
(2) 57.1% 58.2% (1.1)%pts 57.2% (0.1)%pts
-------------------------- --------------------- --------- ---------
Regulatory Capital:
Common equity tier 1
(CET1)
ratio 13.0% 14.5% (1.5)%pts 13.3% (0.3)%pts
Tier 1 ratio 16.6% 18.6% (2)%pts 17.1% (0.5)%pts
Total capital ratio 19.5% 21.9% (2.4)%pts 20.1% (0.6)%pts
Minimum requirement for
own funds
and eligible liabilities
(MREL) ratio 25.6% 25.2% 0.4%pts 26.6% (1.0)%pts
Capital Requirement
Directive IV
(CRD IV) leverage ratio 4.4% 4.7% (0.3)%pts 4.3% 0.1%pts
UK leverage ratio 4.9% 5.3% (0.4)%pts 4.9% -%pts
Tangible net asset value
(TNAV) per
share 252.5p 260.1p (7.6)p 249.2p 3.3p
Funding and Liquidity:
Loan to deposit
ratio (LDR) 113% 118% (5)%pts 114% (1)%pts
Liquidity coverage
ratio
(LCR) 139% 158% (19)%pts 152% (13)%pts
Net stable funding
ratio
(NSFR) 129% 125% 4%pts 128% 1%pts
(1) Cost of risk is calculated on an annualised basis.
(2) 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.
Summary balance sheet
As at
31 Mar 30 Sep 2019 Change
2020
GBPm GBPm %
Customer loans 73,183 72,979 0.3
of which Mortgages 59,521 60,079 (0.9)
of which Business 8,327 7,876 5.7
of which Personal 5,335 5,024 6.2
Other financial assets 14,868 16,391 (9.3)
Other non-financial assets 2,003 1,629 23.0
Total assets 90,054 90,999 (1.0)
Customer deposits 64,652 63,787 1.4
of which relationship
deposits(1) 22,268 21,347 4.3
of which non-linked
savings 20,270 20,197 0.4
of which term deposits 22,114 22,243 (0.6)
Wholesale funding 16,835 18,506 (9.0)
Other liabilities 3,493 3,685 (5.2)
Total liabilities 84,980 85,978 (1.2)
Ordinary shareholders'
equity 4,159 4,106 1.3
Additional Tier 1 (AT1)
equity 915 915 -
Equity 5,074 5,021 1.1
Total liabilities and
equity 90,054 90,999 (1.0)
---------------------------- -------------------------------- ------------ ------
Risk Weighted Assets
(RWAs) 25,173 24,046 4.7
---------------------------- -------------------------------- ------------ ------
(1) Current account and linked savings balances.
Business and financial review
Chief Executive Officer's statement
"We delivered a resilient performance and continued to make good
progress on our self-help strategy in the first half of the year.
Our primary objective now is to safeguard the health and well-being
of our customers, colleagues and communities while also protecting
the bank."
In these unprecedented times I want to first extend my best
wishes to all our customers, colleagues and investors in remaining
safe and well. Our overriding priorities are the health and
economic well-being of our customers, colleagues and communities
while protecting our bank. Our current expectation is for a sharp
shock to the UK economy before a gradual recovery, but the timing
and macro-economic assumptions are still very uncertain. However,
we enter this period from a position of strength with a defensive
loan book, resilient capital, liquidity and funding, and
experienced management and colleagues, meaning we are well placed
to deliver the right outcomes for all our stakeholders to best
support them through this current crisis. Undoubtedly COVID-19 will
have significant implications for us and the wider economy;
however, I feel confident that our agility, digital capabilities
and focus on disrupting the status quo will equip us to best
support changing customer needs and play our part in the UK's
economic recovery longer-term.
Resilient H1 operating performance
We are pleased to report a resilient first half performance and
the dynamics were as anticipated with the continued delivery of our
strategic self-help actions bearing fruit. We have continued with
our balance sheet mix optimisation strategy by selectively growing
in Business and Personal lending, both up c.6% in the half and
remaining disciplined in Mortgages which were 1% lower. As
expected, our margin stabilised in Q1 and then slightly expanded in
Q2, rising 2bps to 1.62% for H1 2020, but overall income of GBP817m
was 3% lower year-on-year due to the expected NIM compression
relative to H1 2019. Costs were down 3% year-on-year to GBP465m,
giving a stable 57% cost:income ratio, and our Transformation
programme delivered further net run-rate cost savings, reaching a
total of GBP76m to date. Asset quality remained strong in H1 with
GBP86m of pre-COVID-19 impairments equivalent to a 23bps cost of
risk. However, given the uncertain environment and likelihood of
higher impairments in the future, this was supplemented by a
COVID-19 impairment P&L charge of GBP146m for a total
impairment P&L charge of GBP232m (63bps cost of risk). We have
therefore delivered underlying profit before tax of GBP120m with an
underlying return on tangible equity of 4.6%, both impacted by the
scale of the impairment provision. Statutory profit after tax of
GBP22m was improved on 2019 with lower exceptional item charges of
GBP127m and no PPI or other conduct charges, and a tax credit from
statutory corporation tax rate changes.
Supporting our Customers
Our immediate focus is on supporting our customers through what
will be a challenging period for many. As at the end of April,
we've already directly supported over 100k customers across the
bank and continue to actively engage with any customers who may
face COVID-19-related difficulties. Close coordination between the
Government, regulators, central bank and the industry will continue
to be important in delivering the best outcomes for customers and
the UK economy; we recognise the important role banks play in this
environment and we are committed to supporting our customers in
these tough times.
In our Mortgage division we are supporting both homeowners and
buy-to-let landlords. We've processed c60k applications for
mortgage payment holidays to date, equivalent to c.15% of our
mortgage customers. Although lockdown has significantly impacted
the house purchase market given the inability to conduct physical
valuations, we have expanded our use of desktop valuations to
support our existing customers looking to transfer their products
along with some prudent new-to-bank customer remortgage activity.
We are also extending the length of mortgage offers for those
part-way through transactions. As market restrictions loosen in
time, we will be ready to resume our full mortgage offering.
Within our Personal division, we have seen debit card activity
reduce by c.30% since pre-COVID-19 and Virgin Money retail credit
card activity reduce c.40% over the same period. Our GBP5.3bn
Personal lending book comprises our GBP4.2bn high-quality and
affluent customer targeted credit card portfolio and our small
GBP1.1bn prime personal loans portfolio. Both books continued to
perform well in the first half, but we have granted c.32k payment
holidays in credit cards (<2% of customers) and c.8k in personal
loans (c.6% of customers). We had already, ahead of the FCA's
announcement, implemented the regulatory requirements now in place
for impacted unsecured lending such as the offer of GBP500 interest
free overdrafts and the fair treatment of customers in distress,
and we remain committed to delivering the right outcomes for our
customers.
In our Business division, our focus is on supporting existing
customers and extending facilities to ensure, wherever possible,
viable businesses are supported through a period of cash flow
challenges. A combination of proactive, early engagement and
delegated responsibility to enable our specialist Relationship
Managers to agree speedy support for businesses has been key in
delivering this. Our book remains well diversified with limited
exposure to the more immediately impacted sectors and around two
thirds is either fully or partially collateralised. To date, we
have supported businesses with c.4.5k of lending facilities,
overdrafts and capital repayment holidays, including c.GBP135m of
support via the Government's CBILS scheme. We are also committed to
supporting the Government's Bounce Back and CLBILS lending
initiatives.
Finally, in our deposit-raising businesses, we've seen limited
requests to withdraw substantial deposits to date, but we remain
ready to allow customers in difficulty to access funds penalty-free
where necessary. During the month of April, we have seen increased
deposit inflows as customers spend less during lockdown, but it is
not clear whether this is just a temporary impact.
Business and financial review
Chief Executive Officer's statement
On top of providing targeted financial support, we have been
helping customers manage their money and businesses while social
restrictions are in place by enabling them to bank safely from home
using mobile or web and being there for them when they need to
speak to us. We have consistently maintained branch services with
>95% of our locations currently open, and although contact
centres have inevitably had to reduce their opening hours, they are
functioning well with waiting times still near pre-COVID-19
levels.
With so much uncertainty right now, we recognise that consumers
and business owners sometimes just need to speak to someone they
trust about financial matters in general which is why we've
launched a new 'Money on your Mind' service. Customers and
non-customers alike can post these broader questions and get
answers to them from our helpful and knowledgeable 'Red Team'.
Supporting our Colleagues
I've been incredibly proud of the response of our colleagues to
the current uncertainty as they continued to support our customers
with their usual diligence, passion and professionalism. In return,
we are doing everything we can to support and keep them safe. We
have not furloughed any colleagues and have no plans to do so.
Where possible, we have ensured colleagues are able to work
remotely, and currently have c.6k of our 9k colleagues working from
home. For those colleagues classified as critical workers who are
still coming into our branches or offices to serve customers, we
have social distancing measures in place, increased cleaning and
are covering the costs of these colleagues' lunches and
commutes.
During the first half we announced a series of branch closures
and redundancies as part of our ongoing Transformation programme,
but it is right that we pause those for now to give our colleagues
across the Group greater certainty in this unprecedented
situation.
While we remain committed to our Transformation programme, it's
right to pause these activities and allow greater focus on
delivering for our customers. The higher digital adoption we've
seen from customers, with digital enrolments up 40% in April and
50% of customers previously inactive online now active and using
the service, has been supported by our strong digital
infrastructure and capabilities. These changing preferences will
provide us with new opportunities to accelerate our digital
transformation in the future.
Supporting our Communities
Virgin Money's strong heritage of community support positions us
well to extend this support during the current crisis and has
enabled us to act quickly and direct help to where it's needed
most. The Virgin Money Foundation has made >GBP850k of funding
available for local charities responding to the COVID-19 pandemic
and is running virtual webinars to share expertise and advice.
Meanwhile, Virgin Money Giving - the not-for-profit digital
fundraising platform owned by Virgin Money - stepped in quickly to
assist charities who found many of their usual fundraising methods
impossible during the government lockdown. It launched a virtual
fundraising hub, a competition for fundraisers to win money for
their charity and enabled the public to donate old books and games
to charity from their doorstep. Virgin Money Giving has never
sought to make a profit from the service it provides, meaning that
more money goes to good causes. It charges a small platform fee to
cover the costs of running a safe, secure and user-friendly service
and we have committed to Virgin Money covering this fee until the
end of the current lockdown period. By doing this we hope that the
efforts of donors and fundraisers go that little bit further to
help charities that are reliant on their support in this
challenging time.
In support of parents across the country who are home-schooling
during lockdown, we have launched a digital version of our
successful school entrepreneurship programme, Make GBP5 Grow. It's
completely free and offers easy-to-follow learning modules that
take children through the steps of setting up and running a
mini-business. Our colleagues are also passionate about supporting
their communities and we are helping them do so with new remote
volunteering opportunities and easy ways to donate, enabling them
to support the causes closest to their hearts.
Protecting our Bank
Since the IPO, we have been very focused on building a defensive
and diversified balance sheet. In our Business division in
particular this has seen us take very deliberate actions to reduce
our previous exposures in areas such as large corporates, oil and
gas, high street retail and speculative development commercial real
estate, and to not originate new lending in these sectors. In
addition, we have significantly strengthened our credit risk
function over the past few years, as evidenced by the regulator's
approval of our IRB application. Across all of our portfolios, we
have strong teams with experience of managing through past
downturns.
Our defensive balance sheet comprises 82% of high-quality
Mortgages, 11% of well diversified relationship-driven Business
lending with no material exposures to the more immediately impacted
sectors and 7% of Personal lending primarily in a prime credit card
book of affluent customers.
We retain a resilient capital base with a CET1 ratio of 13.0%
providing c.GBP800m of CET1 management buffer and with further
capital resilience levers at our disposal. We also maintain a
strong liquidity position with an LCR of 139% and are prudently
funded with a 113% loan-to-deposit ratio. This strong funding
position means we have no reliance on short-term wholesale funding
and always position ourselves to be able to manage 9-12 months
without accessing wholesale funding markets if necessary.
We are therefore well positioned going into this period of
economic stress.
Business and financial review
Chief Executive Officer's statement
Board succession
We are very pleased to have announced the appointment of David
Bennett as our new Chairman effective 6 May 2020. This follows our
announcement in January that Jim Pettigrew had confirmed his
intention to retire from the Board once a successor was found.
David has been Deputy Chairman and a Non-Executive Director of the
Company since October 2015 and Senior Independent Director since
January 2017. I am very pleased that someone with David's extensive
banking experience and deep understanding of our business will
succeed Jim as Chairman. I would also like to thank Jim for his
tremendous leadership of the Board and stewardship of the business
and for the support he has provided to me, the Board and executive
team during that time. We all wish him well for the future.
Outlook
While the outlook remains very uncertain and the range of
potential outcomes is wide, Virgin Money enters this period of
turbulence from a position of strength. Though the full effects of
COVID-19 are far from clear at present, over the coming six months
we anticipate limited customer demand for lending and an increase
in the number of customers facing financial challenges.
In the short-term our focus will remain on supporting our
existing customers first rather than new customer acquisition. In
Mortgages, the market remains severely disrupted, limiting new
mortgage activity. Personal lending is already seeing a slowdown,
as customers focus on essentials. Our focus in the Business
division is on delivering the right support to our existing
customers to enable as many viable businesses as possible survive
the impacts of the COVID-19 pandemic.
Given the environment, we have decided to delay our
non-mandatory Transformation programmes, the Virgin Money re-launch
and re-branding campaigns, as well as the other customer
proposition launches we had planned for the second half of 2020. We
do however see these as temporary delays and plan to continue with
these in time.
In the medium-term, our self-help strategy remains appropriate;
however, the significant and far-reaching behavioural changes
imposed by the virus outbreak present new opportunities for us to
meet the different emerging needs and wants of colleagues and
customers. The rapid adoption by customers of digital solutions
reinforces our digital transformation strategy and proven
operational ability for flexible working gives Virgin Money new
opportunities to provide colleagues with choice, flexibility and
digital enablement to support a diverse and engaged workforce. We
are a smaller and more agile bank than some of our competitors and
our strong digital capability means there is an opportunity for us
to leverage the industry-shaping forces that COVID-19 has unleashed
- we expect to be able to accelerate our existing plan to fully
digitise our bank as soon as the environment stabilises. The Board
and my Leadership Team will be exploring these and other
opportunities over the coming months, but at this stage it remains
too early to determine what, if any, impact the implications of
COVID-19 may have on our 2022 targets.
In the near term it is critical our focus remains on supporting
our customers, colleagues and communities, while protecting the
bank through this uncertain period. If we deliver on that then we
have the opportunity to come out of this with our reputation
enhanced in the eyes of all of our stakeholders and a business that
is ready to thrive in the new operating environment.
David Duffy, Chief Executive Officer - 5 May 2020
Business and financial review
Chief Financial Officer's review
Resilient H1 operational performance
In a tough external environment, the first half of 2020 has seen
us deliver a resilient operational performance. This included a Net
Interest Margin (NIM) of 1.62% (H1 2019: 1.71%), in line with our
guidance as NIM stabilised at the end of 2019 and improved slightly
in the second quarter to 1.63%, albeit remaining at lower levels
than in H1 2019. Non-interest income was flat in the period,
leaving total income down 3% on H1 2019. Operating costs of GBP465m
were 3% lower on the prior year, leading to a stable cost:income
ratio of 57% and a 3% reduction in pre-provision profit. We
reported a pre-COVID-19 impairment cost of risk of 23bps; however,
given the unprecedented environment we have prudently determined
the requirement for a COVID-19-related impairment provision of
GBP164m, with a consequential P&L charge of GBP146m, giving
total impairments of GBP232m in H1. This primarily explains the 58%
reduction in year-on-year underlying profit to GBP120m compared to
H1 2019 (GBP286m). Statutory profit after tax was GBP22m after
exceptional costs of GBP127m including GBP61m of integration and
transformation costs and GBP57m of acquisition accounting unwind,
as well as a GBP29m tax credit. Importantly, no further PPI or
other conduct provisions were required in the period and our PPI
processing uphold rate experience is currently tracking favourably
versus our provisioning assumptions. Our CET1 ratio remains
resilient at 13.0%, but declined 30bps in the period primarily due
to higher RWAs from the implementation of planned Mortgage model
changes.
Balance sheet strength
While the extent of the COVID-19 implications is not yet clear,
it is expected they will lead to higher impairments in time.
However, it is important to consider how we have deliberately
constructed our loan portfolios conservatively. The following table
and commentary explains the asset quality of our portfolios and how
we have prudently determined our COVID-19 impairment provision.
Key portfolio metrics
Mortgages Business Personal
------------------------------------------------- ----------------- -------------------- ----------------
Customer lending balances GBP59.5bn GBP8.3bn GBP5.3bn
Proportion of customer lending 82% 11% 7%
Collateral levels c.65% full
57% LTV or partial n/a
Cards(1)
: 1.2%
Arrears (90 DPD) 0.4% 0.5% Loans: 0.7%
Gross cost of risk (pre-COVID-19) 2bps 45bps 300bps
Balance sheet credit provision (post-COVID-19) GBP50m GBP261m GBP231m
Coverage ratio (post-COVID-19) 9bps 323bps 440bps
IRB status Advanced-IRB Foundation-IRB Standardised
Average risk weight density 14% 73% 75%
------------------------------------------------- ----------------- -------------------- ----------------
(1) Credit cards arrears methodology is 2 cycles past due
Mortgages (82% of Group lending, GBP59.5bn)
A geographically diversified book with 76% owner-occupied loans
and 24% of loans in low LTV, non-professional buy-to-let. House
price rises and a prudent LTV origination profile see an average
stock LTV of just 57%, with only 17% of balances with an LTV over
75%. Current arrears remain low at only 0.4% of the book >90
days past due (DPD), nearly half the UK Finance industry average.
Given refinancing activity over the past few years, much of the
underwriting has been done under stricter Mortgage Market Review
(MMR) rules introduced in April 2014. To date we have granted c.60k
Mortgage payment holidays related to COVID-19, around 15% of
customers.
Business (11% of Group lending, GBP8.3bn)
Our Business lending portfolio has seen a significant
improvement in asset quality over recent years thanks to conscious
decisions to reduce exposures and avoid new lending to higher risk
areas like large corporates, oil and gas, high street retail and
speculative development CRE . The loan book is focused on small and
mid-sized SMEs with c.96% of balances lent to businesses with a
turnover typically >GBP2m, and biased towards defensive sectors
where we have specialist expertise. The cash flows generated by
larger SMEs are typically stronger and these businesses have more
resources and support available in times of stress. Smaller and
micro SME businesses are typically more exposed in times of stress
and can lack the resources to manage severe downturns; our book has
only a small lending balance to these customers (c.4% or
GBP0.3bn).
The Business lending portfolio is well diversified from a sector
and customer number perspective, with no material single-name
exposures. It also has minimal exposure to the sectors more
immediately impacted by the current situation such as oil &
gas, airlines, travel, leisure and high street retail, with no
exposure to speculative development CRE. We have undertaken a
sector by sector assessment of the portfolio to assess
vulnerabilities and the risk of PD migration (which helped to
inform our impairment provision). Broadly, for a stress of this
nature, our book can be split into four key risk categories with
c.55% of the book deemed least exposed (including Agriculture, Food
& Drink and Health & Social Housing), c.22% is
lower-impacted (including Specialist Hotels & Real Estate and
Manufacturing), c.14% is more exposed (including some Business
Services and our legacy property portfolio) while c.9% is in likely
higher-impacted sectors (such as Retail Trade, Legacy Hospitality
and Entertainment). Pre-COVID-19, arrears on the Business portfolio
remained low and stable on prior years with just 0.5% of balances
>90 DPD and the portfolio PD has been stable over recent
years.
So far, we have supported businesses with c4.5k lending
facilities, overdrafts and capital repayment holidays, with
c.GBP135m of lending approved through the Government's CBILS
initiative and a commitment to support the Bounce Back and CLBILS
initiatives.
Business and financial review
Chief Financial Officer's review
Personal (7% of Group lending, GBP5.3bn)
Personal lending comprises a GBP4.2bn high-quality credit card
book focused on prime, affluent customers and a small GBP1.1bn book
of prime personal loans. As a consequence of our conservative
underwriting standards our credit card portfolio has a stronger
risk profile with customers who are typically over 40 years old,
homeowners and have above average income. Our customer base has
stronger than industry average credit profiles and lower
indebtedness, and only c.10% of customers are self-employed. This
prudent underwriting and careful construction of the book has been
maintained through the last few years with c.80% of the book
originated post-2015. In addition, c.62% of credit card balances
are held on balance transfer cards with correspondingly lower debt
service requirements. As we enter this period of stress, only 16%
of those on promotional periods will roll-off during the next 6
months. Pre-COVID-19, arrears on the cards portfolio of 1.2% were
less than half of the industry average of 2.3%. In addition,
balance transfer customers and customers with the higher affluence
levels typical of our portfolio both saw relatively lower
delinquencies through the last crisis. The personal loans book is
also a prime book and currently has a low level of arrears with
just 0.7% of loans currently >90 DPD. Of our c.130k personal
loan customers there is a mix of existing current account customers
where we have good knowledge of their credit record and balances
underwritten on our revamped digital proposition launched in 2018,
which features strict underwriting criteria. To date we have
supported customers with c.40k payment holidays granted, with c.32k
in credit cards equivalent to <2% of customers, and c.8k in
personal loans or 6% of customers.
COVID-19 impairment provision
Given the amount of economic uncertainty, and that IFRS 9 models
are not necessarily calibrated to deliver reliable outputs for a
discontinuity event such as COVID-19, we have undertaken a
comprehensive three-stage process to estimate the impact of
COVID-19. This comprised (1) weighting the existing IFRS 9 models
100% to our existing multi-year "severe downside" scenario to
assume a slower and longer path to recovery with five-year average
unemployment of c.6% and peak-to-trough house price declines of
c.30%; (2) applying additional expert credit risk judgment via
additional provisions in relation to the individual portfolios
based on customer insights and behaviour; and (3) modelling a
"pandemic" scenario for our largest at risk portfolios of business
and credit cards. The "pandemic" shock scenario embeds a further
economic overlay for these portfolios that includes a sharp 10% GDP
fall in 2020 and unemployment peaking at 9.7% in Q1 2021.
This process determined the requirement for an incremental
provision of GBP164m which is split GBP110m in Business, GBP39m in
Personal and GBP15m in Mortgages. The additional expert credit risk
judgement included insights from our ICAAP and ACS-related stress
testing work, as well as an assessment of expected credit
performance at a sector and customer level in the Business
portfolio, with a focus on those sectors more impacted by the
current situation. In Mortgages and Personal we have used expert
judgement and experience data to determine what proportion of
customers on payment holidays may develop into future credit
losses. The Group therefore now holds considerable on balance sheet
provision reserves of GBP542m equating to a total coverage ratio of
75bps. The divisional split is GBP261m of provisions in Business
(323bps coverage ratio), GBP231m in Personal (440bps) and GBP50m in
Mortgages (9bps).
The COVID-19 impairment provision translates into a GBP146m
impairment P&L charge after reallocating some of the Group's
existing provision for economic uncertainty. There is no net CET1
impact of the additional after-tax P&L charge due to an offset
against the Group's existing Excess Expected Loss (EEL) capital
deduction of c.GBP90m and IFRS 9 transitional relief on the
remainder.
Key capital, funding and liquidity metrics
CET1 CRD IV Minimum CET1 management Total capital MREL UK leverage LCR LDR Debt securities
ratio CET1 requirement buffer over ratio % ratio ratio % % % <3 months
% % reg min %
GBP0.4bn
13.0% 9.9% c.GBP800m 19.5% 25.6% 4.9% 139% 113% or 4%
------------------ ---------------- -------------- ------- ------------ ----- ----- ----------------
Resilient capital base and prudent funding & liquidity
position
While the long-term impact of COVID-19 remains uncertain it is
likely to create downward pressure on capital in the near term,
however the Group retains a resilient capital position today with a
CET1 ratio of 13.0% and Total Capital ratio of 19.5%. The recent
decision by the BoE to cut the countercyclical buffer by 1% to 0%
leaves the Group with a significant CET1 management buffer of
c.GBP800m over our CRD IV minimum CET1 requirement, in addition to
the GBP542m of on balance sheet credit provisions. In terms of
RWAs, our model approaches limit the scale of near-term RWA
migration in FY20 under a stress scenario. Our Business banking
book remains primarily a F-IRB portfolio, Personal is Standardised
and only Mortgages are on the more sensitive A-IRB approach.
The Group has several levers at its disposal to increase its
capital resilience further, including tempering asset growth and
re-phasing transformation and re-brand spending plans. Over time,
we also expect a material benefit from RWA optimisation
opportunities including moving our credit card portfolio from the
Standardised approach to IRB, the transition to Hybrid risk-weight
models for Mortgages and other model refinements in Business. In
aggregate, and prior to any RWA future migration, these
opportunities could reduce RWAs by c.5-10%. However, these
opportunities remain subject to regulatory review and approval.
The Group also continues to retain a strong liquidity position
with an LCR of 139%. Our prudent funding approach ensures we have
no reliance on short-term wholesale funding and are positioned to
withstand a 9-12 months closure of the wholesale funding markets if
required, with no help from central bank funding schemes assumed in
this assessment.
Business and financial review
Chief Financial Officer's review
Review of current period results
Underlying income Pro forma
6 months 6 months 6 months
to to to
31 Mar 31 Mar 2019 30 Sep
2020 2019
GBPm GBPm Change GBPm Change
Underlying net interest income 702 728 (4)% 705 -
Non-interest income 115 115 - 91 26%
Total underlying operating income 817 843 (3)% 796 3%
Net interest margin (NIM) 1.62% 1.71% (9)bps 1.61% 1bps
Average interest-earning assets 86,847 85,628 1% 87,092 -
Income was 3% lower than H1 2019 at GBP817m, although it
increased by 3% compared to H2 2019. NII was the key driver falling
4% versus H1 2019 at GBP702m, although remaining in line with H2
2019. Net interest margin was 9bps lower YoY at 1.62% and as
expected this was primarily driven by front versus back book
mortgage compression and higher deposit costs following the base
rate rise. However, NIM improved 2bps compared to Q4 2019 as the
Group continued to optimise the balance sheet mix.
Net interest income
Pro forma
6 months ended 31 6 months ended 31
March 2020 March 2019
---------------------------------------- --------------------------------------
Interest Average Interest Average
Average income/ yield/ Average income/ yield/
balance (expense) (rate)(1) balance (expense) (rate)(1)
Average balance sheet GBPm GBPm % GBPm GBPm %
Interest-earning assets:
Mortgages 59,823 742 2.48 59,991 783 2.62
Business lending(2) 7,963 162 4.08 7,500 156 4.17
Personal lending 5,344 219 8.19 4,506 172 7.65
Liquid assets 11,982 48 0.80 11,984 49 0.82
Due from other banks 1,730 4 0.44 1,647 6 0.74
Swap income/other - (20) n/a - (6) n/a
Other interest earning assets 5 - n/a - - -
Total average interest-earning
assets 86,847 1,155 2.66 85,628 1,160 2.72
Total average
non-interest-earning
assets 3,416 3,243
Total average assets 90,263 88,871
Interest-bearing liabilities:
Current accounts 11,748 (9) (0.16) 11,581 (9) (0.16)
Savings accounts 27,221 (128) (0.94) 23,352 (99) (0.85)
Term deposits 22,151 (178) (1.61) 23,213 (185) (1.60)
Wholesale funding 17,172 (136) (1.59) 19,100 (139) (1.46)
Other interest earning
liabilities 179 (2) n/a - - -
Total average interest-bearing
liabilities 78,471 (453) (1.16) 77,246 (432) (1.12)
Total average
non-interest-bearing
liabilities 6,986 6,522
Total average liabilities 85,457 83,768
Total average equity 4,806 5,103
Total average liabilities
and average equity 90,263 88,871
Net interest income 702 1.62 728 1.71
(1) Average yield is calculated by annualising the interest income/expense
for the period.
(2) Includes loans designated at fair value through profit or loss.
Business and financial review
Chief Financial Officer's review
Net interest income (continued)
Asset yields fell 6bps in the year with mortgage pricing
remaining the key pressure. As expected, we continued to see
pressure from front book pricing being below average back book
rates, leading to an average reduction in yield of 14bps compared
to H1 2019, while balances also declined slightly during the half.
We have remained selective in terms of participation in the market,
in line with our strategy to optimise for value. In Business, a 9bp
reduction in yields was primarily due to lower LIBOR, while strong
balance sheet growth more than offset the lower yield to drive a
modest increase in net interest income. In Personal, strong growth
in average balances drove a significant NII improvement while
yields expanded 54bps due to the seasoning of the credit card book
which performed favourably against our prudent EIR assumptions.
Liability costs increased 4bps relative to H1 2019, with higher
savings account costs and a reduction in lower cost wholesale
funding the key drivers. Our customer deposit base saw stable and
low rate current account balances. While savings deposit costs
increased 9bps due to the base rate rise, the Group's overall cost
of deposits saw a benefit from reducing our utilisation of term
deposits. Lower-cost relationship deposits grew 4.3% in the half to
GBP22.3bn while non-linked customer deposits were stable. The Group
has also undertaken repricing on c.GBP5bn of customer deposits
which resulted in low attrition and these rate reductions will
provide a benefit into the second half of the year.
Wholesale funding costs increased 13bps primarily due to rate
increases and the full impact of additional MREL issuance in 2019,
albeit overall average balances declined 10% as the Group reduced
repo funding, thus reducing the overall cost. The Group entered the
year with excess liquidity following the completion of the FSMA
Part VII transfer process and given the significant market
volatility we have continued to hold prudently higher balances.
The Group manages the risk to its earnings from movements in
interest rates, by hedging assets, liabilities and equity which are
less sensitive to movements in rates. Consistent with this
investment objective, structural products are hedged on a 5-year
rolling basis, with the weighted average life of the hedge
unchanged at 2.5 years (H2 2019: 2.5 years). The average hedge
balance was broadly stable over the half at GBP23.9bn (H2 2019:
GBP24.3bn), generating net interest income of GBP111m (H2 2019:
GBP118m) or a yield of 0.9% (H2 2019: 1.0%).
Non-interest income
Non-interest income was broadly stable YoY at GBP115m with a
GBP16m gain on gilt sales more than offsetting the absence of fee
income earned from the Investments business that was transferred
into a JV with Aberdeen Standard Investments (ASI). On an
underlying basis Business and Mortgages-related fee income were
stable while Personal was GBP7m lower primarily reflecting lower
overdraft and credit card fees. In addition, during the first half
the Group reclassified the fair value unwind related to legacy
Virgin Money hedges as an exceptional item within acquisition
accounting unwind. This equated to a charge of GBP15m in the first
half of 2020 and the remaining unwind is expected to be c.GBP55m
over a period of c.4 years.
Costs
Pro forma
6 months 6 months 6 months
to to to
31 Mar 31 Mar 2019 30 Sep 2019
2020
Operating and administrative expenses GBPm GBPm Change GBPm Change
Total underlying operating and administrative
expenses 465 480 (3)% 467 -
Underlying CIR 57% 57% - 59% (2)%pts
Underlying operating expenses reduced 3% year-on-year to GBP465m
leaving the cost:income ratio of 57% stable compared to last year.
Much of the cost reduction came from lower personnel costs
following the initial headcount rationalisation conducted in
2019.
The Group continued to deliver its Transformation and
Integration programme with additional net run-rate cost savings of
GBP23m realised in the first half through the branch and headcount
reduction programmes announced in late September 2019. Total net
run-rate cost savings of GBP76m have been realised to date, good
progress on the path to the Group's target for c.GBP200m of net
run-rate cost savings.
Given the backdrop, we are now delaying the majority of the
Transformation programmes in 2020 and allowing our colleagues to
focus on delivering support to customers during COVID-19. This
includes the decision to pause the implementation of a programme of
branch closures and redundancies announced in February, with the
decision taken to protect our colleagues at this challenging time.
The expected cost savings to be delivered in 2020 will therefore be
lower and as a result we now expect 2020 costs to be
<GBP920m.
Business and financial review
Chief Financial Officer's review
Impairments post COVID-19 basis
Pro forma
6 months ended 31 March 6 months ended 31 March
2020 2019
------------------------------------ ----------------------------------------------
Mortgages Personal Business Total Mortgages Personal Business Total
-------------------------- --------- -------- -------- ----- --------- -------- -------- ---------------
Impairment
Pre-COVID-19 gross cost
of risk (bps) (1) 2 300 45 28 1 317 55 26
Impairment charge for
COVID-19 4 120 253 40 - - - -
--------- -------- -------- ----- --------- -------- -------- ---------------
Post-COVID-19 gross cost
of risk (bps) (1) 6 420 298 68 1 317 55 26
--------- -------- -------- --------- -------- --------
Specific provision
releases
and recoveries (bps) (5) (5)
----- ---------------
Net cost of risk
post-COVID-19
(bps) (1) 63 21
-------------------------- --------- -------- -------- ----- --------- -------- -------- ---------------
(1) Cost of risk is calculated on an annualised basis.
The Group recorded total impairments of GBP232m (63bps cost of
risk) including a COVID-19 related impairment P&L charge of
GBP146m which is explained in detail on page 9. Pre-COVID-19 asset
quality remained robust with an impairment charge of GBP86m (23bps
net cost of risk).
Pre-COVID-19 Mortgages remained stable at 2bps, slightly up on
H1 2019 but flat on H2 2019, with no signs of asset quality stress
in the portfolio.
Pre-COVID-19 Business cost of risk of 45bps was down 10bps
compared to H1 2019, but remained stable on the FY19 level. After a
depressed impairment in H2 2019 with no material one-off credit
losses, H1 2020 represented a return to a more normalised level
pre-COVID-19. While we continue to monitor the portfolio closely
given the potential impacts of COVID-19, there were no evident
sector or segment concerns in H1 2020, with the pre-COVID-19
provision recognition driven by individual customer
circumstances.
Pre-COVID-19 Personal cost of risk of 300bps reduced 17bps
relative to H1 2019 and was 61bps lower than an elevated H2 2019
driven by the dilution effect of strong growth in good quality
assets all provisioned in Stage 1, as well as a one-off model
recalibration in H2 last year. Credit quality remained robust in
the period and continues to be underpinned by a focus on growth in
affluent segments where arrears levels have remained low compared
to industry averages, currently standing at just 1.2% on cards and
0.7% on loans.
Looking forward, given the high level of uncertainty at present,
we have made the decision to prioritise capacity to deal with
increased customer forbearance using both internal and external
resource to ensure we are appropriately positioned should the
lockdown measures be in place for an extended period of time.
Exceptional items and statutory profit
6 months to
------------------------------------------
Pro forma
31 Mar 2020 31 Mar 2019 30 Sep 2019
GBPm GBPm GBPm
Underlying profit on ordinary activities before
tax 120 286 253
Exceptional items (127) (277) (527)
- Integration and transformation
costs (61) (45) (111)
- Acquisition accounting
unwinds (57) (67) (20)
- Legacy conduct costs - (33) (400)
- Other items (9) (132) 4
(Loss)/profit on ordinary activities
before tax (7) 9 (274)
Add Virgin Money Holdings (UK) PLC pre-acquisition
loss - 33 -
------------------------------------------------------ ------------- ------------ -------------
Statutory (loss)/profit on ordinary
activities before tax (7) 42 (274)
Tax credit/(expense) 29 (5) 58
------------------------------------------------------ ------------- ------------ -------------
Statutory profit/(loss) after tax 22 37 (216)
The Group made a statutory profit after tax of GBP22m,
reflecting GBP127m of exceptional costs incurred during the half,
which have been excluded from the underlying performance of the
business, as well as a tax credit of GBP29m. The exceptional item
charges incurred in H1 2020 were significantly lower than in the
prior year due to the non-recurrence of significant one-off
acquisition costs and legacy conduct charges, as well as lower
restructuring costs as the Group paused some elements of
integration and transformation activity due to the impact of
COVID-19.
Business and financial review
Chief Financial Officer's review
Integration and transformation costs
Due to the impact of COVID-19, the Group is re-phasing some of
its planned restructuring activity, which has led to a lower than
planned spend of GBP61m during the first half of 2020. Certain
rebranding and IT-related activities which have now been paused had
already incurred costs in the first half and we now anticipate
lower integration and transformation costs for the remainder of
FY20 as only mandatory projects continue. Overall the programme is
still expected to incur c.GBP360m of total spend by the end of 2021
with GBP217m spent to date.
Acquisition accounting unwinds
The Group recognised fair value acquisition net accounting
adjustments of c.GBP270m at the time of the acquisition that would
be unwound through the income statement over the remaining life of
the related assets and liabilities (c.5 years). GBP87m was charged
in 2019 and a further GBP57m was incurred in H1 2020. In addition,
during the first half the Group reclassified the fair value unwind
related to legacy Virgin Money hedges which had previously been
recognised in underlying non-interest income. This totalled GBP15m
in H1 2020 and a further c.GBP55m of charges is expected over the
next 4 years.
Legacy conduct
No further legacy conduct provisions were recognised in H1 2020.
The Group has made great progress in processing its outstanding PPI
complaints and Information Requests (IRs) with only c.8k IRs left
to be processed. The Group has observed a slightly higher
IR-to-complaint conversion rate over the past six months, resulting
in c.100k complaints, of which c.25k have been dealt with. However,
the complaint uphold rate of c.25% has been much lower than the
provision assumption of c.40%. If this run-rate continues then the
Group could expect a potential provision surplus, but it is too
early to conclude the final outcome at this stage.
Other items
The Group incurred GBP9m of other one-off exceptional costs
during the year, primarily reflecting the growth opportunity
projects relating to the RBS switching scheme and initial set up
costs relating to the Aberdeen Standard Investments JV.
Taxation
On a statutory basis, the Group tax credit was GBP29m. The key
driver of the credit was GBP26m related to changes in the
corporation tax rate, and a further GBP8m credit related to tax on
AT1 distributions now reflected via the income statement (in prior
periods tax related to AT1 distributions was recorded via changes
in equity), partially offset by non-deductible expenditure and
prior period adjustments.
On an underlying basis, the Group tax credit was GBP2m on
underlying profits of GBP120m. In addition to GBP23m of corporation
tax on underlying profit, the key driver was a GBP25m credit,
comprising the changes in the corporate tax rate on underlying
items, the credit related to tax on AT1, partially offset by
non-deductible expenditure and prior period adjustments.
Returns and TNAV
Pro forma
6 months 6 months 6 months
to to to
31 Mar 31 Mar 2019 Change 30 Sep Change
2020 2019
Underlying RoTE 4.6% 10.4% (5.8)%pts 11.2% (6.6)%pts
TNAV per share 252.5p 260.1p (7.6)p 249.2p 3.3p
Underlying RoTE of 4.6% was 5.8% lower than the prior year,
primarily due to the COVID-19 impairment charge. TNAV per share of
252.5p increased 3.3p relative to 30 Sep 2019, with TNAV build of
17.2p from underlying profit after tax (pre-COVID-19 impairment
charge) and a gain of 8.9p from pensions actuarial gains. This was
partially offset by the COVID-19 impairment charge of 9.3p,
exceptional costs and AT1 distributions of 9.1p and other movements
primarily related to reserves of 4.4p.
Business and financial review
Chief Financial Officer's review
Balance sheet
As at
31 Mar 30 Sep 2019
2020
GBPm GBPm Change
Mortgages 59,521 60,079 (0.9)%
Business 8,327 7,876 5.7%
Personal 5,335 5,024 6.2%
Total customer lending 73,183 72,979 0.3%
Relationship deposits(1) 22,268 21,347 4.3%
Non-linked savings 20,270 20,197 0.4%
Term deposits 22,114 22,243 (0.6)%
Total customer deposits 64,652 63,787 1.4%
Wholesale funding 16,835 18,506 (9.0)%
of which Term Funding
Scheme
(TFS) 7,142 7,342 (2.7)%
Loan to Deposit Ratio
(LDR) 113% 114% (1)%pts
Liquidity Coverage Ratio
(LCR) 139% 152% (13)%pts
(1) Current account and linked savings balances.
Continued customer balance growth
The Group's balance sheet optimisation strategy continued in the
first half with strong growth in Business and Personal lending, and
more selective participation in Mortgages given competitive
pressures. On the deposit side our strategy to increase
relationship deposits and reduce more expensive term deposits
continued.
Business lending increased 5.7% to GBP8.3bn with c1.5% of growth
coming from the RBS switching scheme and the remainder from our
strong relationship manager proposition which continued to resonate
with SMEs. We do however expect the pace of new-to-bank
originations to fall in H2 2020 as we focus on supporting our
existing customers, but would expect some organic growth as we
extend lines to existing customers.
Growth in Personal lending of 6.2% to GBP5.3bn was mainly
focused on our high-quality credit card business where we continued
our long-standing strategy of origination focused on affluent
customers with high levels of disposable income. Personal loans
increased 9.0% and continue to be conservatively underwritten,
benefitting from enhancements to our digital acquisition
implemented in 2018. We would expect the pace of growth to slow
dramatically in the second half, as there has already been a
noticeable slowing in spending on credit cards in April and we
expect the demand for personal loans to shrink as consumers focus
on essentials.
In our Mortgage business balances declined 0.9% to GBP59.5bn as
we maintained pricing discipline in a competitive environment,
continuing to optimise for value in line with our strategy. At H1
2020, c.7% of the book was on SVR, slightly down on FY 2019. We
anticipate a marked reduction in originations in H2 2020 given the
inability to conduct physical home valuations and our focus will
therefore be on existing customer retention.
Customer deposit balances grew 1.4% in the period to GBP64.7bn,
driven by stronger relationship deposits which rose 4.3% to
GBP22.3bn. The growth was seen across personal and business current
accounts, and personal linked-savings balances, as we continued to
execute on our strategy to optimise our deposit mix.
Wholesale funding and liquidity
The Group maintains a robust funding and liquidity position,
reflecting our retail deposit -- led funding strategy. The loan to
deposit ratio was stable over the period at 113%. Having made the
prudent decision to retain most of the additional liquidity held
against potential Brexit and FSMA Part VII transfer risks, the
Group's liquidity coverage ratio of 139% comfortably exceeds both
regulatory requirements and internal risk appetite.
Supplementing the customer deposit position, we ensure
appropriate diversification in our funding base through a number of
well-established wholesale funding programmes. In the period we
successfully completed issuance of mortgage-backed securities
through the Group's Lanark programme across USD and GBP tranches,
raising $250m and GBP300m in January. The Group has no reliance on
short-term wholesale funding and can withstand a 9 to 12 month
wholesale funding market shut-out if needed. Having continued the
repayment, ahead of contractual maturity, of our drawings from the
Bank of England's Term Funding Scheme (TFS) over the period, the
Group will look to refinance the remaining GBP7.1bn outstanding
with the BoE's new scheme (TFSME), extending the duration and
optimising our funding flexibility to support customers through
this period of stress.
Business and financial review
Chief Financial Officer's review
Capital and RWAs As at
31 Mar 30 Sep Change
2020 2019
CET1 ratio 13.0% 13.3% (0.3)%pts
Total capital ratio 19.5% 20.1% (0.6)%pts
MREL ratio 25.6% 26.6% (1.0)%pts
UK leverage ratio 4.9% 4.9% -%pts
---------------------------------- ------------------------ ------ ---------
RWAs 25,173 24,046 4.7%
of which Mortgages 9,104 8,846 2.9%
of which Business 7,580 7,124 6.4%
of which Personal 4,238 4,042 4.8%
---------------------------------- ------------------------ ------ ---------
CET1 Capital movements 6 months
to
31 Mar 2020
%/bps
Opening CET1 ratio as at 1 October 2019 13.3%
Generated(1) (bps) 97
COVID-19 impairment charge (bps) (51)
COVID-19 regulatory adjustments(2) (bps) 51
Underlying RWA growth (bps) (31)
Mortgage model RWA changes (bps) (28)
AT1 distributions (bps) (14)
Underlying capital generated (bps) 24
Integration and transformation costs (bps) (21)
Acquisition accounting impacts (16)
Other (bps) (22)
Net capital absorbed (bps) (35)
Closing CET1 ratio 13.0%
(1) Generated includes 4bps of IFRS 9 transitional relief relating to pre-COVID-19
impairment charges.
(2) COVID-19 regulatory adjustments include IFRS 9 transitional relief
and movements in excess expected losses.
CET1 capital
The Group's CET1 ratio reduced by 35bps in the period primarily
due to planned mortgage model RWA changes. Profit generated capital
(pre-COVID-19 impairment charge) of 97bps was offset by AT1 costs
of 14bps and underlying RWA growth of 31bps. The implementation of
planned mortgage model changes that increased RWAs consumed a
further 28bps of capital. The COVID-19 impairment provision had no
CET1 impact as the after-tax income statement impairment charge was
fully offset by the Group's c.GBP90m EEL capital deduction and 85%
IFRS transitional relief on the remainder. The Group incurred
exceptional item charges including restructuring costs and
acquisition accounting unwind totalling 37bps along with other item
charges of 22bps, including the Q1 pension scheme contributions and
movements in the cash flow hedge reserve.
Risk weight assets
RWAs have grown by c.5% during the period, largely reflecting
the shift in the mix of the Group's lending towards higher RWA
density lending and mortgage model changes. The impact of
implementing the planned Mortgage model changes increased RWAs by
c.GBP0.5bn. RWAs in the Personal and Business portfolios tracked
lending volumes and non-credit risk RWAs of GBP3.0bn remained
stable.
MREL
The Group's MREL ratio remained robust at 25.6%, comfortably
ahead of the Group's 2020 interim MREL requirement of 18.0% of
RWAs. While the final MREL requirements are not yet confirmed, we
expect to issue, subject to market conditions, between GBP1.5bn and
GBP2.0bn of further MREL eligible senior unsecured between now and
2022 to meet our estimated final MREL requirements.
Business and financial review
Chief Financial Officer's review
Outlook and guidance
Given the unprecedented nature of COVID-19, the exact economic
outlook for the UK is clearly evolving and remains hard to predict
with any certainty. The implications of the support measures
currently being deployed in the UK will take time to feed through
in to the real economy, while the speed with which current
restrictions are lifted will be key in determining the size of the
shock to GDP and the associated shape of any recovery. However, the
Group enters this period from a position of balance sheet strength
and we remain agile in managing the emerging risks while continuing
to support our existing customers.
Since our NIM guidance range was set back in November 2019, the
Bank of England's MPC has cut the base rate by 65bps to 0.10% with
a corresponding impact on the Group's NII and we therefore now
expect the Group NIM for FY2020 to be 155-160bps. We anticipate a
structural step down in the NIM in Q3 due to the adverse mismatch
in timing between asset repricing and deposit repricing, but
thereafter our ongoing balance sheet optimisation strategy should
support a relatively resilient NIM.
We have also taken the decision to re-phase our Transformation
programmes to allow colleagues to focus on supporting customers,
which is the right thing to do but will limit the planned delivery
of synergies in the second half of 2020. As a result of these
changes, we now expect to deliver operating costs of <GBP920m
for FY2020.
It remains the Group's ambition to return to a sustainable
dividend approach in time and the Board always considers any
dividend decision at the end of the financial year. However, the
Board will of course give consideration to the unprecedented
economic backdrop when considering any dividend decision in respect
of full year 2020.
In the medium term, we continue to believe our self-help
strategy remains the right approach, with our focus on cost
reduction, digitising the bank and driving an improved balance
sheet mix. However with such an uncertain outlook and delays to the
delivery of some elements of our Transformation programme, it is
too early to say what, if any, impact the implications of COVID-19
will have on our 2022 financial targets.
Business and financial review
Reconciliation of statutory to underlying 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 comparative 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 underlying
results, and full details on the adjusted items to the underlying
results are included on page 80.
Integration Acquisition
Statutory and transformation accounting Legacy Underlying
results costs unwinds conduct Other basis
6 months to 31 Mar 2020 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------- ------------------- ----------- -------- ------
Net interest income 671 - 31 - - 702
Non-interest income 96 - 15 - 4 115
Total operating income 767 - 46 - 4 817
Total operating and administrative
expenses before impairment
losses (537) 61 6 - 5 (465)
Operating profit before impairment
losses 230 61 52 - 9 352
Impairment losses on credit
exposures (237) - 5 - - (232)
(Loss)/profit on ordinary activities
before tax (7) 61 57 - 9 120
------------------------------------- ------------------- ----------- -------- ------
Financial performance measures
(1 4.6
RoTE .0)% 2.7% 2.5% -% 0.4% %
CIR 70.0% (6.3)% (5.8)% -% (0.9%) 57.0%
Return on assets 0.02% 0.11% 0.10% -% 0.02% 0.25%
Basic EPS (1.2)p 3.3p 3.1p -p 0.5p 5.7p
Integration Acquisition
Statutory and transformation accounting Legacy Underlying
results costs unwinds conduct Other basis
6 months to 30 Sep 2019 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------- ------------------- ----------- -------- -----
Net interest income 694 - 11 - - 705
Non-interest income 129 - - - (38) 91
Total operating income 823 - 11 - (38) 796
Total operating and administrative
expenses before impairment
losses (1,018) 111 6 400 34 (467)
Operating (loss)/profit before
impairment losses (195) 111 17 400 (4) 329
Impairment losses on credit
exposures (79) - 3 - - (76)
(Loss)/profit on ordinary activities
before tax (274) 111 20 400 (4) 253
------------------------------------- ------------------- ----------- -------- -----
Include
Virgin Integration
Money Pro and Acquisition
Statutory pre-acquisition forma transformation accounting Legacy Underlying
results results results costs unwinds conduct Other basis
6 months to 31 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Mar 2019
------------------ ---------------- -------- ----------------- ----------- -------- -----
Net interest
income 820 22 842 - (34) - (80) 728
Non-interest
income 106 9 115 - - - - 115
Total operating
income 926 31 957 - (34) - (80) 843
Total operating
and
administrative
expenses before
impairment losses (711) (60) (771) 45 1 33 212 (480)
Operating
profit/(loss)
before impairment
losses 215 (29) 186 45 (33) 33 132 363
Impairment losses
on credit
exposures (173) (4) (177) - 100 - - (77)
Profit/(loss)
on ordinary
activities
before tax 42 (33) 9 45 67 33 132 286
------------------ ----------------- ----------- -------- -----
Financial
performance
measures
RoTE 0.1% (1.5)% (1.4)% 1.9% 2.9% 1.4% 5.6% 10.4%
CIR 77% 4% 81% (6)% 4% (4)% (18)% 57%
Return on assets 0.06% (0.06)% -% 0.08% 0.12% 0.06% 0.23% 0.49%
Basic EPS 0.2p (2.0)p (1.8)p 2.5p 3.7p 1.8p 7.2p 13.4p
Business and financial review
Financial review - statutory basis
Summary income statement- statutory basis
6 months 6 months 6 months
to to to
31 Mar 31 Mar 2019 Change 30 Sep Change
2020 2019
GBPm GBPm % GBPm %
Net interest income 671 820 (18) 694 (3)
Non-interest income 96 106 (9) 129 (26)
Total operating income 767 926 (17) 823 (7)
Operating and administrative
expenses (537) (711) (24) (1,018) (47)
Operating profit/(loss) before
impairment
losses 230 215 7 (195)
Impairment losses on credit
exposures (237) (173) 37 (79) 200
------------------------------------ -------- ---------------- ------ -------- ------
Statutory (loss)/profit on ordinary
activities before tax (7) 42 (274) (97)
Tax credit/(expense) 29 (5) 58 (50)
------------------------------------ -------- ---------------- ------ -------- ------
Statutory profit/(loss) after tax 22 37 (41) (216)
Key performance indicators(1)
6 months 6 months 12 months
to to to
31 Mar 31 Mar
2020 2019 Change 30 Sep 2019(2) Change
Profitability:
Statutory RoTE (1.0)% 0.1% (1.1)%pts (6.8)% 5.8%pts
Statutory CIR 70% 77% (7)%pts 99% (29)%pts
Statutory return
on assets 0.02% 0.06% (4)bps (0.23)% 25bps
Statutory EPS (1.2)p 0.2p (1.4)p (17.9)p 16.7p
(1) For a definition of each of the KPIs, refer to 'Measuring financial
performance - glossary' on pages 278 to 279 of the Group Annual Report
and Accounts for the year ended 30 September 2019. The KPIs include
statutory, regulatory and alternative performance measures. Where
applicable certain KPIs are calculated on an annualised basis for
the periods to 31 March.
(2) Profitability KPIs are provided with a full year to 30 September
2019 comparative in line with the statutory income statement presentation
in the financial statements and as previously reported in the 2019
Group Annual Report and Accounts.
Risk management
Risk overview
Effective risk management is critical to realising the Group's
strategic priorities of pioneering growth, with delighted customers
and colleagues, while operating with super straightforward
efficiency, discipline and sustainability. The safety and soundness
of the Group is aligned to Our Purpose and is a fundamental
requirement to enable our customers and stakeholders to be 'happier
about money'.
Risk appetite is defined as the level and types of risk the
Group is willing to assume within the boundaries of its risk
capacity, to achieve its strategic objectives. The Risk Appetite
Statement (RAS) articulates the Group's risk appetite to
stakeholders and provides a view on the risk-taking activities the
Board is comfortable with, guiding decision-makers in their
strategic and business decisions.
The Group identifies and manages risk in line with the Risk
Management Framework (RMF). The RMF is the totality of systems,
structures, policies, processes and people that identifies,
measures, evaluates, controls, mitigates, monitors and reports all
internal and external sources of material risk.
COVID-19
The Group's priority in dealing with the exceptional challenges
posed by COVID-19 is to ensure the safety of, and provision of
support for, customers and colleagues.
COVID-19 is a global crisis resulting in the Group invoking
intensive incident management, governance and procedural actions.
The pandemic poses multiple risks to the Group in both the short
and longer-term and the Group's response to date includes:
- updating the capital and funding plans to incorporate the
prudential responses introduced, such as the UK base rate cut and a
reduction in the countercyclical capital buffer;
- implementing the range of government, regulatory and central
bank support measures to support customers, including the
application of FCA direction on payment holidays and overdraft
buffers, participation in the CBILS, the CLBILS, the Bounce Back
Loan Scheme (BBLS) and the TFSME;
- operational changes to ensure that as many colleagues as
possible can work from home in accordance with the Government's
"stay at home, protect the NHS, stay safe" objectives. These
changes have been made in ways that allow us to continue to offer
support to our customers during these difficult times;
- analysing various scenarios in order to understand and plan for potential outcomes;
- undertaking risk assessments and establishing action plans to
address any material control gaps;
- re-deploying skilled colleagues to customer support, business
lending and financial care departments, to ensure customers in or
approaching financial difficulty are supported. This includes a
balanced streamlining of processes and policies to rapidly provide
support to customers who need it most;
- evaluating the potential impacts on financial results,
including impairment, provisioning and RWA calculations, given the
deep and prolonged customer impacts expected. Further detail on
this can be found within the credit risk section on page 23;
and
- developing a programme to provide ongoing monitoring of risks,
indicators and impacts, with regular reporting to appropriate
Committees and the Leadership Team;
Principal risks and definitions
The Group's principal risks remain as disclosed in the 2019
Annual Report and Accounts and are shown below.
Credit risk
The risk of loss of principal or interest stemming from a
borrower's failure to meet its contracted obligations to the Group
in accordance with the terms agreed. Credit risk manifests at both
a portfolio and transactional level.
Financial risk
Financial risk includes capital risk, funding risk, liquidity
risk, market risk, model risk, pension risk and financial risks
arising from climate change, all of which have the ability to
impact the financial performance of the Group, if managed
improperly.
Regulatory and compliance risk
The risk of failing to comply with relevant laws and regulatory
requirements, not keeping regulators informed of relevant issues,
not responding effectively to information requests, not meeting
regulatory deadlines or obstructing the regulator.
Conduct risk
The risk of undertaking business in a way that is contrary to
the interests of customers, resulting in inappropriate customer
outcomes or detriment, regulatory censure, redress costs and/or
reputational damage.
Operational risk
The risk of loss resulting from inadequate or failed internal
processes, people or systems or from external events.
Risk management
Risk overview
Financial crime risk
The risk that the Group's products and services will be used to
facilitate financial crime against the Group, its customers or
third parties.
Technology risk
The risk of loss resulting from inadequate or failed information
technology processes. Technology risk includes cybersecurity, IT
resilience, information security, data privacy and payment
risk.
Strategic and enterprise risk
The risk of significant loss of earnings or damage arising from
decisions or actions that impact the long-term interests of the
Group's stakeholders or from an inability to adapt to external
developments, including potential execution risk as a result of
integration and transformation activity.
People risk
The risk of not having sufficiently skilled and motivated
colleagues, who are clear on their responsibilities and
accountabilities and who behave in an ethical way.
Operational resilience underpins all nine principal risks and is
defined as the ability of the Group to support its customers and
protect and sustain the most critical functions and underlying
assets, while adapting to expected or unexpected operational stress
or disruption. In addition, operational resilience includes having
the capacity to recover from issues as and when they arise. The
Group assesses its operational resilience in relation to people,
technology, third parties and premises, ensuring it aims to provide
a superior level of support and services to customers and
stakeholders on a consistent and uninterrupted basis.
COVID-19 impacts on principal risks
COVID-19 has emerged as a multi-faceted risk with a variety of
implications for individuals, businesses and communities. The
measures introduced to support the economy create new operational,
conduct, enforceability and financial risks to the Group and these
risks will be monitored and managed over time.
The most material potential impacts on the Group's principal
risks are:
Risk Key Mitigating actions
---------------------------------------------- -------------------------------------------
Credit Risk : Although the impact The Group has amended credit frameworks
on the Group's retail and business and policies, providing temporary
credit portfolios is yet to fully support to existing customers through
manifest, it is clear that credit capital repayment holidays, interest
risk is heightened, with implications free overdrafts (for retail customers),
for the Group's customers, resulting extensions of credit, including through
in increased levels of capital the CBILS and the CLBILS, and introduced
repayment holidays, forbearance a variety of additional supporting
and other forms of customer support. measures across all portfolios.
Levels of default, provisions and The Group has implemented additional
impairments are also expected to credit monitoring and updated the
increase over time. Risk Appetite Statement.
-------------------------------------------
Operational Risk, Technology Risk There is additional fraud monitoring,
and Financial Crime: continuous risk assessment of temporary
Increased remote working, the implementation process changes, customers have been
of new processes and the pressure directed to digital banking and there
on customer support areas all have continues to be enhanced focus on
the potential to increase the Group's supplier service level agreements
operational risk profile. This and contingency plans.
could lead to increased errors
or delays and subsequent loss. A significant amount of work has been
undertaken to enable and improve home
Enabling working from home can working conditions, and network capacity
increase risk of internal fraud, for telephony has been increased to
which may arise as a result of meet demand. System monitoring, incident
unauthorised access to critical management and escalation processes
systems and data. There is an increased are in place with oversight from the
risk in cyber-attacks, due to phishing Risk function.
emails which use a COVID-19 theme,
and breaches could have legal, The Group has undertaken risk assessments
regulatory or privacy implications. for remote working, tracked policy
exceptions, implemented additional
There is an increased risk of fraud, controls such as an increased levels
as fraudsters take advantage of of monitoring, and mobilised awareness
the vulnerabilities created by initiatives.
the current situation.
-------------------------------------------
Risk management
Risk overview
COVID-19 impacts on principal risks (continued)
People Risk: There is an impact The Group is following government
on colleague health from risk of advice with colleagues working from
illness and increased absence, home where possible, and social distancing
in addition to longer-term well-being and additional cleaning measures are
risks, such as mental health impacts, in place to support key workers based
which may arise from societal factors. in offices and branches. Vulnerable
These factors could also increase colleagues are not on site.
pressure and reduce skills availability
in key areas. The Group is ensuring that colleagues
are protected through adhering to
the government's physical and health
measures, while recognising there
is uncertainty surrounding timing
of their removal or relaxation. Additional
well-being programmes have been implemented
to support colleagues.
Conduct Risk : There is the potential The Group is prioritising its customers
for harm to customers impacted and will maintain open and transparent
by COVID-19 through failure to communication with regulators. The
recognise customer circumstances, Group is undertaking file reviews,
financial difficulties or vulnerability call listening, managing contact centre
and to apply appropriate actions. availability and workflow management
impacted due to increased volumes
and reduced staff.
---------------------------------------------
Financial Risk: Capital may be Capital, funding and liquidity are
required to absorb the impact of all subject to extensive stress testing
heightened levels of credit risk with the results informing the levels
and the expected increase of impairment of capital and liquidity that are
levels over time. Wholesale funding required to be held in the event of
markets may be fragile during high adverse conditions.
levels of uncertainty. Customers'
use of deposits may change, particularly
amongst businesses, and the taking
of loan repayment holidays will
alter cash flows for the management
of liquidity.
---------------------------------------------
Emerging risks
The Group's risks are continually reviewed and reassessed
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 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 are allocated a status based on their expected
impact and time to fully crystallise, in line with the definitions
outlined in the RMF.
With the exception of material developments in the period as a
result of COVID-19, the key emerging risks to the Group's strategy,
as stated below, remain broadly unchanged to those set out in the
2019 Annual Report and Accounts.
Geo-political The Group is exposed to a variety of risks resulting from
and macro-economic a downturn in the UK economic environment. These risks
environment are expected to crystallise in the near- term due to the
impact of the COVID-19 pandemic.
The precise duration and depth of the downturn is uncertain,
but risks to credit and margin performance are expected
and significant disruption to both business supply and
demand has already been seen. The efficacy of monetary
and fiscal policy, and the speed and ability with which
the UK can return to normal operating conditions, will
determine the overall economic impact for the UK and the
Group.
Uncertainty remains regarding the future relationship
between the UK and EU and whether the scheduled trade
deal negotiations can be completed ahead of the transition
period end date of 31 December 2020.
Risk management
Risk overview
Emerging risks (continued)
Regulatory There is wide-ranging and material short-term disruption
change to firms and regulators as a result of COVID-19 that impacts
customers, businesses and firms, requiring large-scale
prioritisation decisions in a fast-moving and highly uncertain
environment.
The longevity of temporary changes (e.g. cancellation
of the 2020 Annual Cyclical Scenario), or the possible
requirement for lasting changes, is currently unknown
and may impact firms in the medium term.
Beyond COVID-19, there is continued evolution of the regulatory
landscape, and the requirement to respond to on-going
prudential and conduct driven initiatives.
Competition The Group continues to operate in a highly competitive
environment, with growth across a number of digital-only
providers, and emerging signs of participation from large
technology companies. Forced changes in customer behaviour,
as a result of COVID-19, could make it easier, and faster,
for these digital companies to enter the UK financial
services market.
As the market continues to react to COVID-19, and the
impacts become clearer, it will be necessary to remain
agile, focused and responsive to ensure we are addressing
new risks in a safe and efficient manner.
This increased competition within the financial services
industry could also drive consolidation within the market,
as banks review ways of increasing their UK footprint.
-----------------------------------------------------------------
Climate change The Group continues to consider its exposure to the physical,
transitional and reputational risks arising from climate
change, and the transition to a low carbon economy, which
have the potential to impact the Group's customers, strategic
priorities and operational activities.
-----------------------------------------------------------------
Further detail on these risks and how they are managed is
available in the 2019 Annual Report and Accounts.
Risk management
Credit risk
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.
COVID-19 Assessment
The single largest impact on the Group's credit risk profile,
for the six months to 31 March 2020, has been the emergence of the
COVID-19 pandemic.
The implications of the COVID-19 pandemic on both the Global and
UK macro-economic environment is evolving and fluid. Given the
fluidity it has not been possible to fully reflect anticipated
economic impacts in the underlying assumptions embedded within the
IFRS 9 models. As a result, the Group's approach to estimating the
impact of COVID-19 on impairment provisioning has been partially
enacted through post model adjustments, and in doing so has not
impacted the staging composition of the portfolios as at 31 March
2020. A three-stage approach has been adopted comprising (i)
weighting the existing IFRS 9 models to a 100% severe downside
scenario; (ii) applying additional expert credit risk judgment
overlays in relation to the individual portfolios based on customer
insight and expected behaviour; and (iii) modelling a "pandemic"
scenario for our largest at risk portfolios of business and credit
cards. The additional expert credit risk judgement is based on an
assessment of credit performance at both the portfolio and customer
level for Business lending with a particular focus on higher risk
sectors and specific segments of the portfolio. For the mortgages
and personal portfolios, expert judgement and historical data has
been used to determine what proportion of customers, for example,
those granted payment holidays, could potentially lead to credit
losses. The outcome of this has resulted in an increase to the
impairment provision of GBP164m, split GBP110m in Business, GBP39m
in Personal and GBP15m in Mortgages. After reallocating some of the
existing provision for economic uncertainty, the net increase to
the impairment charge is GBP146m, split GBP104m in Business, GBP32m
in Personal and GBP10m in Mortgages.
IFRS 9 Methodology
While the overall policies and methodologies adopted by the
Group relative to the calculation of IFRS 9 provisions are
compliant with the standard, there are differences in the detail
relating to the two heritage business inputs and processes
supporting the Expected Credit Loss (ECL) calculation. The
complexity of the underlying data, model related methodology and
inputs used means that a single methodology in providing a combined
Group ECL view, while being developed, is not possible at this
point in time, with each heritage retaining its own distinct set of
IFRS 9 compliant models.
Key credit metrics
As at
---------------------------------------------------
31 Mar
31 Mar 2020 30 Sept 2019 2019
(unaudited) (audited) (unaudited)
GBPm GBPm GBPm
------------------------------ --------------------- ------------- -------------
Impairment provisions held on credit exposures(1)
(pre COVID-19)
Mortgage lending 40 40 35
Personal lending 199 175 152
Business lending 157 147 163
396 362 350
------------------------------ --------------------- ------------- -------------
As at
---------------------------------------------------
31 Mar
31 Mar 2020 30 Sept 2019 2019
(unaudited) (audited) (unaudited)
GBPm GBPm GBPm
------------------------------ --------------------- ------------- -------------
Impairment provisions held on credit exposures(1)
(post COVID-19)
Mortgage lending 50 40 35
Personal lending 231 175 152
Business lending 261 147 163
542 362 350
------------------------------ --------------------- ------------- -------------
(1) The impairment provision includes an element relating to the Group's
undrawn credit exposures.
Risk management
Credit risk
Pro-forma Pro-forma
6 months (3) 12 months 6 months
to to to
31 Mar
31 Mar 2020 30 Sept 2019 2019
(unaudited) (unaudited) (unaudited)
GBPm GBPm GBPm
----------------------------------- ------------- --------------- -----------------------------------
Underlying impairment charge on credit
exposures(1)
Mortgage lending (pre COVID-19) 2 4 1
Mortgage lending impairment charge
for
COVID-19 10 n/a n/a
Personal lending (pre COVID-19) 68 124 58
Personal lending impairment charge
for
COVID-19 32 n/a n/a
Business lending (pre COVID-19) 16 25 18
Business lending impairment charge
for
COVID-19 104 n/a n/a
232 153 77
Asset quality measures:
Underlying cost of risk pre
COVID-19(2) 0.23% 0.21% 0.21%
Underlying cost of risk post
COVID-19 0.63% n/a n/a
Stage 3 assets to customer loans 1.13% 1.09% 1.08%
Total provision to customer loans
pre
COVID-19 0.55% 0.50% 0.49%
Total provision to customer loans
post
COVID-19 0.75% n/a n/a
Stage 3 provision to Stage 3 loans 18.38% 14.32% 15.00%
----------------------------------- ------------- --------------- -----------------------------------
(1) The underlying impairment charge in the 2019 periods exclude the
impact of the acquisition of Virgin Money Holdings (UK) PLC on
15th October 2018.
(2) Inclusive of gains/losses on assets held at fair value and
elements
of fraud loss.
(3) The comparative has been restated in line with the current period
presentation
The increase in the underlying pre-COVID-19 impairment charge,
to GBP86m for the 6 months to 31 March 2020 (GBP77m H1 FY19; GBP76m
H2 FY19) reflects a higher charge on business exposures as a result
of portfolio growth and the recognition of a small number of single
name, individually significant, provisions. The charge relative to
personal exposures has also increased due to a higher level of
early stage delinquency and arrears, together with a lower level of
recoveries, the pre-COVID-19 cost of risk, at 23bps, is reflective
of normalisation and is in line with expectations.
Overall asset quality remained 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
and demonstrates the credit quality of the portfolios, supported by
the low interest rate environment. The ratio of total provisions to
customer loans, pre-COVID-19, at 0.55% is reflective of a
well-collateralised portfolio, supported by the size of the
mortgage portfolio which proportionately requires a lower provision
coverage.
The distribution of the Group's gross loans and advances is
analysed below:
As at 31 March 2020
(unaudited)
Stage Stage Stage Stage
2 2 2 3
Stage Stage
1 <30 DPD >30 DPD Total 3 POCI Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ------- -------- -------- ------ ------ ------ -------
Mortgages 56,906 2,180 188 2,368 398 92 59,764
Personal of which: 4,929 425 35 460 66 5 5,460
------------------------- ------- -------- -------- ------ ------ ------ -------
- credit cards 3,875 384 28 412 50 5 4,342
- personal overdrafts 42 - 1 1 3 - 46
- other retail lending 1,012 41 6 47 13 - 1,072
------------------------- ------- -------- -------- ------ ------ ------ -------
Business 5,570 2,456 3 2,459 273 - 8,302
------- -------- -------- ------ ------ ------ -------
Closing balance 67,405 5,061 226 5,287 737 97 73,526
------------------------- ------- -------- -------- ------ ------ ------ -------
As at 30 September 2019
(audited)
Stage Stage Stage Stage
2 2 2 3
Stage Stage
1 <30 DPD >30 DPD Total 3 POCI Total
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 retail 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
------------------------- -------- -------- -------- ------- ------ ------ --------
Risk management
Credit risk
The lending portfolio increased by GBP280m between 1 October
2019 and 31 March 2020, with growth in both business and personal
lending marginally offset by a small contraction in mortgages
lending.
Mortgages - With total gross loans and advances of GBP59.84bn as
at 31 March 2020, there has been marginal underlying contraction in
the portfolio. Over 95% are classed as Stage 1, reflective of the
strong credit quality of the portfolio. Stage 3 purchased or
originated credit impaired (POCI) for Mortgages reduced from
GBP103m as at 30 September 2019 to GBP92m as at 31 March 2020, as a
result of customer redemptions and balance paydowns.
Personal - Of the GBP5.5bn total personal portfolio, the
majority is credit cards, at GBP4.3bn. The growth in the period
results mainly from the credit cards portfolio, however there has
also been an increase in the balance of personal loans. The
personal portfolio continues to evidence stable performance with
90% of balances classed as Stage 1. Stage 3 POCI has reduced from
GBP8m as at 30 September 2019 to GBP5m as at 31 March 2020, due to
write-offs and customer balance paydowns.
Business - At GBP8.3bn, business lending continues to evidence
strong underlying growth. The proportion of lending in Stage 2 has
remained stable at 30%, 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.
Credit quality of loans and advances as at 31 March 2020
(unaudited)
The following tables highlight the significant exposure to
credit risk in respect of which the 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.
Risk management
Credit risk
Credit risk exposure, by internal PD rating, by IFRS 9 stage
allocation (unaudited)
The distribution of the Group's credit exposures, by internal PD
rating is analysed below:
As at 31 March 2020
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
GBPm GBPm GBPm GBPm GBPm
------------------ --------- --------------- ------------ ---------- -------
Mortgages
------------------ --------- --------------- ------------ ---------- -------
<0.15 36,087 369 - - 36,456
------------------ --------- --------------- ------------ ---------- -------
0.15 to <0.25 6,135 178 - - 6,313
------------------ --------- --------------- ------------ ---------- -------
0.25 to <0.50 9,040 395 - - 9,435
------------------ --------- --------------- ------------ ---------- -------
0.50 to <0.75 2,683 170 - - 2,853
------------------ --------- --------------- ------------ ---------- -------
0.75 to <2.50 2,561 629 - - 3,190
------------------ --------- --------------- ------------ ---------- -------
2.50 to <10.00 339 266 - - 605
------------------ --------- --------------- ------------ ---------- -------
10.00 to <100.00 61 361 - - 422
------------------ --------- --------------- ------------ ---------- -------
100.00 (Default) - - 398 92 490
------------------ --------- --------------- ------------ ---------- -------
Total 56,906 2,368 398 92 59,764
------------------ --------- --------------- ------------ ---------- -------
Personal
------------------ ------ ---- --- ------
<0.15 81 - - - 81
------------------ ------ ---- --- ------
0.15 to <0.25 70 - - - 70
------------------ ------ ---- --- ------
0.25 to <0.50 1,248 5 - - 1,253
------------------ ------ ---- --- ------
0.50 to <0.75 1,001 7 - - 1,008
------------------ ------ ---- --- ------
0.75 to <2.50 1,910 35 - - 1,945
------------------ ------ ---- --- ------
2.50 to <10.00 584 250 - - 834
------------------ ------ ---- --- ------
10.00 to <100.00 35 163 - - 198
------------------ ------ ---- --- ------
100.00 (Default) - - 66 5 71
------------------ ------ ---- --- ------
Total 4,929 460 66 5 5,460
------------------ ------ ---- --- ------
Business
------------------ ------ ------ ---- ------
<0.15 658 5 - - 663
------------------ ------ ------ ---- ------
0.15 to <0.25 308 10 - - 318
------------------ ------ ------ ---- ------
0.25 to <0.50 788 56 - - 844
------------------ ------ ------ ---- ------
0.50 to <0.75 365 118 - - 483
------------------ ------ ------ ---- ------
0.75 to <2.50 2,373 971 - - 3,344
------------------ ------ ------ ---- ------
2.50 to <10.00 1,078 1,159 - - 2,237
------------------ ------ ------ ---- ------
10.00 to <100.00 - 140 - - 140
------------------ ------ ------ ---- ------
100.00 (Default) - - 273 - 273
------------------ ------ ------ ---- ------
Total 5,570 2,459 273 - 8,302
------------------ ------ ------ ---- ------
Risk management
Credit risk
Credit quality of loans and advances as at 30 September 2019
(audited)
As at 30 September 2019
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
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
The following tables disclose the impairment allowance by
portfolio:
As at 31 March 2020
(unaudited)
Stage Stage Stage Stage
2 2 2 3
Stage Stage
1 <30 DPD >30 DPD Total 3 POCI Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ------ -------- -------- ------ ------ ------ ------
Mortgages 7 8 7 15 29 (1) 50
Personal of which: 79 92 20 112 42 (2) 231
------------------------- ------ -------- -------- ------ ------ ------ ------
- credit cards 65 85 15 100 30 (2) 193
- personal overdrafts 2 - 1 1 3 - 6
- other retail lending 12 7 4 11 9 - 32
------------------------- ------ -------- -------- ------ ------ ------ ------
Business 44 140 - 140 77 - 261
------------------------- ------ -------- -------- ------ ------ ------ ------
Closing balance 130 240 27 267 148 (3) 542
------------------------- ------ -------- -------- ------ ------ ------ ------
As at 30 September 2019
(audited)
Stage Stage Stage Stage
2 2 2 3
Stage Stage
1 <30 DPD >30 DPD Total 3 POCI Total
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 retail lending 9 6 3 9 6 - 24
------------------------- ------ -------- -------- ------ ------ ------ ------
Business 20 72 - 72 55 - 147
Closing balance 79 148 20 168 118 (3) 362
------------------------- ------ -------- -------- ------ ------ ------ ------
The Group's impairment allowance has increased by GBP180m in the
period from 1 October 2019 to 31 March 2020, which is primarily due
to the impact of the COVID-19 related overlay of GBP164m.
Mortgages - The Mortgage impairment allowance of GBP50m is
reflective of the level of collateral held and the low expected
credit loss for this portfolio. The increase from September 2019 is
due to the GBP15m impact of COVID-19 overlay.
Personal - The total impairment allowance for the personal
portfolio of GBP231m has increased by GBP56m, of which GBP39m is
attributed to the COVID-19 overlay. The underlying increase in
impairment allowance over the period is almost entirely due to the
credit cards portfolio 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
increased by GBP114m to GBP261m, primarily due to the impact of the
COVID-19 overlay. The pre-COVID-19 increase is due to the growth in
the portfolio over the period.
Risk management
Credit risk
Coverage ratios
As at 31 March 2020
(unaudited)
Stage Stage Stage Stage
2 2 2 3
Stage Stage
1 <30 DPD >30 DPD Total 3 POCI Total
% % % % % % %
------------------------- ------ -------- -------- ------ ------ -------- ------
Mortgages 0.01 0.39 3.88 0.67 7.23 (0.58) 0.09
Personal of which: 1.65 22.44 59.68 25.27 66.67 (36.72) 4.40
------------------------- ------ -------- -------- ------ ------ -------- ------
- credit cards 1.69 22.83 54.95 25.03 63.13 (36.72) 4.56
- personal overdrafts 5.51 13.69 66.06 57.77 86.07 - 12.20
- other retail lending 1.32 18.59 82.36 26.83 76.05 - 3.32
------------------------- ------ -------- -------- ------ ------ -------- ------
Business 0.80 5.86 6.37 5.86 29.14 - 3.23
------------------------- ------ -------- -------- ------ ------ -------- ------
Closing balance 0.19 4.84 12.35 5.16 20.43 (2.43) 0.75
------------------------- ------ -------- -------- ------ ------ -------- ------
As at 30 September 2019
(audited)
Stage Stage Stage Stage
2 2 2 3
Stage Stage
1 <30 DPD >30 DPD Total 3 POCI Total
% % % % % % %
------------------------- ------ -------- -------- ------ ------ -------- ------
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 retail 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
------------------------- ------ -------- -------- ------ ------ -------- ------
The coverage ratio increased by 25bps in the period, of which
21bps can be attributed to the impact of the COVID-19 related
overlay.
Mortgages - The coverage ratio increased by 2bps in the period
as a result of the COVID-19 overlay. On an underlying basis the
coverage ratio remained stable at 7bps, reflective of the
composition, quality and value of the mortgage portfolio.
Personal - The total coverage ratio increased by 101bps, with
the COVID-19 overlay representing 61bps. Underlying coverage of
3.79% is an increase of 40bps, primarily due to the increased early
delinquency and arrears and maturation of the portfolios.
Business - Coverage for the business portfolio increased by
130bps, almost all of which is attributable to the COVID-19
overlay. Excluding the impact of the overlay, the underlying
increase was 2bps 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. Coverage in Stage 2
for the business portfolio has reduced on an underlying basis to
3.07%.
Risk management
Credit risk
Reconciliation of movement in gross balances and impairment loss
allowance (unaudited)
The following tables explain the changes in the loss allowance
and gross carrying value of the portfolios between 30 September
2019 and 31 March 2020. Values are calculated using the individual
customer account balances, and the stage allocation is taken as at
the end of each month. The monthly position of each account is
aggregated to report a net closing position for the period, thereby
incorporating all movements an account has made during the
period.
Non credit impaired Credit impaired Total Total
------------------------------
Stage 3
Stage 1 Stage 2 Stage 3 POCI
Gross Gross Gross Gross Gross
Loans ECL Loans ECL Loans ECL Loans ECL Loans ECL
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- -------- ----- ------- ----- ------- ----- ------- ----- ------
Opening balance at
1 October 2019 67,925 79 4,514 168 696 118 111 (3) 73,246 362
------------------------- -------- ----- ------- ----- ------- ----- ------- ----- ------
Transfers Across Stages (1,511) (3) 790 29 141 54 - - (580) 80
------------------------- -------- ----- ------- ----- ------- ----- ------- ----- ------
Assets Originated or
Purchased 9,790 42 529 37 68 3 - - 10,387 82
Repayments and Other
movements (8,799) 12 (546) 33 (100) 29 (13) 1 (9,458) 75
Write-offs - - - - (68) (68) (1) (1) (69) (69)
Cash Recoveries - - - - - 12 - - - 12
Closing balance at
31 March 2020 67,405 130 5,287 267 737 148 97 (3) 73,526 542
------------------------- ------- ------- -------
The contractual amount outstanding on loans and advances that
were written off during the reporting period or still subject to
enforcement activity was GBP2.9m.
Transfers Across Stage - The net movement of loan and ECL
balances across the IFRS stages.
Assets originated or purchased - The balance and ECL calculated
on newly opened or originated assets. Assets where the term has
ended, and a new facility has been provided are reported as new
assets.
Repayments and other movements - Movements due to customer
repayment and other minor movements not captured under any other
category.
Write-offs - The amount of principal written off and
derecognised from the balance sheet.
Cash recoveries - ECL impact of payments received on assets that
had previously been written off.
Risk management
Credit risk
Mortgage lending by average LTV
The LTV ratio of mortgage lending, coupled with the relationship
of the debt to customers' income, is key to the credit quality of
these loans. The table below sets out the indexed LTV analysis of
the Group's mortgage stock:
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
LTV(1) % %
-------------------- ------------------------------------ -----------------------------------
Less than 50% 34 35
50% to 75% 49 48
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% - -
100 100
-------------------- ------------------------------------ -----------------------------------
LTV of the mortgage portfolio is defined as mortgage portfolio weighted
(1) by balance. The heritage Clydesdale and Yorkshire Bank portfolios
are indexed using the MIAC Acadametrics indices at a given date,
while the heritage Virgin Money portfolio is indexed using the Markit
indices. The Group view is a combined summary of the two portfolios.
Risk management
Credit risk
Forbearance
In dealing with the exceptional challenges posed by COVID-19 and
to ensure the appropriate provision of support for our customers, a
number of concessions have been, and will continue to be, granted
in response to the short-term financial consequences for our
customers. In line with regulatory guidance, these interim measures
are not considered to be forbearance, as determined by the Group's
Forbearance Policy, and have not been reflected in the Group's
forbearance disclosures.
Where underlying longer term, financial difficulties are evident
the Group's normal forbearance assessment applies.
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.
As at 31 March
2020
(unaudited) Impairment allowance on
Total loans and advances loans and advances subject
to
subject to forbearance measures forbearance measures
--------------------------------------- ---------------------------------
Gross
carrying Impairment
amount allowance Coverage
Number of GBPm % of total GBPm %
loans portfolio
------------------- --------- ------------------ ------------
Formal arrangements 1,333 159 0.26 6.7 4.20
Temporary
arrangements 856 111 0.19 4.2 3.81
Payment arrangement 1,353 134 0.22 3.1 2.34
Payment holiday 1,340 148 0.25 1.4 0.97
Interest only
conversion 353 53 0.09 0.2 0.43
Term extension 165 14 0.02 0.1 0.59
Other 33 3 0.01 - 0.62
Legal 135 12 0.02 1.0 8.20
------------------- ------------- --------- ------------- ------------------ ------------
Total mortgage
forbearance 5,568 634 1.06 16.7 2.65
------------------- ------------- --------- ------------- ------------------ ------------
Personal
forbearance
- credit cards 6,609 30 0.61 14.0 46.73
------------------- ------------- --------- -------------
Total 12,177 664 1.03 30.7 4.59
------------------- ------------- --------- -------------
As at 30 September
2019
(audited) Impairment allowance on
Total loans and advances loans and advances subject
to
subject to forbearance measures forbearance measures
---------------------------------------
Gross
carrying Impairment
amount allowance Coverage
Number of GBPm % of total GBPm %
loans portfolio
------------------- ---------
Formal arrangements 1,352 157 0.26 4.4 2.83
Temporary
arrangements 913 119 0.20 3.1 2.62
Payment arrangement 1,118 113 0.19 1.6 1.41
Payment holiday 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
------------------- ------------- --------- ------------- ------------
Relative to Mortgages, when all other avenues of resolution
including forbearance have been explored, the Group will take steps
to repossess and sell underlying collateral. In the period to 31
March 2020, there were 34 repossessions of which 8 were voluntary
(12 months to 30 September 2019: 66 including 14 voluntary).
Risk management
Credit risk
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 GBP10.9m as at 31 March 2020 (30
September 2019: GBP11.5m), representing 1.08% of the personal
lending portfolio (30 September 2019: 1.10%).
Impairment provisions on forborne balances totalled GBP4.2m as
at 31 March 2020 (30 September 2019: GBP3.6m) providing overall
coverage of 38.3% (30 September 2019: 31.58%).
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.
As at 31 March 2020
(unaudited) Impairment allowance
on
Total loans and advances loans subject to
subject to forbearance forbearance measures
measures
Gross carrying
amount Impairment
allowance Coverage
Number GBPm % of total GBPm %
of customers portfolio
Term extension 199 189 2.23 22.9 12.15
Deferral of contracted capital
repayments 86 98 1.16 19.3 19.75
Reduction in contracted interest
rate 2 1 0.01 0.1 5.32
Alternative forms of payment 2 6 0.08 0.4 5.97
Debt forgiveness 2 4 0.05 0.3 6.89
Refinancing 17 9 0.10 2.1 23.45
Covenant breach/reset/waiver 55 201 2.37 36.2 18.02
Total business forbearance 363 508 6.00 81.3 16.00
As at 30 September 2019
(audited) Impairment allowance on
Total loans and advances loans and advances subject
to
subject to forbearance forbearance measures
measures
Gross
carrying Impairment
amount allowance Coverage
Number GBPm % of total GBPm %
of customers portfolio
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
Included in other financial assets at fair value is a portfolio
of loans which are included in the above table. The gross value of
fair value loans subject to forbearance as at 31 March 2020 is
GBP6m (30 September 2019: GBP8m), representing 0.07% of the total
business portfolio (30 September 2019: 0.11%). The credit risk
adjustment on these amounts totalled GBP0.2m (30 September 2019:
GBP0.6m), a coverage of 4.26% (30 September 2019: 6.94%).
Risk management
Financial risk
Financial risk covers several categories of risk which impact
the way in which the Group can support its customers in a safe and
sound manner. They include capital risk, funding risk, liquidity
risk, market risk, model risk, pension risk and financial risks
arising from climate change.
Capital risk
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.
Included in this section are certain Pillar 3 disclosures which
the Group has assessed as requiring semi-annual disclosure.
Regulatory capital developments
The Group measures the amount of capital it is required to hold
by applying CRD IV as implemented in the UK by the Prudential
Regulation Authority (PRA) and supplemented through additional
regulation under the PRA Rulebook. The table below summarises the
amount of capital in relation to RWA the Group is currently
required to hold, excluding any PRA Buffer. These ratios apply at
the consolidated Group level.
As at 31 March
2020
Minimum requirements (unaudited) CET1 Total capital
Pillar 1(1) 4.5% 8.0%
Pillar 2A 2.9% 5.2%
Total capital requirement 7.4% 13.2%
Capital conservation buffer 2.5% 2.5%
UK countercyclical capital buffer(2) 0.0% 0.0%
Total (excluding PRA buffer)(3) 9.9% 15.7%
(1) The minimum amount of total capital under Pillar 1 of the
regulatory
framework is determined as 8% of RWA, of which at least 4.5% of
RWA
is required to be covered by CET1 capital.
(2) The UK countercyclical capital buffer (CCyB) is set by the
Financial
Policy Committee (FPC). On 11 March 2020, as part of a package
of
measures to support the economy from the impacts of the COVID-19
virus,
the FPC announced an immediate reduction of the CCyB from 1.00%
to
0.00%.
(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.
* a buffer relating to the results of the Bank of
England's stress tests.
The Group continues to maintain a significant buffer to its CRD
IV minimum CET1 requirement of 9.9%, being a buffer equivalent to
GBP0.8 billion.
The Group's total capital Pillar 2A requirement has reduced from
5.3% at September 2019 to 5.2% at March 2020. This is because some
elements of the Pillar 2A requirement are fixed and therefore
represent a lower percentage of RWAs following the RWA growth seen
since September 2019.
The UK countercyclical capital buffer (UK CCyB) may be set
between 0% and 2.5%. At its December 2019 meeting, the FPC raised
the level of the UK CCyB rate that it expects to set in a standard
risk environment from in the region of 1% to in the region of 2%
and accordingly raised the UK CCyB rate from 1% to 2% which would
have taken effect in December 2020.
The FPC also noted that the PRA would consult in 2020 on a
proposal to reduce variable Pillar 2A requirements for the largest
UK banks by 50% of the relevant firm-specific increase in the UK
CCyB rate.
The FPC stated that its intention was to leave the overall
loss-absorbing capacity in the banking system broadly unaffected
but that the changes will shift the balance of that capacity to
higher-quality Tier 1 capital. The PRA's consultation has since
been launched and was in line with these proposals.
However, on 11 March 2020, as part of a package of measures to
support the economy from the impact of the COVID-19 virus, the FPC
announced a reduction in the UK CCyB to 0% with immediate effect.
The FPC expects to maintain the 0% rate for at least 12 months, so
that any subsequent increase would not take effect until March 2022
at the earliest.
The Bank of England has not yet advised the Group's final MREL
requirements. From 1 January 2020 until 31 December 2021, the Group
is required to hold 18% of RWA in the form of MREL. From 1 January
2022, the Group continues to expect that it will be subject to an
end state MREL of two times Pillar 1 and Pillar 2A capital.
Following the Bank of England's announcement on 20 March 2020,
in relation to supervisory and prudential policy measures to
address the challenges of COVID-19, the requirements to comply with
updates to definition of default, as well as mortgage Hybrid PD and
LGD are now required to be approved and implemented by 1 January
2022, a year later than the original timeline.
Risk management
Financial risk
Regulatory capital developments (continued)
Distributable reserves are determined as required by the
Companies Act 2006 by reference to a company's individual financial
statements . At 31 March 2020, the Company had accumulated
distributable reserves of GBP 1,018m (30 September 2019:
GBP1,015m).
Capital position
The Group's capital position as at 31 March 2020 is summarised
below.
Regulatory capital (unaudited) (1)
31 Mar 2020 30 Sep 2019
GBPm GBPm
Statutory total equity 5,074 5,021
CET1 capital: Regulatory Adjustments
(2)
AT1 capital instruments (915) (915)
Defined benefit pension fund assets (402) (257)
Prudent valuation adjustment (5) (5)
Intangible assets (501) (501)
Goodwill (11) (11)
Deferred tax asset relying on future
profitability (156) (146)
Cash flow hedge reserve 51 26
Excess expected losses - (88)
AT1 coupon accrual (21) (20)
IFRS 9 transitional adjustments 147 100
Total CET1 capital 3,261 3,204
AT1 capital
AT1 capital instruments 915 915
Total AT1 capital 915 915
Total Tier 1 capital 4,176 4,119
Tier 2 capital
Subordinated debt 722 721
IRB excess provisions over expected
losses 5 -
Total Tier 2 capital 727 721
Total regulatory capital 4,903 4,840
(1) The table shows the capital position on a CRD IV 'fully loaded' basis
and transitional IFRS 9 basis.
(2) A number of regulatory adjustments to CET1 capital are required under
CRD IV regulatory capital rules.
Risk management
Financial risk
Capital position (continued)
Regulatory capital flow of funds (unaudited) (1) 31 Mar 2020 30 Sep 2019
GBPm GBPm
CET1 capital (2)
CET1 capital at 1 October 3,204 2,113
Share capital and share premium 1 3
Retained earnings and other reserves (including special
purpose entities) 51 (210)
Acquisition of Virgin Money Holdings (UK) plc - 1,567
Prudent valuation adjustment - (2)
Intangible assets - (89)
Goodwill arising on acquisition of Virgin Money Holdings
(UK) plc - (11)
Deferred tax asset relying on future profitability (10) (47)
Defined benefit pension fund assets (145) (119)
Cash flow hedge reserve 25 (13)
IRB shortfall of credit risk adjustments to expected
losses 88 (88)
IFRS 9 transitional relief 47 100
Total CET1 capital 3,261 3,204
AT1 capital
AT1 capital at 1 October 915 450
AT1 capital issued and transferred from Virgin Money
Holdings (UK) plc - 465
Total AT1 capital 915 915
Total Tier 1 capital 4,176 4,119
Tier 2 capital
Tier 2 capital at 1 October 721 626
IRB excess provisions over expected losses 5 -
Credit risk adjustments(3) - (152)
Other movements 1 -
Capital instruments issued: subordinated debt - 247
Total Tier 2 capital 727 721
Total capital 4,903 4,840
(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 GBP57m in the first six
months of the year, primarily due to movement in the IRB shortfall
of credit risk adjustments to expected losses. This was driven by
an increase in impairment provisions as a result of the COVID-19
related overlay, alongside an increase in retained earnings. These
increases are offset by a charge to the Group's defined benefit
pension scheme which was closed to future accrual for most members
on 1 August 2017.
AT1 and Tier 2 capital remained stable during the first six
months of the year.
31 Mar 2020 30 Sep
2019
Minimum Pillar 1 capital requirements (unaudited) GBPm GBPm
Credit risk 1,771 1,685
Operational risk 209 209
Counterparty credit risk 18 15
Credit valuation adjustment 16 15
Total Pillar 1 regulatory capital requirements 2,014 1,924
Risk management
Financial risk
Capital (continued)
IFRS 9 transitional arrangements(1) 31 March 2020 (GBPm)
(unaudited)
----------------------------------------------------------------------
IFRS 9 Transitional IFRS 9 Fully
Available capital (amounts) basis loaded basis
CET1 capital 3,261 3,114
Tier 1 capital 4,176 4,029
Total capital 4,903 4,756
RWA (amounts)
Total RWA 25,173 25,074
Capital ratios
CET1 (as a percentage of risk exposure
amount) 13.0% 12.4%
Tier 1 (as a percentage of risk exposure
amount) 16.6% 16.1%
Total capital (as a percentage of risk
exposure
amount) 19.5% 19.0%
Leverage ratio
Leverage ratio total exposure measure 94,452 94,305
Leverage ratio 4.4% 4.3%
(1) The table shows a comparison of capital resources, requirements and
ratios with and without the application of transitional arrangements
for IFRS 9.
Transitional arrangements in Capital Requirements Regulation
(CRR) mean the regulatory capital impact of ECL is being phased in
over time. The Group currently receives 85% relief on new
provisions due to IFRS 9.
RWA movements (unaudited)
6 months to 31 March 2020 6 months to 30 September 2019(1)
Other Capital Other Capital
RWA flow IRB RWA STD RWA RWA Total Required IRB RWA STD RWA RWA Total required
statement GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
RWA at 1
October 15,104 5,953 2,989 24,046 1,924 15,318 5,558 2,988 23,864 1,908
Asset size 213 308 48 569 46 129 386 1 516 42
Asset quality 135 94 - 229 18 156 (17) - 139 11
Model
updates(2) (148) - - (148) (12) (511) - - (511) (40)
Methodology
and
policy 417 - - 417 33 11 - - 11 1
Other - 60 - 60 5 1 26 - 27 2
RWA at 31
March 15,721 6,415 3,037 25,173 2,014 15,104 5,953 2,989 24,046 1,924
(1) The comparative has been restated in line with current year presentation
following a change in flow logic.
(2) Model updates include the mortgage quarterly PD calibrations.
Methodology and policy movements have been driven primarily by
the inclusion of a new mortgage LGD model, approved by the
regulator and deployed into the heritage Virgin Money rating system
in March 2020. This resulted in an uplift of GBP511m in RWA,
reflecting increased risk sensitivity and improved downturn
estimation. The other material change is the inclusion of
additional eligible collateral types within the business portfolio
following approval by the PRA, resulting in a reduction of RWA of
GBP94m.
Risk management
Financial risk
Capital (continued)
Pillar 1 RWA and capital requirements
by business line (unaudited)
At 31 March 2020 At 30 September 2019
Capital Capital
required RWA Exposure required RWA Exposure
Capital requirements for calculating GBPm GBPm GBPm GBPm GBPm GBPm
RWA
Corporates 529 6,617 8,971 501 6,258 8,587
Retail 728 9,104 63,747 708 8,846 64,067
Total IRB approach 1,257 15,721 72,718 1,209 15,104 72,654
Central governments or central
banks - - 10,262 1 9 11,663
Regional governments or local
authorities 1 13 202 1 13 175
Public sector entities - 5 344 - 5 335
Multilateral development banks - - 1,146 - - 1,034
Financial institutions 14 174 830 16 195 948
Corporates 27 334 358 28 347 376
Retail 334 4,177 5,570 319 3,993 5,324
Secured by mortgages on immovable
property 47 582 970 40 498 875
Exposures in default 6 80 71 5 59 55
Collective investments undertakings - - - - 1 1
Equity exposures 1 10 9 1 11 9
Items associated with particularly
high risk 3 32 21 1 11 7
Covered bonds 13 157 1,566 11 141 1,415
Other items 68 851 1,000 53 670 754
Total standardised approach 514 6,415 22,349 476 5,953 22,971
Total credit risk 1,771 22,136 95,067 1,685 21,057 95,625
Operational risk 209 2,606 209 2,606
Counterparty credit risk 18 229 15 191
Credit valuation adjustment 16 202 15 192
Total Pillar 1 regulatory capital
requirements 2,014 25,173 1,924 24,046
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' tables on pages 39 to 42.
Risk management
Financial risk
Capital (continued)
31 Mar 2020 30 Sep 2019
Capital position and CET1 (unaudited) GBPm GBPm
RWA(1)
Retail mortgages 9,104 8,846
Business lending 7,580 7,124
Other retail lending 4,238 4,042
Other lending 272 481
Other(2) 942 564
Credit risk 22,136 21,057
Credit valuation adjustment 202 192
Operational risk 2,606 2,606
Counterparty credit risk 229 191
Total RWA 25,173 24,046
Capital ratios
CET1 ratio 13.0% 13.3%
Tier 1 ratio 16.6% 17.1%
Total capital ratio 19.5% 20.1%
(1) RWA are calculated under the AIRB approach for the mortgage
portfolio
and the foundation internal ratings-based (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.
EU CR6 - IRB approach - Credit risk by exposure class and PD
range.
Heritage Clydesdale Bank PLC and heritage Virgin Money PLC have
separate IRB models for Retail Mortgages, with different modelling
methodologies and risk profiles. Combining these into a single
table does not provide a valid representation of risk, therefore
the position of each portfolio as at 31 March 2020 (unaudited) is
presented separately below.
The exposure amounts shown are disclosed after, where
applicable, on- or off-balance sheet netting.
Clydesdale Bank PLC Retail Mortgages(1)
(AIRB) Retail Secured by Immovable Property non-SME
EAD
Original post
on-balance Off-balance CRM Value
sheet sheet and adjustments
gross exposures post Number and
exposures pre CCF Average CCF Average of Average Average RWAs RWA EL provisions
PD scale GBPm GBPm CCF GBPm PD obligors LGD maturity GBPm density(2) GBPm GBPm
As at 31
Mar 2020
0.00 to
<0.15 1,656 522 102.1% 2,228 0.12% 17,282 13.64% - 72 3.2% -
0.15 to
<0.25 4,073 319 102.2% 4,496 0.20% 36,136 12.25% - 232 5.2% 1
0.25 to
<0.50 10,035 449 102.1% 10,734 0.37% 54,179 15.51% - 1,110 10.3% 6
0.50 to
<0.75 2,241 52 102.2% 2,348 0.62% 10,834 18.13% - 409 17.4% 3
0.75 to
<2.50 4,729 125 102.1% 4,966 1.29% 24,422 17.32% - 1,304 26.3% 11
2.50 to
<10.00 769 11 102.4% 799 4.63% 5,763 16.89% - 447 55.9% 7
10.00 to
<100.00 253 3 102.2% 262 35.23% 1,790 15.79% - 218 83.3% 15
100.00
(Default) 306 8 100.0% 313 100.00% 2,520 20.20% - 711 226.8% 9
Subtotal 24,062 1,489 102.1% 26,146 2.19% 152,926 15.47% - 4,503 17.2% 52 30
As at 30
Sep 2019
0.00 to
<0.15 2,425 821 102.1% 3,319 0.11% 26,334 14.89% - 116 3.5% -
0.15 to
<0.25 4,668 294 102.2% 5,080 0.20% 36,111 12.90% - 275 5.4% 1
0.25 to
<0.50 9,881 208 102.2% 10,331 0.37% 51,816 16.01% - 1,125 10.9% 6
0.50 to
<0.75 1,605 58 102.1% 1,702 0.62% 7,575 19.11% - 312 18.4% 2
0.75 to
<2.50 4,765 87 102.1% 4,963 1.30% 25,051 17.94% - 1,362 27.4% 11
2.50 to
<10.00 801 14 102.4% 833 4.77% 6,544 17.60% - 494 59.3% 7
10.00 to
<100.00 225 4 102.3% 233 36.42% 1,726 15.94% - 196 83.9% 14
100.00
(Default) 283 7 100.0% 290 100.00% 2,514 21.06% - 679 224.4% 10
Subtotal 24,653 1,493 102.1% 26,751 2.03% 157,671 15.94% - 4,559 17.0% 51 29
(1) Clydesdale Bank PLC retail mortgages excluding the portfolio of heritage
Virgin Money mortgages transferred under FSMA Part VII.
(2) RWA density calculation has been performed on unrounded figures.
Risk management
Financial risk
Capital (continued)
Virgin Money Retail Mortgages(1)
(AIRB) Retail Secured by Immovable Property non-SME
Original EAD
on- post
balance Off-balance CRM Value
sheet sheet and adjustments
gross exposures post Number and
exposures pre CCF Average CCF Average of Average Average RWAs RWA EL provisions
PD scale GBPm GBPm CCF GBPm PD obligors LGD maturity GBPm density(2) GBPm GBPm
As at 31
Mar 2020
0.00 to
<0.15 4,885 389 100.0% 5,337 0.10% 34,143 10.24% - 137 2.6% -
0.15 to
<0.25 7,236 247 100.0% 7,570 0.19% 54,842 10.72% - 342 4.5% 2
0.25 to
<0.50 13,817 395 100.0% 14,377 0.36% 84,315 11.89% - 1,165 8.1% 6
0.50 to
<0.75 4,733 97 100.0% 4,891 0.67% 29,339 18.64% - 937 19.2% 6
0.75 to
<2.50 3,045 375 100.0% 3,469 1.42% 25,798 15.59% - 887 25.6% 8
2.50 to
<10.00 1,192 28 100.0% 1,237 4.01% 9,732 17.22% - 629 50.8% 8
10.00 to
<100.00 646 11 100.0% 666 32.87% 5,479 13.33% - 451 67.8% 26
100.00
(Default) 54 1 100.0% 54 100.00% 478 10.00% - 53 98.4% 3
Subtotal 35,608 1,543 100.0% 37,601 1.50% 244,126 12.84% - 4,601 12.2% 59 19 19
As at 30
Sep 2019
0.00 to
<0.15 2,598 163 100.0% 2,794 0.12% 18,484 9.35% - 73 2.6% -
0.15 to
<0.25 8,636 294 100.0% 9,035 0.20% 61,300 8.41% - 321 3.6% 2
0.25 to
<0.50 10,325 245 100.0% 10,690 0.35% 59,179 10.29% - 706 6.6% 4
0.50 to
<0.75 8,267 149 100.0% 8,523 0.63% 55,895 15.77% - 1,318 15.5% 9
0.75 to
<2.50 3,755 294 100.0% 4,104 1.26% 30,016 12.65% - 798 19.5% 7
2.50 to
<10.00 1,453 34 100.0% 1,507 3.77% 11,718 14.43% - 620 41.1% 8
10.00 to
<100.00 589 10 100.0% 608 32.72% 5,034 12.22% - 373 61.4% 21
100.00
(Default) 55 1 100.0% 55 100.0% 492 12.66% - 79 141.9% 3
Subtotal 35,678 1,190 100.0% 37,316 1.51% 242,118 11.48% - 4,288 11.5% 54 15 19
(1) Retail mortgages written under the Virgin Money brand which
were previously held in Virgin Money PLC prior to the FSMA
Part VII transfer.
(2) RWA density calculation has been performed on unrounded figures.
Risk management
Financial risk
Capital (continued)
Clydesdale Bank PLC Corporates - Other
(FIRB) Corporates - Other
Original EAD
on- post
balance Off-balance CRM Value
sheet sheet and adjustments
gross exposures post Number and
exposures pre CCF Average CCF Average of Average Average RWAs RWA EL provisions
PD scale GBPm GBPm CCF GBPm PD obligors LGD maturity GBPm density(1) GBPm GBPm
As at 31
Mar 2020
0.00 to
<0.15 17 47 71.8% 67 0.11% 26 34.34% 651 15 22.6% -
0.15 to
<0.25 38 26 73.6% 65 0.20% 9 38.54% 926 28 42.6% -
0.25 to
<0.50 329 162 51.1% 413 0.40% 57 43.70% 1,055 285 69.0% 1
0.50 to
<0.75 42 33 71.4% 66 0.62% 18 44.10% 908 52 79.1% -
0.75 to
<2.50 625 449 56.4% 897 1.65% 342 42.14% 1,053 998 111.4% 6
2.50 to
<10.00 212 63 71.6% 261 4.03% 105 43.26% 918 372 142.6% 5
10.00 to
<100.00 17 6 71.6% 21 22.53% 47 42.84% 959 52 244.9% 2
100.00
(Default) 83 17 73.8% 95 100.00% 92 42.06% 745 - 0.0% 40
Subtotal 1,363 803 59.1% 1,885 6.79% 696 42.31% 995 1,802 95.6% 54 66
As at 30
Sep 2019
0.00 to
<0.15 7 72 74.0% 69 0.11% 29 39.27% 597 16 23.6% -
0.15 to
<0.25 39 29 73.6% 67 0.20% 17 40.09% 1,063 32 47.9% -
0.25 to
<0.50 362 199 58.1% 480 0.41% 72 44.03% 982 325 67.7% 1
0.50 to
<0.75 22 12 29.9% 26 0.62% 28 43.23% 976 21 79.3% -
0.75 to
<2.50 535 306 65.5% 746 1.60% 352 43.93% 1,060 858 114.9% 5
2.50 to
<10.00 96 62 72.6% 145 4.03% 85 42.58% 1,014 208 143.4% 2
10.00 to
<100.00 4 3 72.7% 7 23.43% 40 43.47% 805 16 246.6% 1
100.00
(Default) 91 10 73.5% 98 100.0% 87 42.52% 796 - 0.0% 42
Subtotal 1,156 693 64.7% 1,638 7.29% 710 43.49% 996 1,476 90.1% 51 37
(1) RWA density calculation has been performed on unrounded figures.
Risk management
Financial risk
Capital (continued)
Clydesdale Bank PLC Business Lending
(FIRB) Corporates - Business
Original
on-
balance Off-balance EAD post
sheet sheet CRM and Value
gross exposures post Number adjustments
exposures pre CCF Average CCF Average of Average Average RWAs RWA EL and provisions
PD scale GBPm GBPm CCF GBPm PD obligors LGD maturity GBPm density(1) GBPm GBPm
As at 31
Mar 2020
0.00 to
<0.15 102 98 69.6% 172 0.11% 181 41.92% 931 41 24.0% -
0.15 to
<0.25 170 154 70.3% 280 0.19% 646 39.43% 870 74 26.4% -
0.25 to
<0.50 784 388 70.6% 1,068 0.38% 1,646 39.16% 894 426 39.9% 2
0.50 to
<0.75 381 149 66.4% 480 0.62% 691 39.28% 905 250 52.0% 1
0.75 to
<2.50 3,239 883 67.1% 3,850 1.52% 5,745 39.41% 1,008 2,934 76.2% 23
2.50 to
<10.00 822 273 64.4% 999 4.57% 1,823 39.88% 822 948 94.9% 18
10.00 to
<100.00 85 14 74.8% 96 20.04% 163 39.05% 679 142 148.2% 8
100.00
(Default) 136 7 69.4% 141 100.00% 151 40.47% 823 - 0.0% 57
Subtotal 5,719 1,966 67.8% 7,086 3.84% 11,046 39.51% 942 4,815 67.9% 109 176
As at 30
Sep 2019
0.00 to
<0.15 75 76 68.0% 130 0.11% 176 41.50% 831 28 21.4% -
0.15 to
<0.25 235 187 70.5% 367 0.19% 686 40.73% 939 112 30.4% -
0.25 to
<0.50 752 376 67.7% 1,015 0.39% 1,611 39.42% 891 405 39.9% 2
0.50 to
<0.75 356 125 71.1% 447 0.62% 665 39.14% 1,100 250 55.9% 1
0.75 to
<2.50 3,108 910 66.6% 3,734 1.50% 5,794 40.34% 995 2,852 76.4% 23
2.50 to
<10.00 843 259 67.9% 1,021 4.48% 1,808 41.33% 853 1,008 98.7% 19
10.00 to
<100.00 77 12 70.6% 86 18.60% 164 40.55% 710 129 150.5% 6
100.00
(Default) 145 6 75.0% 150 100.0% 179 40.65% 7776 - 0.0% 61
Subtotal 5,591 1,951 67.7% 6,950 3.95% 11,083 40.32% 952 4,784 68.8% 112 99
(1) RWA density calculation has been performed on unrounded figures.
Leverage
31 Mar 2020 30 Sep 2019
Leverage ratio (unaudited) GBPm GBPm
Total Tier 1 capital for the leverage ratio
Total CET1 capital 3,261 3,204
AT1 capital 915 915
Total Tier 1 4,176 4,119
Exposures for the leverage ratio
Total assets as per published financial statements 90,054 90,999
Adjustment for off-balance sheet items 2,811 2,728
Adjustment for derivative financial instruments (420) (35)
Adjustment for securities financing transactions 2,884 1,934
Other adjustments (877) (882)
Leverage ratio exposure 94,452 94,744
CRD IV leverage ratio(1) 4.4% 4.3%
UK leverage ratio(2) 4.9% 4.9%
Average UK leverage ratio exposure (3) 86,088 n/a
Average UK leverage ratio (3) 4.7% n/a
(1) IFRS 9 transitional capital arrangements have
been applied to the
CRD IV leverage ratio calculation as at 31
March 2020.
(2) 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.
(3) The fully loaded average leverage exposure
measure is based on the
daily average of on-balance sheet items and
three month-end average
of off-balance sheet items. The average
leverage ratio is based on
the average of the month end tier 1 capital
position.
Under the UK leverage ratio framework, the
Group was only required
to start reporting average balances from
December 2019.
Risk management
Financial risk
Leverage (continued)
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 first reporting date from which the Group met
this threshold was 31 December 2019 and as a result the average UK
leverage ratio exposure and average UK leverage ratio are
disclosed.
The leverage ratio is monitored against a Board set risk
appetite statement with the responsibility for managing the ratio
delegated to the Group's Asset and Liabilities 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 CRD IV leverage ratio of 4.4% (30 September 2019:
4.3%) exceeds the Basel Committee's proposed minimum of 3%,
applicable from 2018, and the Group's UK leverage ratio of 4.9% (30
September 2019: 4.9%) exceeds the UK minimum ratio of 3.25%.
Following the FPC announcement on 11 March 2020, the Group's
CCyB rate reduced to 0% which also moved the leverage ratio buffer
to 0%.
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 resource below
internal or regulatory stress requirements.
The Group is predominantly funded by personal and business
customers. Customer funding is supported by the Group's ongoing
wholesale funding programmes, medium-term secured funding issuance
(e.g. the Group's securitisation programmes), Regulated Covered
Bonds and unsecured medium-term notes.
Funding risk exposures arise from an unsustainable or
undiversified funding base, for example, a reliance on short-term
wholesale deposits. The risk may result in deviation from funding
strategy, requiring funding to be originated rapidly and at
excessive cost, or require a reduction in lending growth, which are
outcomes that may adversely affect customers or shareholders.
The Group's primary liquidity risk exposure arises through the
redemption of retail deposits where customers have the ability to
withdraw funds with limited or no notice. Exposure also arises from
the refinancing of customer and wholesale funding at maturity and
the requirement to fund new and existing committed lending
obligations including mortgage pipeline and credit card
facilities.
Risk management
Financial risk
Sources of funding
The table below provides an overview of the Group's sources of
funding as at 31 March 2020:
31 Mar 2020
30 Sept 2019
(unaudited) (audited)
GBPm GBPm
GBPm GBPm
Total assets 90,054 90,999
Less: other liabilities(1) (3,292) (3,471)
Funding requirement 86,762 87,528
Funded by:
Customer deposits 64,853 64,000
Debt securities in issue 9,245 9,591
Due to other banks 7,590 8,916
of which:
Secured loans 7,122 7,308
Securities sold under agreements to repurchase 401 1,554
Transaction balances with other banks 12 12
Deposits with other banks 55 42
Equity 5,074 5,021
Total funding 86,762 87,528
(1) Other liabilities includes customer deposits at fair value through
profit or loss, derivative financial instruments, deferred tax
liabilities,
provisions for liabilities and charges, and other liabilities as per
the balance sheet line item.
The Group's funding objective is to prudently manage the sources
and tenor of funds in order to provide a sound base from which to
support sustainable lending growth. At 31 March 2020, the Group had
a funding requirement of GBP86,762m (30 September 2019: GBP87,528m)
with the majority being used to support loans and advances to
customers.
Customer deposits
The majority of the Group's funding requirement was met by
customer deposits of GBP64,853m (30 September 2019: GBP64,000m).
Customer deposits are comprised of interest bearing deposits, term
deposits and non-interest bearing demand deposits from a range of
sources including personal and business customers. The increase of
GBP853m in the six month period ended 31 March 2020 is primarily
due to increased current accounts.
Equity
Equity of GBP5,074m (30 September 2019: GBP5,021m) was also used
to meet the Group's funding requirement. Equity is comprised of
ordinary share capital, retained earnings, other equity investments
and a number of other reserves. For full details on equity refer to
note 4.1.
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
31 March 2020 (30 September 2019: compliant).
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).
Risk management
Financial risk
The volume and quality of the Group's liquid asset portfolio is
defined through a series of stress tests across a range of time
horizons and stress conditions. The stresses applied ensure the
portfolio meets internal and external requirements of stressed
outflows, including most recently the Group's view of liquidity
risk due to COVID-19 impacts. The liquid asset portfolio is
primarily comprised of cash at the Bank of England, UK government
securities (Gilts) and listed securities (e.g. bonds issued by
supra-nationals and AAA-rated covered bonds).
30 Sep
31 Mar 2020 2019 Average Average
(unaudited) (audited) Change 2020 2019
Liquid asset portfolio(1) GBPm GBPm % GBPm GBPm
Level 1
Cash and balances with central
banks 5,969 7,469 (20.1) 6,530 7,266
UK government treasury bills
and gilts 1,078 1,076 0.2 1,389 870
Other debt securities 3,269 2,867 14.0 3,117 2,604
----------- ---------
Total level 1 10,316 11,412 (9.6) 11,036 10,740
Level 2(2) 29 29 - 37 103
----------- ---------
Total LCR eligible assets 10,345 11,441 (9.6) 11,073 10,843
----------- ---------
(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 volumes of assets are maintained to support future
planned and potential stressed funding requirements. Encumbrance
limits are set in the Group RAS and calibrated to ensure that after
a stress scenario is applied, the balance sheet can recover over an
acceptable period of time. 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.
Assets not positioned
at the central bank
Assets encumbered
with non-central bank
counterparties
Positioned
at Other
the central Readily assets
bank available capable Cannot
Covered Securiti- (including for of being be
31 March 2020 bonds sations Other Total encumbered) encumbrance encumbered encumbered Total Total
(unaudited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Loans and
advances
to customers 2,653 7,923 - 10,576 16,962 24,681 17,956 3,233 62,832 73,408
Cash and
balances
with central
banks - - - - 2,851 5,799 - - 8,650 8,650
Due from other
banks 207 412 106 725 100 - 109 12 221 946
Derivative
financial
instruments - - - - - - - 403 403 403
Financial
instruments
at fair value
through other
comprehensive
income - - 563 563 - 4,072 - - 4,072 4,635
Other assets - - 556 556 - - 318 1,138 1,456 2,012
Total assets 2,860 8,335 1,225 12,420 19,913 34,552 18,383 4,786 77,634 90,054
Risk management
Financial risk
Assets not positioned
at the central bank
Assets encumbered
with non-central bank
counterparties
Positioned Other
at assets
the central Readily capable
available Cannot
Covered Securiti- bank (including for of being be
30 September
2019 bonds sations Other Total encumbered) encumbrance encumbered encumbered Total Total
(unaudited) 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
The table below shows the residual maturity of the Group's debt
securities in issue:
Analysis of debt securities in issue by residual maturity
(unaudited)
3 months 3 to 12 1 to 5 Over 5 Total at Total at
or less months years years 31 Mar 2020 30 Sep
GBPm GBPm GBPm GBPm GBPm 2019
GBPm
Covered bonds 26 - 620 1,271 1,917 1,912
Securitisation 6 1,569 3,113 - 4,688 5,051
Medium term notes 328 - 1,173 408 1,909 1,897
Subordinated debt 9 - 722 - 731 731
Total debt securities
in issue 369 1,569 5,628 1,679 9,245 9,591
Of which issued by Virgin
Money UK PLC 31 - 1,895 408 2,334 2,257
External credit ratings
The Group's long-term credit ratings are summarised below:
Outlook as at As at
31 Mar 2020(1) 31 Mar 2020 30 Sep 2019
Virgin Money UK PLC
Moody's Stable Baa3 Baa3
Fitch Stable(3) BBB+ BBB+
Standard & Poor's Stable(4) BBB- BBB-
Clydesdale Bank PLC
Moody's(2) Stable Baa1 Baa1
Fitch Stable(3) A- A-
Standard & Poor's Positive(4) BBB+ BBB+
(1) For detailed background on the latest credit opinions please refer
to the respective rating agency websites.
(2) Long-term deposit rating.
(3) Moved to "Rating Watch Negative" on 1 April 2020 - see commentary
below.
(4) Moved to "Negative" on 23 April 2020 - see commentary below.
Risk management
Financial risk
External credit ratings (continued)
On 21 October 2019, Moody's and Fitch withdrew the long- and
short-term ratings of Virgin Money Holdings (UK) PLC and Virgin
Money PLC following the completion of the FSMA Part VII
transfer.
On 12 November 2019, Moody's changed the outlook on Virgin Money
UK PLC and Clydesdale Bank PLC long-term ratings from 'Positive' to
'Stable'. This followed a revision in Moody's outlook for the UK
Sovereign from 'Stable' to 'Negative', reflecting their view that
UK institutions have weakened, and the UK's economic and fiscal
strength is likely to be weaker going forward. Subsequently,
Moody's adjusted the ratings outlook for 15 UK banks and building
societies, including the Group.
On 17 January 2020, S&P changed the outlook on the
Clydesdale Bank PLC long-term rating from 'Stable' to 'Positive',
reflecting the progress the Group has made in raising additional
loss-absorbing capital buffers.
The following changes have been made to the Group's long-term
credit ratings or outlooks since the period end:
- On 1 April 2020, Fitch changed the outlook on Virgin Money UK
PLC and Clydesdale Bank PLC long-term ratings from "Stable" to
"Rating Watch Negative". This followed Fitch's one notch downgrade
to the UK Sovereign rating, reflecting their view of the near-term
damage to the UK economy and significant weakening in the UK's
public finances caused by the COVID-19 outbreak, in addition to the
lingering uncertainty regarding the post-Brexit UK-EU trade
relationship. Subsequently, Fitch adjusted the ratings Outlook on
18 UK banks and building societies, including the Group.
- On 23 April 2020, S&P changed the outlook on the Virgin
Money UK PLC long-term rating from "Stable" to "Negative" and the
outlook on the Clydesdale Bank PLC long-term rating from "Positive"
to "Negative", as part of a broader action on the European banking
sector. The outlook revisions reflect S&P's view that the
economic stress triggered by the COVID-19 outbreak is likely to put
pressure the Group's asset quality and earnings, and it may
struggle to maintain an additional loss-absorbing capacity ratio
sustainably above 8% in 2020.
LIBOR replacement
The Group has a LIBOR replacement programme to manage the impact
of the Bank of England's plan to discontinue the use of LIBOR as a
reference rate after 2021. The work to decommission LIBOR is
focused on reducing the use of LIBOR well in advance of December
2021 and to migrate existing loans onto new reference rates. A
similar approach is being taken with new and existing derivatives.
The programme will ensure that the risks of being unable to offer
products with suitable reference rates will be mitigated and that
full consideration is given to the potential for any conduct issues
that may arise through the transition.
Financial risks arising from climate change
The Group is contributing to global efforts to limit the global
temperature risk to 1.5 degrees Celsius this century, in line with
the Paris Agreement.
The Group aims to have 'net zero' carbon emissions by 2030.
Progress is being monitored through the Group's annual CO2
disclosures (see page 38 of the 2019 ARA). The Group has a process
to apply Environment, Social and Governance (ESG) criteria to
lending decisions and has committed to targeting 5% of business
banking loans being focused on firms pursuing activity promoting
environmental sustainability. Work continues to deepen the Group's
understanding of financial risks arising from climate change, in
line with its plan to embed consideration of climate change into
all business practices. As part of this work, the Group's existing
ESG criteria has been reviewed and actions have been identified to
reflect the Group's evolving approach to managing climate change
risks.
Statement of Directors' responsibilities
The Directors confirm that to the best of their knowledge these
interim condensed consolidated financial statements have been
prepared in accordance with International Accounting Standard 34,
'Interim Financial Reporting' (IAS 34) as adopted by the European
Union and that the interim management report includes a fair review
of the information required by DTR 4.2.7R and DTR 4.2.8R,
namely:
a) an indication of important events that have occurred during the six
months ended 31 March 2020 and their impact on the condensed consolidated
interim financial statements and a description of the principal risks
and uncertainties for the remaining six months of the financial year;
and
b) material related party transactions in the six months ended 31 March
2020 and any material changes in the related party transactions described
in the last Annual Report of Virgin Money UK PLC.
Signed by order of the Board
David Duffy
Chief Executive Officer
5 May 2020
Independent review report to Virgin Money UK PLC
Introduction
We have been engaged by Virgin Money UK PLC to review the
condensed set of financial statements in the interim financial
report for the six months ended 31 March 2020 which comprises the
interim condensed consolidated income statement, interim condensed
consolidated statement of comprehensive income, interim condensed
consolidated balance sheet, interim condensed consolidated
statement of changes in equity, interim condensed consolidated
statement of cash flows and the related explanatory notes 1.1 to
5.4. We have read the other information contained in the interim
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
This report is made solely to the Company in accordance with
guidance contained in International Standard on Review Engagements
2410 (UK and Ireland) "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the
Auditing Practices Board. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
Company, for our work, for this report, or for the conclusions we
have formed.
Directors' Responsibilities
The interim financial report is the responsibility of, and has
been approved by, the Directors. The Directors are responsible for
preparing the interim financial report in accordance with
International Accounting Standard 34, "Interim Financial
Reporting," as adopted by the European Union and the Disclosure and
Transparency Rules of the United Kingdom's Financial Conduct
Authority.
As disclosed in note 1, the annual financial statements of the
Group are prepared in accordance with International Financial
Reporting Standards as adopted by the European Union. The condensed
set of financial statements included in this interim financial
report has been prepared in accordance with International
Accounting Standard 34, "Interim Financial Reporting", as adopted
by the European Union.
Our Responsibility
Our responsibility is to express to Virgin Money UK PLC a
conclusion on the condensed set of financial statements in the
interim financial report based on our review.
Scope of Review
We conducted our review in accordance with International
Standard on Review Engagements 2410 (UK and Ireland), "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the interim financial report for the six months ended 31 March
2020 is not prepared, in all material respects, in accordance with
International Accounting Standard 34 as adopted by the European
Union and the Disclosure and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Ernst & Young LLP
Leeds
5 May 2020
Financial statements
Interim condensed consolidated income statement
6 months 6 months 12 months
to to to
31 Mar 2020 31 Mar 2019(1)(2) 30 Sep 2019(1)
(unaudited) (unaudited) (audited)
Note GBPm GBPm GBPm
Interest income 1,135 1,254 2,420
Other similar interest 5 8 13
Interest expense and
similar charges (469) (442) (919)
Net interest income 2.2 671 820 1,514
Gains less losses on financial instruments
at fair value (9) (9) (17)
Other operating income 105 115 252
Non-interest income 2.3 96 106 235
Total operating income 767 926 1,749
Operating and
administrative expenses
before impairment
losses 2.4 (537) (711) (1,729)
Operating profit before impairment losses 230 215 20
Impairment losses on
credit exposures (237) (173) (252)
(Loss)/profit on ordinary activities before
tax (7) 42 (232)
Tax credit/(expense) 2.5 29 (5) 53
Profit/(loss) for the
period 22 37 (179)
Attributable to:
Ordinary shareholders (18) 3 (253)
Other equity holders 40 18 41
Non-controlling
interests - 16 33
Profit/(loss) for the
period 22 37 (179)
Basic (loss)/earnings
per share (pence) 2.6 (1.2) 0.2 (17.9)
Diluted (loss)/earnings
per share (pence) 2.6 (1.2) 0.2 (17.9)
(1) The comparative has been restated in line with the current period
presentation. Refer to note 1.4.
(2) The presentation of the comparative period has been realigned to the
current period's presentation, with financial assets at fair value
through profit or loss being reclassified from interest income to
other similar interest.
All material items dealt with in arriving at the (loss)/profit
before tax for the periods relate to continuing activities.
The notes on pages 55 to 79 form an integral part of these
interim condensed consolidated financial statements.
Financial statements
Interim condensed consolidated statement of comprehensive
income
6 months 6 months 12 months
to to to
31 Mar 2020 31 Mar 2019(1) 30 Sep 2019(1)
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Profit/(loss) for the period 22 37 (179)
Items that may be reclassified to the income statement
Change in cash flow hedge reserve
(Losses)/gains during the period (52) 13 73
Transfers to the income statement 18 6 (57)
Taxation thereon - deferred tax
credit/(charge) 8 (9) (9)
Taxation thereon - current tax
credit 1 5 6
(25) 15 13
Change in fair value through other
comprehensive
income (FVOCI) reserve
(Losses)/gains during the period (13) 2 13
Transfers to the income statement (16) - (4)
Taxation thereon - deferred tax
credit/(charge) 9 - (2)
(20) 2 7
Total items that may be reclassified
to the
income statement (45) 17 20
Items that will not be reclassified to the income
statement
Change in asset revaluation reserve - - -
Taxation thereon - deferred tax
credit/(charge) - - (1)
Change in defined benefit pension
plan 197 (37) 110
Taxation thereon - deferred tax
(charge)/credit (77) 13 (56)
Taxation thereon - current tax
credit 4 - 7
124 (24) 61
Total items that will not be
reclassified
to the income statement 124 (24) 60
Other comprehensive
income/(losses), net
of tax 79 (7) 80
Total comprehensive income/(losses)
for the
period, net of tax 101 30 (99)
Attributable to:
Ordinary shareholders 61 (4) (173)
Other equity holders 40 18 41
Non-controlling interests - 16 33
Total comprehensive income/(losses)
attributable
to equity holders 101 30 (99)
(1) The comparative has been restated in line with the
current period
presentation. Refer to note 1.4.
The notes on pages 55 to 79 form an integral part of these
interim condensed consolidated financial statements.
Financial statements
Interim condensed consolidated balance sheet
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
Note GBPm GBPm
Assets
Financial assets at amortised cost
Loans and advances to customers 3.1 73,194 73,095
Cash and balances with central banks 8,650 10,296
Due from other banks 946 1,018
Financial assets at fair value through profit or
loss
Loans and advances to customers 3.2 214 253
Derivative financial instruments 3.3 403 366
Other financial assets 3.2 9 14
Financial assets at fair value through other comprehensive
income 4,635 4,328
Property, plant and equipment 318 145
Intangible assets and goodwill 515 516
Current tax assets 22 13
Deferred tax assets 3.4 340 322
Defined benefit pension assets 3.8 618 396
Other assets 190 237
Total assets 90,054 90,999
Liabilities
Financial liabilities at amortised cost
Customer deposits 64,853 64,000
Debt securities in issue 3.5 9,245 9,591
Due to other banks 3.6 7,590 8,916
Financial liabilities at fair value through profit
or loss
Customer deposits 3.2 - 4
Derivative financial instruments 3.3 205 273
Deferred tax liabilities 3.4 246 201
Provisions for liabilities and charges 3.7 258 459
Other liabilities 2,583 2,534
Total liabilities 84,980 85,978
Equity
Share capital and share premium 4.1 147 146
Other equity instruments 4.1 915 915
Capital reorganisation reserve 4.1 (839) (839)
Merger reserve 4.1 2,128 2,128
Other reserves 4.1 (35) 10
Retained earnings 2,758 2,661
Total equity 5,074 5,021
Total liabilities and equity 90,054 90,999
The notes on pages 55 to 79 form an integral part of these
interim condensed consolidated financial statements.
These interim condensed consolidated financial statements were
approved by the Board of Directors on 5 May 2020 and were signed on
its behalf by:
David Duffy Ian Smith
Chief Executive Officer Chief Financial Officer
Company name: Virgin Money UK PLC, Company number: 09595911
Financial statements
Interim condensed consolidated statement of changes in
equity
Other reserves
Share
capital Equity Cash
and Capital Other Own Deferred based Asset flow Non-
share reorg' Merger equity shares shares comp' reval FVOCI hedge Retained controlling Total
premium reserve reserve instruments held reserve reserve reserve reserve reserve earnings interest 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 4.1.6
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
As at 1 October
2018(1) 89 (839) 633 450 - - 10 2 4 (39) 2,855 - 3,165
Profit for the
period(2) - - - - - - - - - - 37 - 37
Other
comprehensive
income/(losses)
net
of tax - - - - - - - - 2 15 (24) - (7)
Total
comprehensive
income for the
period - - - - - - - - 2 15 13 - 30
Acquisition of
Virgin
Money 54 - 1,495 - (5) 23 - - - - - 422 1,989
Dividends paid to
ordinary
shareholders - - - - - - - - - - (45) - (45)
AT1 distributions
paid(2) - - - - - - - - - - (18) - (18)
Distributions to
non-controlling
interests(2) - - - - - - - - - - (16) - (16)
Transfer from
equity
based
compensation
reserve - - - - - - (6) - - - 6 - -
Equity based
compensation
expensed - - - - - - 3 - - - - - 3
Settlement of
Virgin
Money share
awards 3 - - - 3 (4) - - - - 1 - 3
AT1 issuance - - - 247 - - - - - - - - 247
As at 31 March
2019(1) 146 (839) 2,128 697 (2) 19 7 2 6 (24) 2,796 422 5,358
Loss for the
period(2) - - - - - - - - - - (216) - (216)
Other
comprehensive
income/(losses)
net
of tax - - - - - - - (1) 5 (2) 85 - 87
Total
comprehensive
income/(losses)
for
the period - - - - - - - (1) 5 (2) (131) - (129)
AT1 distributions
paid(2) - - - - - - - - - - (23) - (23)
Distributions to
non-controlling
interests(2) - - - - - - - - - - (17) - (17)
Transfer from
equity-based
compensation
reserve - - - - - - (2) - - - 2 - -
Equity based
compensation
expensed - - - - - - 1 - - - - - 1
Settlement of
Virgin
Money share
awards - - - - 1 - - - - - - - 1
AT1 issuance - - - 218 - - - - - - - - 218
Capital note
redemption - - - - - - - - - - 34 (422) (388)
At 30 September
2019(1) 146 (839) 2,128 915 (1) 19 6 1 11 (26) 2,661 - 5,021
Adjustment on
adoption
of IFRS 16 (net
of
tax) - - - - - - - - - - 1 - 1
As at 1 October
2019
(1) 146 (839) 2,128 915 (1) 19 6 1 11 (26) 2,662 - 5,022
Profit for the
period - - - - - - - - - - 22 - 22
Other
comprehensive
income/(losses)
net
of tax - - - - - - - - (20) (25) 124 - 79
Total
comprehensive
income for the
period - - - - - - - - (20) (25) 146 - 101
AT1 distributions
paid - - - - - - - - - - (40) - (40)
Ordinary shares
issued 1 - - - - - - - - - - - 1
Transfer from
equity
based
compensation
reserve - - - - - - (2) - - - 2 - -
Equity based
compensation
expensed - - - - - - 4 - - - - - 4
Settlement of
Virgin
Money share
awards - - - - 1 (3) - - - - 1 - (1)
FSMA transfer - - - - - - - - - - (13) - (13)
At 31 March 2020
(1) 147 (839) 2,128 915 - 16 8 1 (9) (51) 2,758 - 5,074
(1) The balances as at 1 October 2018 and 30 September 2019 have been
audited; the movements in the individual six months periods to 31
March 2019 and 31 March 2020, together with the impact of the adoption
of IFRS 16, are unaudited.
(2) The comparative has been restated in line with the current period
presentation. Refer to note 1.4.
The notes on pages 55 to 79 form an integral part of these
interim condensed consolidated financial statements.
Financial statements
Interim condensed consolidated statement of cash flows
6 months 6 months 12 months
to to to
31 Mar 2020 31 Mar 2019 30 Sep 2019
(unaudited) (unaudited)(2) (audited)(2)
Note GBPm GBPm GBPm
Operating activities
(Loss)/profit on ordinary
activities before
tax (7) 42 (232)
Adjustments for:
Non-cash or non-operating
items included
in profit before tax (357) (458) (1,035)
Changes in operating assets (422) (2,081) (2,543)
Changes in operating
liabilities (676) 1,273 2,630
Payments for short-term and
low value leases (1) - -
Interest received 1,151 1,211 2,320
Interest paid (383) (328) (745)
Tax paid (12) - (8)
Net cash (used in)/provided by operating
activities (707) (341) 387
Cash flows from investing
activities
Interest received 22 22 27
Cash acquired on acquisition
of Virgin
Money Holdings (UK) PLC - 4,663 4,663
Proceeds from maturity of
financial assets
at FVOCI 691 287 659
Proceeds from sale of
financial assets
at FVOCI 551 134 352
Purchase of financial assets
at FVOCI (1,519) (833) (1,647)
Proceeds from sale of 50%
(less one share)
consideration in UTM - - 45
Proceeds from sale of
property, plant and
equipment - 3 3
Purchase of property, plant
and equipment (3) (10) (20)
Purchase and development of
intangible
assets (51) (62) (130)
Net cash (used in)/provided
by investing
activities (309) 4,204 3,952
Cash flows from financing
activities
Interest paid (78) (79) (81)
Repayment of principal
portion of lease
liabilities(1) 5.3 (15) - -
Proceeds from issuance of
other equity
instruments - 247 247
Repayment of AT1 classified
as non-controlling
interest - - (160)
Redemption and principal
repayment on RMBS
and covered bonds 5.3 (876) (1,288) (2,003)
Issuance of RMBS and covered
bonds 5.3 491 1,104 2,227
Issuance of medium term
notes/subordinated
debt 5.3 - 247 642
Amounts repaid under the TFS 5.3 (200) (150) (1,295)
Ordinary dividends paid - (45) (45)
AT1 distributions 4.1 (40) (18) (41)
Distributions to
non-controlling interests - (16) (33)
Net cash (used in)/provided by financing
activities (718) 2 (542)
Net (decrease)/increase in
cash and cash
equivalents (1,734) 3,865 3,797
Cash and cash equivalents at
the beginning
of the period 11,131 7,334 7,334
Cash and cash equivalents at
the end of
the period 9,397 11,199 11,131
(1) The Company adopted IFRS 16 'Leases' on 1 October 2019. The payment
of principal amounts of lease liabilities is now included as a
deduction
within financing activities whereas previously under IAS 17
'Leases'
operating lease charges were included as a deduction within cash
flow
from operating activities. Interest on lease liabilities is
included
within 'interest paid' and depreciation on right-of-use assets is
included
within 'depreciation'.
(2) Cash and cash equivalents has been restated in the comparative
period
in line with the current period presentation, as detailed in note
1.2.
The notes on pages 55 to 79 form an integral part of these
interim condensed consolidated financial statements.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 1: Basis of preparation and accounting policies
Overview
These interim condensed consolidated financial statements for
the six months ended 31 March 2020 have been prepared in accordance
with the Disclosure and Transparency Rules of the Financial Conduct
Authority and IAS 34 'Interim Financial Reporting' as adopted by
the European Union (EU). They do not include all the information
required by International Financial Reporting Standards (IFRS) in
full annual financial statements and should therefore be read in
conjunction with the Annual Report and Accounts for the year ended
30 September 2019, which were prepared in accordance with IFRS as
adopted by the EU. Copies of the 2019 Annual Report and Accounts
are available from the Group's website -
https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/
The information in these interim condensed consolidated
financial statements is unaudited and does not constitute annual
accounts within the meaning of Section 434 of the Companies Act
2006 ('the Act'). Statutory accounts for the year ended 30
September 2019 have been delivered to the Registrar of Companies
and contained an unqualified audit report under Section 495 of the
Act, which did not draw attention to any matters by way of emphasis
and did not contain any statements under Section 498 of the
Act.
1.1 Going concern
The Group's business activities, together with the factors
likely to affect its future development, performance and position,
are set out in the business and financial review section of these
interim condensed consolidated financial statements. This should be
read in conjunction with the strategic report which can be found in
the Annual Report and Accounts for the year ended 30 September
2019. In addition, the Risk report contained in the 2019 Annual
Report includes the Group's risk management objectives. The Group's
objectives, policies and processes for managing capital can be
found in the risk management section of this report.
In relation to the recent COVID-19 outbreak, our business
continuity plans are working well. At this very early stage of the
outbreak however it is difficult to fully assess the magnitude of
the impact on the Group. The Directors are mindful of the risks
associated with COVID-19 and have a plan in place to ensure the
continuation of the Group's operations during COVID-19 and we have
no reason to believe, at this stage, it will impact the going
concern of the Company.
The Directors have a reasonable expectation that the Group has
adequate resources to continue in operational existence for the
foreseeable future and therefore believe that the Group is well
placed to manage its business risks successfully. Accordingly, they
continue to adopt the going concern basis in preparing these
interim condensed consolidated financial statements.
1.2 Accounting policies
The accounting policies adopted in the preparation of these
interim condensed consolidated financial statements are consistent
with those policies followed in the preparation of the Virgin Money
UK PLC Annual Report and Accounts for the year ended 30 September
2019 except for those policies highlighted below. Comparatives are
presented on a basis that conforms to the current presentation
except where stated otherwise.
Changes to accounting policies on adoption of IFRS 16 'Leases'
with effect from 1 October 2019
The Group adopted IFRS 16: 'Leases' from 1 October 2019, which
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 sets out the principles for the recognition,
measurement, presentation and disclosure of leases. The Group's
accounting as a lessor is substantially unchanged from the previous
approach under IAS 17; however, it resulted in most leases where
the Group is a lessee being brought on to the balance sheet under a
single lease model, removing the distinction between finance and
operating leases. IFRS 16 requires a lessee to recognise a 'right
-- of -- use' asset and a corresponding lease liability at the date
at which the leased asset is available for use. Assets and
liabilities arising from a lease are initially measured on a
present value basis. On transition and as permitted by IFRS 16, the
Group has not restated comparative figures, with the adoption
impact adjusted through retained earnings. Adoption of the new
standard has had a material impact on the Group's financial
statements, with right-of-use assets of GBP194m recognised on
transition together with lease liabilities of GBP205m. As at 31
March 2020 the right-of-use assets and lease liabilities were
GBP182m and GBP193m respectively. Further detail on the
transitional impact of IFRS 16 can be found in note 5.4. The
accounting policies relating to leases have been revised as
follows:
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 1: Basis of preparation and accounting policies
(continued)
1.2 Accounting policies (continued)
Lessee accounting
The Group recognises a right-of-use asset and a lease liability
at the commencement date of the lease. The right-of-use asset is
initially measured at cost, comprising the initial amount of the
lease liability plus any initial direct costs incurred and any
lease payments made at or before the lease commencement date, less
any lease incentives received. The right-of-use asset is
subsequently depreciated using the straight line method from the
commencement date to the earlier of the end of the useful life of
the asset or the end of the lease term. 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. If that rate cannot readily be
determined, as is the case in the vast majority of the leasing
activities of the Group, the lessee's incremental borrowing rate is
used, being the rate that the lessee would have to pay to borrow
the funds necessary to obtain an asset in a similar economic
environment with similar terms and conditions. The liability is
remeasured when there is a change in future lease payments arising
from a change in an index or a rate or a change in the Group's
assessment of whether it will exercise an extension or termination
option. When the lease liability is remeasured, a corresponding
adjustment is made to the right-of-use asset or is recorded in the
income statement if the carrying amount of the right -- of -- use
asset has been reduced to zero.
Termination options are included in a number of leases across
the Group with a small number of leases having extension options.
These terms are used to maximise operational flexibility in terms
of managing contracts. The majority of extension and termination
options held are exercisable only by the Group and not by the
respective lessor.
In determining judgements on the lease term, management
considers all facts and circumstances that create an economic
incentive to exercise an extension option, or not exercise a
termination option. Periods covered by termination options are only
included in the lease term if it is reasonably certain that the
lease will not be terminated. The assessment of the lease term is
reviewed if a significant event or a significant change in
circumstances occurs that is within the control of the Group.
The Group has elected 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. Low value assets comprise primarily IT
and office equipment.
Lessor accounting
As a lessor, the Group classifies leases as either operating or
finance leases. A lease is classified as a finance lease if it
transfers substantially all the risks and rewards incidental to
ownership of the underlying asset and classified as an operating
lease if it does not.
Other changes
Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and
IFRS 7)
This amendment was issued by the International Accounting
Standards Board (IASB) in September 2019, was effective for
financial years beginning on or after 1 January 2020 (with early
adoption permitted) and was endorsed for use in the EU in January
2020. The detail of the amendments and related disclosure
requirements relating to IAS 39 and IFRS 7 were early adopted by
the Group with effect from 1 October 2019 (the Group exercised the
accounting policy choice to continue hedge accounting under IAS 39
on adoption of IFRS 9 in October 2018). The amendments provide
temporary reliefs which enable hedge accounting to continue during
the period of uncertainty before the replacement of an existing
interbank offered rates (IBOR) with an alternative nearly risk-free
interest rate (an RFR). Further detail on the effect of early
adopting the amendment in these interim condensed consolidated
financial statements, including the nominal amount of the hedging
instruments in hedging relationships directly affected by
uncertainties related to LIBOR reform, is disclosed in note
3.3.
Cash and cash equivalents
During the period, the Group has re-assessed the individual
elements that comprise 'cash and cash equivalents'. This has
resulted in a revision to the definition that more closely aligns
the Group's internal use of the cash and cash equivalents
definition and cash management practices, with the changes
resulting in an increase to the cash and cash equivalents balance
primarily as a result of the inclusion of amounts due from other
banks. The revised definition can be found on page 81. Comparative
periods have been restated to reflect this change in definition,
with the balance for the six months to 31 March 2019 increasing by
GBP366m from GBP10,833m to GBP11,199m, and the balance for the 12
months to 30 September 2019 increasing by GBP1,012m from GBP10,119m
to GBP11,131m.
1.3 Critical accounting estimates and judgements
The preparation of financial statements requires the use of
certain critical accounting estimates and judgements that affect
the reported amounts of assets, liabilities, revenues and expenses
and the disclosed amounts of contingent liabilities. Assumptions
made at each balance sheet date are based on best estimates at that
date. Although the Group has internal control systems in place to
ensure that best estimates can be reliably measured, actual amounts
may differ from those estimated. The Group's critical accounting
estimates and judgements are unchanged compared to those shown in
the 2019 Annual Report and Accounts, however the following updates
are provided below:
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 1: Basis of preparation and accounting policies
(continued)
1.3 Critical accounting estimates and judgements (continued)
Allowance for impairment losses on credit exposures
The Group's allowance for ECL's at 31 March 2020 was GBP542m (31
March 2019: GBP350m; 30 September 2019: GBP362m).
The Group's approach to calculating ECL's is to model a number
of economic scenarios over a five-year forecast period. The output
of the models is then supplemented by a series of Post Model
Adjustments (PMA's) where management considers that not all the
risks identified in a product segment have been, or are capable of
being, accurately reflected within those models.
The COVID-19 pandemic has introduced unprecedented economic
uncertainty. Due to the evolving estimates of the severity and
duration of the economic impact, coupled with the evolving nature
of the mitigating measures being introduced by the UK and Scottish
Governments, it has been appropriate to reflect the estimated
impact via focused PMA's.
The Group has responded by calculating a model-based PMA for
COVID-19 supplemented by further PMA's at a product level to
address additional risks. The Group has assessed that it requires
to hold a PMA of GBP164m in relation to the COVID-19 pandemic.
GBP144m has been driven by the Business and credit card portfolios,
with a further GBP20m attributed to the Group's mortgage, personal
loan and current account portfolios.
The following sections set out the approach and conclusions in
calculating the allowance for ECL's:
-- the Group's response in estimating the COVID-19 PMA; and
-- the Group's standard approach for the pre COVID-19 modelled output.
COVID-19 PMA
The COVID-19 pandemic has resulted in a significant PMA. In
adopting this approach, the Group has reviewed the statements and
guidance issued by the PRA, FCA, IASB and other regulators released
towards the end of March 2020 to help guide banks in assessing the
impact of COVID-19 on IFRS 9 ECL requirements. In addition, the
approach reflects the significant mitigating measures that have
been introduced by the UK and Scottish Governments and the Group,
along with the wider Banking industry, to support individuals and
businesses, which have also been considered in estimating the
Group's ECLs. The overall impact of COVID-19 over the longer term
is subject to a great deal of uncertainty.
In the period since social distancing lockdown measures were
introduced in the UK there has been a substantial impact to
businesses and individuals. The Group has assessed that the more
material impact from an ECL perspective will be on the business and
unsecured personal lending portfolios, primarily credit cards.
Therefore, while the impact of COVID-19 will be on the whole
lending book, particular focus has been applied to the Group's
GBP8.3bn business banking portfolio and GBP4.2bn credit card
portfolio.
The Group's approach has been to determine a separate
model-based PMA by applying a 100% weighting to the Group's
existing severe downside scenario. This scenario includes the
projected significant negative movements in both UK GDP and house
prices expected in quarters two and three and a short-term
acceleration of unemployment over the planning horizon. The
scenario recognised the potential that the recovery in the economy
may be more gradual and therefore reflects a slower return to
normal economic conditions over the forecast horizon.
The modelling of the severe downside weighted at 100% has been
further supplemented by additional PMA's at a product level to
address additional risks, primarily in business lending and
unsecured personal lending. Finally, the Group undertook further
sensitivity analysis through the use of a specific pandemic
scenario model applied to the Business and credit card portfolios.
The impact of the further work undertaken on these two portfolios
is provided below:
Business Lending
In addition to considering the modelled PMA elements of the
severe downside scenario as outlined above, the Group has
performed:
-- A detailed review of the Group's most significant customers by value; and
-- An assessment of the impact of a proportion of business
customers being impacted by a negative rating migration in the
Group's through the cycle IRB probability of default models.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 1: Basis of preparation and accounting policies
(continued)
1.3 Critical accounting estimates and judgements (continued)
Allowance for impairment losses on credit exposures
(continued)
Credit Cards
The analysis considers the impact of customers requesting
payment holidays and the potential, over time, for a proportion of
these customers to move into arrears.
There is a risk that the measures introduced could result in the
payment holidays masking true deterioration in customer position
due to loss of earnings, jobs or other income. There is also a risk
that customer financial difficulty could extend beyond the payment
holiday period and thus lead to arrears and losses emerging later.
The risk is somewhat mitigated due to the UK Government offering to
cover 80% of salaries (up to GBP2,500) and average profits for
self-employed customers. The salary promise does not entirely
preclude employed customers from being affected as, in addition to
the short-term reduction in income, some businesses could fail,
driving up unemployment and financial hardship.
Pandemic downside scenario
On 22 April 2020 the Group's external macro-economic scenario
provider issued a COVID-19 specific pandemic downside scenario. The
Group has applied this to the Business and credit card portfolios
by applying a 100% weighting.
The 5-year simple average model inputs are:
UK GDP CPI House Bank ILO
growth inflation prices rate Unemployment
COVID-19 scenario 1.0% 1.2% (0.7)% 0.4% 5.6%
While the simple 5-year average illustrates the impact of
COVID-19 on the long run economic cycle, this obscures the
significant and unprecedented impacts within these figures. Many of
these are currently forecast to transpire within the next 12
months. Most significant among these are a startling peak in
unemployment at 9.7% in the quarter to March 2021, with GDP
anticipated to contract significantly in the quarter to September
2020. The modelled outcomes are fully reflective of these economic
consequences.
In applying the approach outlined above the Group has a total
COVID-19 overlay of GBP164m. This comprises GBP110m for Business,
GBP39m for Personal and GBP15m for Mortgages.
Pre COVID-19 modelled output
The Group continues to calculate the pre COVID-19 ECL allowance
with reference to three economic scenarios over a five-year
forecast period. A number of key economic assumptions such as
unemployment rates, base rates and inflation are used which ensures
that non-linear relationships between different forward-looking
scenarios and their associated credit losses do not materially
impact the ECL calculation.
The three chosen scenarios have been updated to reflect the
current economic environment. There have been no changes to the
related weightings at 31 March 2020 from those used at 30 September
2019:
Base case (60%)
The base case used by the Group for IFRS 9 modelling is also
used for the Group's internal planning purposes and reflects the
outcome of the December 2019 election result, which delivered a
working majority for the Conservative party and the resultant
implications for the EU withdrawal agreement. However, the outlook
remains weak by historical standards.
Mild upside (20%)
This could be considered an alternative base case scenario,
where cyclical momentum in the developed world exceeds current
expectations. GDP averages 2.3%, compared to 1.5% in the base case,
and unemployment reaches a trough of 3.3% driving an accelerated
increase in bankers buying rate (BBR).
Severe downside (20%)
This scenario encompasses the possibility of the UK entering a
recession later this year which lasts until mid-2022 and sees GDP
fall by 3.1% peak to trough. This is a more severe impact than the
median post war fall of 2.5% reflecting the ongoing uncertainty
over a future trade deal with the EU.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 1: Basis of preparation and accounting policies
(continued)
1.3 Critical accounting estimates and judgements (continued)
Allowance for impairment losses on credit exposures
(continued)
Considering the nature and quantum of the PMA's allocated across
the lending portfolios, the Group's standard sensitivity
disclosures on the impact to ECL's from changes in the weightings
of individual economic scenarios would not provide meaningful
information. As such, they have not been disclosed.
Macro-economic assumptions
A range of future macro-economic 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 macro-economic 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 31 March 2020 (2020-2024)
and 30 September 2019 (2019-2023) are:
UK GDP CPI House Bank ILO
growth inflation prices rate Unemployment
31 March 2020
Mild upside 2.3% 2.1% 5.2% 1.7% 3.3%
Base 1.5% 1.7% 2.6% 0.7% 3.7%
Severe downside (0.1%) 0.9% (5.2%) 0.2% 5.7%
30 September
2019
Mild upside 2.7% 2.3% 5.8% 2.0% 3.4%
Base 1.8% 1.7% 2.9% 0.9% 3.8%
Severe downside 0.2% 0.8% (4.6%) 0.4% 5.8%
Other PMAs
In addition, there are further non COVID-19 related PMAs which
increase the collectively assessed modelled output where the Group
considers that not all the risks identified in a product segment
have been, or are capable of being, accurately reflected within
those models. The Group has reviewed these and considered that
GBP19m of PMAs to cover these areas is appropriate.
Effective interest rate
Effective interest rate 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 effective interest rate asset may be recognised in profit or
loss. Such adjustments can introduce income statement volatility
and consequently the effective interest rate method introduces a
source of estimation uncertainty. Management considers that
material risk of adjustments exists in relation to the application
of effective interest rate 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 effective interest rate 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 88%, the loans and advances to customers balance would
reduce by GBP8m with the adjustment recognised in net interest
income.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 1: B asis of preparation and accounting policies
(continued)
1.3 Critical accounting estimates and judgements (continued)
Effective interest rate (continued)
Credit cards
The Group measures credit card effective interest rate 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 effective interest rate of new business written
post-acquisition is 5.47% while that on acquired portfolios nearing
the end of their promotional periods is 8.49%. Revisions to the
estimates of future cash flows (compared to the original
assumptions) that would have resulted in the effective interest
rate across all cohorts being reduced by 25bps, would lead to a
GBP35m 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.
1.4 Accounting developments
In addition to the policy changes highlighted above in note 1.2,
the Group has also adopted the following IASB pronouncements in the
current financial period which have all been endorsed for use in
the EU. Unless stated otherwise, these do not have a material
impact on the interim condensed consolidated financial
statements:
-- 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'
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 23 'Borrowing Costs'.
The amendment to IAS 12 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. This means that the taxation
impacts of distributions relating to AT1 securities and
non-controlling interests are now recognised within tax expense in
the income statement as opposed to being recognised directly in
retained earnings within equity. The amendment impacts only the
presentation of the related taxation and not the calculation, with
no change to the Group's net assets but an increase in profit
attributable to equity owners. Comparatives have been restated. The
adoption of this amendment has resulted in a reduction in tax
expense and an increase in profit for the period of GBP9m (six
months to March 2019: GBP8m; 12 months to 30 September 2019:
GBP15m);
-- amendment to IAS 19: 'Plan amendment, curtailment or
settlement' 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; and
-- 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).
During the period, there have been no further pronouncements
issued by the IASB that are considered relevant and material to the
Group.
1.5 Presentation of risk disclosures
Certain disclosures outlined in IFRS 7 'Financial Instruments:
Disclosure' concerning the nature and extent of risks relating to
financial instruments have been included within the risk management
section of this report.
Financial statements
Notes to the interim condensed consolidated finan cial
statements
Section 2: Results for the period
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.
With effect from 1 October 2019, the business has been aligned
to a three operating segments model: Business, Personal and
Mortgages. However, the business continues to be reported to the
Group's Chief Operating Decision Maker as a single segment and
decisions made on the performance of the Group on that basis.
Segmental information will therefore continue to be presented on
this single segment basis until segment reporting has been fully
embedded within the Group.
6 months 6 months 12 months
to to to
31 Mar 2020 31 Mar 2019 30 Sep 2019
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Net interest income 671 820 1,514
Non-interest income 96 106 235
Total operating income 767 926 1,749
Operating and administrative
expenses (537) (711) (1,729)
Impairment losses on
credit exposures (237) (173) (252)
Segment (loss)/profit
before tax (7) 42 (232)
Average interest earning
assets 86,847 85,628 86,362
2.2 Net interest income
6 months 6 months 12 months
to to to
31 Mar 2020 31 Mar 2019(1) 30 Sep 2019
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Interest income
Loans and advances to customers 1,083 1,204 2,320
Loans and advances to other banks 30 34 72
Financial assets at fair value through
other
comprehensive income 22 15 27
Other interest income - 1 1
Total interest income 1,135 1,254 2,420
Other similar interest
Financial assets at fair value through
profit
or loss 8 12 21
Derivatives economically hedging
interest
bearing assets (3) (4) (8)
Total other similar interest 5 8 13
Less: interest expense and similar
charges
Customer deposits (315) (273) (580)
Debt securities in issue (106) (90) (185)
Due to other banks (46) (70) (144)
Other interest expense (2) (9) (10)
Total interest expense and similar
charges (469) (442) (919)
Net interest income 671 820 1,514
(1) The presentation of the comparative period has been
realigned to the
current period's presentation with interest from
financial assets
at fair value through profit or loss being reclassified
from interest
income to other similar interest.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 2: Results for the period (continued)
2.3 Non-interest income
6 months 6 months 12 months
to to to
31 Mar 2020 31 Mar 2019 30 Sep 2019
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Gains less losses on financial instruments at fair
value
Held for trading derivatives 9 8 16
Financial assets and
liabilities at
fair value(1) (2) (4) 3
Ineffectiveness arising from
fair value
hedges (8) (7) (22)
Ineffectiveness arising from
cash flow
hedges (8) (6) (14)
(9) (9) (17)
Other operating income
Net fee and commission income 81 103 195
Margin on foreign exchange
derivative brokerage 9 11 19
Gain on sale of financial assets
at fair value
through other comprehensive
income 16 - 3
Gain on sale of Virgin Money
Unit Trust
Managers Limited - - 35
Share of joint venture results (3) - (1)
Other income 2 1 1
105 115 252
Total non-interest income 96 106 235
(1) A credit risk gain on loans and advances at fair value of GBP
1m,
offset by a fair value loss of GBP3m, has been recognised in
the current
period (31 March 2019: GBP1m gain and GBP5m fair value loss,
30 September
2019: GBP2m gain and GBP1m fair value gain).
Non-interest income includes the following fee and commission
income disaggregated by income type:
Current account and debit card
fees 55 59 117
Credit cards 22 20 42
Insurance, protection and
investments 12 23 37
Non-banking and other fees(1) 14 16 31
Total fee and commission income 103 118 227
Total fee and commission expense (22) (15) (32)
Net fee and commission income 81 103 195
(1) Non-banking and other fees include mortgages, invoice and asset
finance,
and ATM fees.
2.4 Operating and administrative expenses
6 months 6 months 12 months
to to to
31 Mar 2020 31 Mar 2019 30 Sep 2019
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Personnel expenses 203 238 421
Depreciation and amortisation expense 76 56 108
Other operating and administrative expenses 258 417 1,200
Total operating and administrative expenses 537 711 1,729
Personnel expenses comprise the following
items:
6 months 6 months 12 months
to to to
31 Mar 2020 31 Mar 2019 30 Sep 2019
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Salaries, wages and non-cash benefits and
social security costs 121 148 256
Defined contribution pension expense 25 18 47
Defined benefit pension expense (1) 16 9
Equity based compensation 4 5 4
Other personnel expenses 54 51 105
Personnel expenses 203 238 421
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 2: Results for the period (continued)
2.5 Taxation
6 months 6 months 12 months
to to to
31 Mar 2020 31 Mar 2019 30 Sep 2019
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Current tax
Current period 7 14 5
Adjustment in respect of prior periods 1 (3) (5)
8 11 -
Deferred tax (note 3.4)
Current period ( 37) (8) (56)
Adjustment in respect of prior periods - 2 3
( 37) (6) (53)
Tax (credit)/expense for the period ( 29) 5 (53)
The tax assessed for the period differs from that arising from
applying the standard rate of corporation tax in the UK of 19%. A
reconciliation from the (credit)/expense implied by the standard
rate to the actual tax expense is as follows:
6 months 6 months 12 months
to to to
31 Mar 2020 31 Mar 2019 30 Sep 2019
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
(Loss)/profit on ordinary activities before
tax (7) 42 (232)
Tax (credit)/expense based on the standard
rate of corporation tax in the UK of 19% (March
and September 2019: 19%) (1) 8 (44)
Effects of:
Disallowable expenses 1 3 50
Conduct indemnity adjustment 8 10 10
Deferred tax assets de-recognised/(recognised) 4 (16) (49)
Non-taxable gain on partial disposal of UTM - - (7)
Banking surcharge - 6 -
Bank levy - - 1
Impact of rate change (34) 3 3
AT1 distribution (8) (8) (15)
Adjustments in respect of prior periods 1 (1) (2)
Tax (credit)/expense for the period ( 29) 5 (53)
Deferred tax assets recognised represent historic losses,
previously derecognised, that are now brought onto the balance
sheet in accordance with the Group's established methodology,
reflecting their expected utilisation against future taxable
profits.
The rate change arises on the revaluation of the Group's net
deferred tax assets to reflect the reversal of the previously
enacted 17% mainstream corporation tax rate in the Budget of 11
March 2020 (see note 3.4).
As outlined in note 1.4, and in accordance with IASB
improvements for periods commencing on or after 1 January 2019, the
tax credit associated with the distribution on AT1 instruments and
to non-controlling interests have been presented in the income
statement, rather than in equity. This change is presentational
only; it has no effect on total shareholder assets. Prior period
comparatives have been restated.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 2: Results for the period (continued)
2.6 Earnings per share (EPS)
6 months 6 months 12 months
to to to
31 Mar 2020 31 Mar 2019 30 Sep 2019
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
(Loss)/profit attributable to ordinary equity
holders for the purposes of basic and diluted
earnings/(loss) per share (18) 3 (253)
31 Mar 2020 31 Mar 2019 30 Sep 2019
Number of Number of Number of
shares shares shares
Weighted-average number of ordinary shares
in issue (millions)
- Basic 1,440 1,390 1,414
- Diluted 1,440 1,391 1,414
Basic (loss)/earnings per share (pence) (1.2) 0.2 (17.9)
Diluted (loss)/earnings per share (pence) (1.2) 0.2 (17.9)
Basic earnings per share has been calculated after deducting
0.5m (2019: 1m) ordinary shares representing the weighted average
of the Group's holdings of own shares. The calculation of the
diluted earnings per share for the current period and for the 12
months to 30 September 2019 excluded conditional awards of over 1m
ordinary shares made under equity based compensation schemes. These
are considered anti-dilutive due to the Group making a loss in
these periods.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities
3.1 Loans and advances to customers
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
GBPm GBPm
Gross loans and advances to customers 73,526 73,246
Impairment provisions on credit exposures (542) (362)
Fair value hedge adjustment 210 211
73,194 73,095
Included within gross loans and advances is GBP713m (30
September 2019: GBP685m) relating to finance lease receivables.
The Group has a portfolio of fair valued business loans of
GBP214m (30 September 2019: GBP253m) which are classified
separately as financial assets at fair value through profit or loss
on the balance sheet (note 3.2). Combined with the above this is
equivalent to total loans and advances of GBP73,408m (30 September
2019: GBP73,348m).
The fair value hedge adjustment represents an offset to the fair
value movement on derivatives designated in hedge accounting
relationships of the mortgage portfolio. Such relationships are
established to protect the Group from interest rate risk on fixed
rate products.
The Group has transferred a proportion of mortgages to the
securitisation and covered bond programmes (note 3.3).
3.2 Financial assets and liabilities at fair value through profit or loss
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
GBPm GBPm
Financial assets at fair value through profit or loss
Loans and advances 214 253
Other financial assets 9 14
223 267
Financial liabilities at fair value through profit or loss
Customer deposits - term deposits - 4
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 GBP214m (30 September 2019: GBP253m)
including accrued interest receivable of GBP1m (30 September 2019:
GBP1m). The cumulative loss in the fair value of the loans
attributable to changes in credit risk amounts to GBP3m (30
September 2019: GBP4m); the change for the current period is a
decrease of GBP1m (30 September 2019: decrease of GBP4m) of which
GBP1m (30 September 2019: GBP2m) has been recognised in the income
statement.
Other financial assets
Included in other financial assets are GBP8m (30 September 2019:
GBP8m) of unlisted securities and GBP1m (30 September 2019: GBP6m)
of debt instruments.
Refer to note 3.9 for further information on the valuation
methodology applied to financial assets held at fair value through
profit and loss and their classification within the fair value
hierarchy. Details of the credit quality of financial assets is
provided in the Risk report.
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 (30 September 2019: GBPNil). The Group is
contractually obligated to pay GBPNil (30 September 2019: GBPNil)
less than the carrying amount at maturity to the deposit
holder.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.3 Derivative financial instruments
The tables below analyse derivatives between those designated as
hedging instruments and those classified as held for trading:
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
GBPm GBPm
Fair value of derivative financial assets
Designated as hedging instruments 256 315
Designated as held for trading 147 51
403 366
Fair value of derivative financial liabilities
Designated as hedging instruments 99 191
Designated as held for trading 106 82
205 273
Cash collateral on derivatives placed with banks totalled GBP51m
(30 September 2019: GBP55m). Cash collateral received on
derivatives totalled GBP102m (30 September 2019: GBP149m). These
amounts are included within due from and due to other banks
respectively. Collateral placed with clearing houses, which did not
meet offsetting criteria set out in IAS 32, totalled GBP37m (30
September 2019: GBP55m) and is included within other assets.
The derivative financial instruments held by the Group are
further analysed below. The notional contract amount is the amount
from which the cash flows are derived and does not represent the
principal amounts at risk relating to these contracts.
31 March 2020 (unaudited) 30 September 2019 (audited)
Notional Notional
Total derivative contract Fair value Fair value contract Fair value Fair value
contracts 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) 31,327 100 165 25,023 105 121
Less: Net settled
interest
rate swaps (1) (20,776) (44) (126) (14,513) (47) (75)
Interest rate swaps
(net)
(2) 10,551 56 39 10,510 58 46
Cross currency swaps (2) 641 68 - 1,446 162 -
11,192 124 39 11,956 220 46
Fair value hedges
Interest rate swaps
(gross) 20,783 186 565 25,492 146 526
Less: Net settled
interest
rate swaps (1) (19,348) (80) (520) (23,872) (60) (389)
Interest rate swaps
(net)
(2) 1,435 106 45 1,620 86 137
Cross currency swaps (2) 1,000 26 15 808 9 8
2,435 132 60 2,428 95 145
Total derivatives
designated
as hedging instruments 13,627 256 99 14,384 315 191
Derivatives designated as held for trading
Foreign exchange rate related contracts
Spot and forward foreign
exchange
(2) 1,211 30 23 728 16 15
Cross currency swaps (2) 1,460 69 9 1,123 11 9
Options (2) 1 - - 2 - -
2,672 99 32 1,853 27 24
Interest rate related contracts
Swaps (gross) 721 23 48 1,159 24 53
Less: Net settled
interest
rate swaps (1) - - - (363) (5) (2)
Swaps (net) (2) 721 23 48 796 19 51
Swaptions (2) 11 - 1 11 - 2
Options (2) 482 2 3 465 2 3
1,214 25 52 1,272 21 56
Commodity related
contracts 133 23 22 55 2 2
Equity related contracts - - - 3 1 -
Total derivatives
designated
as held for trading 4,019 147 106 3,183 51 82
(1) Presented within other assets
(2) Presented within derivative financial instruments
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.3 Derivative financial instruments (continued)
Derivatives transacted to manage the Group's interest rate
exposure on a net portfolio basis are accounted for as either cash
flow hedges or fair value hedges as appropriate. Cash flow hedged
derivatives include vanilla interest rate swaps and cross currency
swaps. Derivatives traded to manage interest rate risk on certain
fixed rate assets, such as UK Government Gilts, are accounted for
as fair value hedges.
The Group hedging positions also include those designated as
foreign currency and interest rate hedges of debt issued from the
Group's securitisation and covered bond programmes. As such,
certain derivative financial assets and liabilities have been
booked in structured entities and consolidated within these
financial statements.
Interest Rate Benchmark Reform
As highlighted in note 1.2, the Group has early adopted and
applied the Amendments to IAS 39 and IFRS 7 on Interest Rate
Benchmark Reform. The amendments provide temporary exceptions from
applying specific hedge accounting requirements during the period
of uncertainty resulting from interest rate benchmark reform.
However, any hedge ineffectiveness continues to be recorded in the
income statement.
In summary, the reliefs provided by the amendments that apply to
the Group are:
-- When considering the 'highly probable' requirement, the Group
has assumed that the IBOR interest rates upon which the hedged
items are based do not change as a result of IBOR reform.
-- In assessing whether the hedge is expected to be highly
effective on a prospective basis the Group has assumed that the
IBOR interest rates upon which the cash flows of the hedged items
and the hedging instruments that hedge them are based are not
altered by IBOR reform.
-- The Group will not discontinue hedge accounting should the
retrospective assessment of hedge effectiveness fall outside the 80
-- 125 per cent range and the hedging relationship is subject to
interest rate benchmark reforms. For those hedging relationships
that are not subject to the interest rate benchmark reforms the
Group will continue to cease hedge accounting if retrospective
effectiveness is outside the 80 -- 125 per cent range.
-- The Group has retained the cumulative gain or loss in the
cash flow hedge reserve for designated cash flow hedges that are
subject to interest rate benchmark reforms even though there is
uncertainty arising from the interest rate benchmark reform with
respect to the timing and amount of the cash flows of the hedged
items. Should the Group consider the hedged future cash flows are
no longer expected to occur due to reasons other than interest rate
benchmark reform, the cumulative gain or loss will be immediately
reclassified to profit or loss.
-- The Group has assessed whether the hedged IBOR risk component
is a separately identifiable risk only when it first designates a
hedged item in a fair value hedge and not on an ongoing basis.
The Group has cash flow and fair value hedge accounting
relationships that are exposed to different IBORs, predominantly
GBP LIBOR, but also Euro Interbank Offer Rate (EURIBOR) and USD
LIBOR, which are subject to the interest rate benchmark reform.
As at 31 March 2020, the notional of the hedged items that the
Group has designated into cash flow hedge relationships that is
directly affected by the interest rate benchmark reform is
GBP28,817m, of which GBP28,176m relates to GBP LIBOR. These are
principally debt securities in issue, both current and highly
probable forecast issuances. The notional of the hedged items that
the Group has designated in fair value hedge relationships that is
directly affected by the interest rate benchmark reform is
GBP15,818m. These fair value hedges principally relate to fixed
rate mortgages.
At 31 March 2020, the notional amount of the hedging instruments
in hedge relationships to which these amendments apply was
GBP44,706m, of which GBP15,889m relates to fair value hedges and
GBP28,817m relates to cash flow hedges.
Page 47 of the Risk report describes how the Group is managing
the transition to new benchmark interest rates.
The Group will continue to apply the amendments to IAS 39 until
the uncertainty arising from the interest rate benchmark reforms
with respect to the timing and the amount of the underlying cash
flows that the Group is exposed ends. The Group has assumed that
this uncertainty will not end until the Group's contracts that
reference IBORs are amended to specify the date on which the
interest rate benchmark will be replaced, the cash flows of the
alternative benchmark rate and the relevant spread adjustment.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.4 Deferred tax
The Group has recognised deferred tax in relation to the
following items:
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
GBPm GBPm
Deferred tax assets
Tax losses carried forward 156 146
Capital allowances 107 91
Cash flow hedge reserve 11 3
Acquisition accounting adjustments 22 44
Transitional adjustment - IFRS 9 16 16
Transitional adjustment - available for sale reserve 1 1
Employee equity based compensation 4 5
Unamortised issue costs 3 4
Loss on financial instruments at fair value through
other comprehensive income 3 -
Pension spreading 11 11
Other 6 1
340 322
Deferred tax liabilities
Defined benefit pension scheme surplus (216) (139)
Acquisition accounting adjustments (23) (51)
Gains on financial instruments at fair value through
other comprehensive income - (6)
Intangible assets (3) (4)
Other (4) (1)
(246) (201)
Net deferred tax asset 94 121
Since 1 April 2017, the statutory rate of UK corporation tax has
been 19%. The previously enacted corporation tax reduction to 17%
on 1 April 2020 was cancelled in the Budget of 11 March 2020, and a
resolution effecting this passed by Parliament on 17 March 2020.
This new rate is used to measure the values at which assets are
expected to be realised and liabilities settled. The result is a
significant credit to the income statement as set out in note
2.5.
At 31 March 2020, the Group had an unrecognised deferred tax
asset of GBP131m, valued at 19% (30 September 2019: GBP114m, valued
at the previously enacted rate of 17%) representing trading losses
with a gross value of GBP689m (30 September 2019: GBP668m).
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.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.5 Debt securities in issue
The breakdown of debt securities in issue is shown below:
31 March 2020 (unaudited) Medium-term Subordinated
notes debt Securitisation Covered bonds Total
GBPm GBPm GBPm GBPm GBPm
Carrying value 1,838 722 4,667 1,826 9,053
Fair value hedge adjustments 49 - 13 65 127
Total debt securities 1,887 722 4,680 1,891 9,180
Accrued interest payable 22 9 8 26 65
1,909 731 4,688 1,917 9,245
30 September 2019 (audited) Medium-term Subordinated
notes debt Securitisation Covered 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
The following tables provide a breakdown of the medium-term
notes and subordinated debt by instrument:
Medium-term notes (excluding accrued interest)
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
GBPm GBPm
VM UK 3.125% fixed-to-floating rate callable senior
notes due 2025 298 298
VM UK 4% fixed rate reset callable senior notes due
2026 524 523
VM UK 3.375% fixed rate reset callable senior notes
due 2025 365 366
VM UK 4% fixed rate reset callable senior notes due
2027 400 397
CB PLC 2.25% fixed rate senior notes due 2020 300 301
1,887 1,885
Subordinated debt (excluding accrued interest)
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
GBPm GBPm
VM UK 5% fixed rate reset callable subordinated notes
due 2026 475 476
VM UK 7.875% fixed rate reset callable subordinated
notes due 2028 247 246
722 722
The Group has not issued any medium-term notes, subordinated
debt or covered bonds during the period. The Group issued GBP491m
in Sterling and US Dollar denominations from the securitisation
programmes (30 September 2019: GBP1,102m).
3.6 Due to other banks
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
GBPm GBPm
Secured loans 7,122 7,308
Securities sold under agreements to
repurchase(1) 401 1,554
Transaction balances with other banks 12 12
Deposits from other banks 55 42
7,590 8,916
(1) The underlying securities sold under agreements to repurchase have
a carrying value of GBP550m (30 September 2019: GBP2,324m).
Secured loans comprise amounts drawn under the Term Funding
Schemes (including accrued interest).
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.7 Provisions for liabilities and charges
6 months 12 months
to to
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
GBPm GBPm
PPI redress provision
Opening balance 379 275
Charge to the income statement - 415
Utilised (161) (311)
Closing balance 218 379
Customer redress and other provisions
Opening balance 25 41
Adoption of IFRS 16 (note 5.4) 8 -
Opening balance (restated) 33 41
Virgin Money provision on acquisition - 11
(Credit)/charge to the income statement (1) 18
Utilised (18) (45)
Closing balance 14 25
Restructuring provision
Opening balance 55 15
Adoption of IFRS 16 (note 5.4) (10) -
Opening balance (restated) 45 15
Virgin Money provision on acquisition - 2
Charge to the income statement - 64
Utilised (19) (26)
Closing balance 26 55
Total provisions for liabilities and charges 258 459
PPI redress
In common with the wider UK retail banking sector, the Group
continues to deal with complaints received in the period up to the
time bar in August 2019. The Group has made good progress in
reviewing and closing the remaining IRs and related complaints and
considers the remaining provision to be enough to meet current and
future expectations in relation to the mis-selling of PPI policies
and therefore no additional charge was required in the period. The
total provision raised to date in respect of PPI is GBP3,055m (30
September 2019: GBP3,055m), with GBP218m of this remaining (30
September 2019: GBP379m).
At 30 September 2019 the Group had received 629,000 complaints
and allowed for a further 86,000 complaints to be converted from
c.325,000 IRs that remained unprocessed at that time.
In the last six months the Group has processed the majority of
the unprocessed IRs, with c.8,000 IRs now left to review. Based on
the IR-to-complaint conversion rate experience over the past six
months it is now estimated that the actual final number of
complaints, from the stock of IRs which existed as at 30 September
2019, will be c.100,000.
In the last six months the Group has closed c.75,000 complaints
representing the 52,000 complaints which were outstanding at the
end of September 2019 and c.25,000 which have been converted from
IRs outstanding at the end of September 2019. Subject to estimating
the valid complaints in the final c8,000 IRs the Group has c.75,000
complaints left to review.
The overall provision continues to be based on several
assumptions derived from a combination of past experience,
estimated future experience, industry comparison and the exercise
of judgement in the key areas identified. Our experience since the
time bar has been positive relative to expectations, particularly
around the validity of complaints requiring redress (uphold rate),
and this more than offsets the costs associated with the additional
complaints. As the operation moves into the final months the main
area of variability is the uphold rate on the remaining complaints.
Using current experience and extrapolating on the remaining cases
indicates a potential provision surplus, but this will not be
validated until the outstanding complaints have been closed. In
terms of the Group's sensitivity to this variable, the actual
complaint uphold rate would have to increase by c.70% relative to
the 25% experienced in the six months to 31 March 2020 in order to
utilise the remaining provision. Therefore there does of course
remain a residual risk that existing provisions for PPI customer
redress may not cover all potential costs, but given the experience
over the past six months this risk has reduced significantly.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.7 Provisions for liabilities and charges (continued)
Customer redress and other provisions
Other provisions include amounts in respect of a number of
non-PPI conduct related matters, legal proceedings, claims arising
in the ordinary course of the Group's business and property related
provisions. The Group has not raised further provisions in relation
to non-PPI conduct matters in the period. 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.
Restructuring provision
Restructuring of the business continues with a provision held to
cover redundancy payments, property vacation costs and associated
enablement costs.
3.8 Retirement benefit obligations
The Group funds a defined benefit pension scheme, the Yorkshire
and Clydesdale Bank Pension Scheme ('the Scheme'). The Group's
trading subsidiary, Clydesdale Bank PLC, is the sponsoring employer
in the Scheme, which was closed to future benefit accrual for the
majority of current employees on 1 August 2017. The assets of the
Scheme are held in a trustee administered fund, with the Trustee
responsible for the operation and governance of the Scheme,
including making decisions regarding the Scheme's funding and
investment strategy.
The following table provides a summary of the fair value of plan
assets and present value of the defined benefit obligation for the
Scheme:
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
GBPm GBPm
Fair value of Scheme assets 4,437 4,707
Total defined benefit obligation (3,819) (4,311)
Net defined benefit pension asset 618 396
The Group also provides post-retirement health care under a
defined benefit scheme for pensioners and their dependant relatives
for which provision of GBP2m (30 September 2019: GBP3m) 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.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.9 Fair value of financial instruments
This section should be read in conjunction with note 3.18, Fair
value of financial instruments, of the 2019 Virgin Money UK PLC
Annual Report and Accounts, which provides more detail about
accounting policies adopted and valuation methodologies used in
calculating fair value. There have been no changes in the
accounting policies adopted or the valuation methodologies
used.
(a) Fair value of financial instruments recognised on the
balance sheet at amortised cost
The tables below show a comparison of the carrying amounts of
financial assets and liabilities measured at amortised cost, as
reported on the balance sheet, and their fair values where these
are not approximately equal.
There are various limitations inherent in this fair value
disclosure, particularly where prices are derived from unobservable
inputs due to some financial instruments not being traded in an
active market. The methodologies and assumptions used in the fair
value estimates are therefore described in the notes to the tables.
The difference between carrying value and fair value is relevant in
a trading environment but is not relevant to assets such as loans
and advances.
31 Mar 2019 30 Sep 2019
(unaudited) (audited)
Carrying Fair value Carrying Fair value
value value
GBPm GBPm GBPm GBPm
Financial assets
Loans and advances to customers(1) 73,194 73,117 73,095 73,119
Financial liabilities
Due to other banks(2) 7,590 7,590 8,916 8,874
Customer deposits(2) 64,853 65,055 64,000 64,166
Debt securities in issue(3) 9,245 9,194 9,591 9,667
(1) Loans and advances to customers are categorised as Level 3
in the fair value hierarchy with the exception of GBP1,415m (30
September 2019: GBP1,513m) 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 GBP2,492m of listed debt (30 September 2019:
GBP2,606m) which is categorised as level 1.
(b) Fair value of financial instruments recognised on the
balance sheet at fair value
The following tables provide an analysis of financial
instruments that are measured at fair value, using the fair value
hierarchy described above.
Fair value measurement Fair value measurement
as at as at
31 Mar 2020 (unaudited) 30 Sep 2019 (audited)
Level Level Level Total Level Level Level Total
1 2 3 1 2 3
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Financial assets at fair
value
through other comprehensive
income 4,635 - - 4,635 4,328 - - 4,328
Financial assets at fair
value
through profit or loss - 214 - 214 - 253 - 253
Other financial assets - - 9 9 - - 14 14
Derivative financial assets - 403 - 403 - 366 - 366
Total financial assets
at fair value 4,635 617 9 5,261 4,328 619 14 4,961
Financial liabilities
Customer deposits - - - - - 4 - 4
Derivative financial liabilities - 205 - 205 - 273 - 273
Total financial liabilities
at fair value - 205 - 205 - 277 - 277
There were no transfers between Level 1 and 2 in the current or
prior period.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.9 Fair value of financial instruments (continued)
Additional analysis on assets and liabilities measured at fair
value based on valuation techniques for which any significant input
is not based on observable market data (Level 3):
Level 3 movement
analysis:
6 months to 31 Mar 2020 12 months to 30 Sep 2019
(unaudited) (audited)
Financial assets Financial assets
Financial assets at fair value Financial assets at fair value
available for through profit available for through profit
sale or loss sale or loss
GBPm GBPm GBPm GBPm
Balance at the beginning
of the period - 14 11 -
Reclassification on
adoption of IFRS 9(1) - - (11) 11
Fair value
gains/(losses)
recognised(2)
In profit or loss -
unrealised - - - 1
In profit or loss -
realised - 5 - 3
Purchases - - - 3
Sales - (10)
Settlements - - - (4)
Balance at the end
of the period - 9 - 14
(1) Changes required as a result of the adoption of IFRS 9 from 1
October
2018.
(2) Net gains or losses were recorded in non-interest income, FVOCI
reserve
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
31 March 2020.
Fair
value Valuation Unobservable Low High
GBPm technique inputs range range
Other financial assets
at fair value through
profit or loss (FVTPL)
Discounted cash Contingent litigation
Equity investments 8 flow risk 0% 100%
Discounted cash
Debt investments 1 flow Recoverable amount 0% 100%
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 into the FVTPL equity investment is the
contingent litigation risk. Were this to crystallise in its
entirety, the carrying value of the equity investments would reduce
by GBP6m.
Other than this significant Level 3 measurement, 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.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 4: Capital
4.1 Equity
4.1.1 Share capital and share premium
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
GBPm GBPm
Share capital 144 143
Share premium 3 3
Share capital and share premium 147 146
31 Mar 2020 30 Sep 2019
(unaudited) (audited) 31 Mar 2020 30 Sep 2019
Number of Number of (unaudited) (audited)
shares shares GBPm GBPm
Ordinary shares of GBP0.10 each - allotted,
called up, and fully paid
Opening ordinary share capital 1,434,485,689 886,079,959 143 89
Share for share exchange - 540,856,644 - 54
Issued under employee share schemes 3,444,676 7,549,086 1 -
Closing ordinary share capital 1,437,930,365 1,434,485,689 144 143
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 31 March 2020 rank equally with regard to the Company's residual
assets.
During the period 3,444,676 (30 September 2019: 7,549,086)
ordinary shares were issued under employee share schemes with a
nominal value of GBP0.3m (30 September 2019: GBP0.7m).
The Directors recommended that no interim dividend would be paid
in respect of the half year ended 31 March 2020. This reflects the
current uncertainty as to the overall impact of the COVID-19 virus
and is consistent with the PRA's statement welcoming the decision
of large UK banks to suspend dividends until the end of 2020.
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.
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 originally held
by Virgin Money Holdings (UK) PLC and recognised as a
non-controlling interest (note 4.1.6). Following a change in
obligor from Virgin Money Holdings (UK) PLC to the Company 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 (30
September 2019: GBP15m). AT1 distributions of GBP40m were paid in
the period (30 September 2019: GBP41m; 31 March 2019: GBP18m).
Following revisions to the tax rules on hybrid capital which took
effect from 1 January 2019, Hybrid Capital Instruments elections
covering the Group's AT1s that existed at 1 January 2019 were made
to HMRC on 27 September 2019. Accordingly, in line with the revised
standard, the tax credits for these payments have been recognised
in the income statement.
4.1.3 Capital reorganisation reserve
The capital reorganisation reserve of GBP839m was recognised on
the issuance of the Company's ordinary shares in February 2016 in
exchange for the acquisition of the entire share capital of the
Group's previous parent company, CYB Investments Limited (CYBI).
The reserve reflects the difference between the consideration for
the issuance of the Company's shares and CYBI's share capital and
share premium.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 4: Capital (continued)
4.1.4 Merger reserve
A merger reserve of GBP633m was recognised on the issuance of
the Company's ordinary shares in February 2016 in exchange for the
acquisition of the entire share capital of CYBI. An additional
GBP1,495m was recognised on the issuance of the Company's ordinary
shares in October 2018 in exchange for the acquisition of the
entire share capital of Virgin Money Holdings (UK) PLC. The merger
reserve reflects the difference between the consideration for the
issuance of the Company's shares and the nominal value of the
shares issued.
4.1.5 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 the Company, the shares held
in the EBT were converted to the Company's shares at a ratio of
1.2125 Company shares for each Virgin Money Holdings (UK) PLC
share. The investment in own shares as at 31 March 2020 is GBPNil
(30 September 2019: GBP1m). The market value of the shares held in
the EBT at 31 March 2020 was GBP0.1m (30 September 2019:
GBP1m).
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.
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.
Cash flow hedge reserve
The cash flow hedge reserve represents the effective portion of
cumulative post-tax gains and losses on derivatives designated as
cash flow hedging instruments that will be recycled to the income
statement when the hedged items affect profit or loss.
6 months 12 months
to to
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
GBPm GBPm
Opening cash flow hedge reserve (26) (39)
Amounts recognised in other comprehensive income:
Cash flow hedge - interest rate risk
Effective portion of changes in fair value of interest
rate swaps (32) 14
Amounts transferred to the income statement (2) -
Taxation 9 (3)
Cash flow hedge - Foreign exchange risk
Effective portion of changes in fair value of cross
currency swaps (20) 59
Amounts transferred to the income statement 20 (57)
Taxation - -
Closing cash flow hedge reserve (51) (26)
4.1.6 Non-controlling interests
On 15 October 2018, the date on which it was acquired by the
Company, Virgin Money Holdings (UK) PLC (now an intermediate
holding company within the Group) 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 at that
time, 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. Subsequently on 20 August 2019, there was a change in
obligor from Virgin Money Holdings (UK) PLC to the Company,
following which these instruments have been recognised within other
equity (note 4.1.2).
There were no distributions to non-controlling interests in the
current period (30 September 2019: GBP33m paid, GBP26m net of tax,
31 March 2019: GBP16m paid, GBP13m net of tax).
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 5: Other notes
5.1 Contingent liabilities and commitments
The table below sets out the amounts of financial guarantees and
commitments which are not recorded on the balance sheet. Financial
guarantees and commitments are credit-related instruments which
include acceptances, letters of credit, guarantees and commitments
to extend credit. The amounts do not represent the amounts at risk
at the balance sheet date but the amounts that would be at risk
should the contracts be fully drawn upon and the customer 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.
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
GBPm GBPm
Guarantees and assets pledged as collateral security:
Due in less than 3 months 20 24
Due between 3 months and 1 year 22 24
Due between 1 year and 3 years 9 6
Due between 3 years and 5 years 11 11
Due after 5 years 49 48
111 113
Other credit commitments
Undrawn formal standby facilities, credit lines and
other commitments to lend at call 16,463 15,158
Other contingent liabilities
Conduct risk related matters
There continues to be uncertainty and thus judgement is required
in determining the quantum of conduct risk related liabilities,
with note 3.7 reflecting the Group's current position in relation
to redress provisions including those for PPI. Following the August
2019 time bar for PPI complaints the Group has made good progress
in reviewing and closing the IRs and related complaints. Until all
matters are closed the final amount required to settle the Group's
potential liabilities for these, and other conduct related matters,
remains 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.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 5: Other notes (continued)
5.2 Related party transactions
The tables below reflect transactions and balances with related
entities in the current and prior periods:
31 Mar 2020 30 Sep 2019
(unaudited) (audited)
GBPm GBPm
Assets with related entities:
Investments in joint ventures and
associates
Virgin Money Unit Trust Managers
Limited (1) 5 8
Other assets
Amounts due from Virgin Money Unit
Trust Managers Limited(1) 3 2
Total assets with related entities 8 10
Liabilities with related entities:
Customer deposits
The Virgin Money Foundation 1 1
Other liabilities
Group pension deposits(2) 25 17
Commissions and charges due to Virgin
Atlantic Airways
Limited(3) 4 6
Trademark licence fees to Virgin
Enterprises Limited(4) 4 4
Total liabilities with related
entities 34 28
Transactions with related entities:
Non-interest income
Net fees and commissions to Virgin
Atlantic Airways
Limited (8) (15)
Share of post-tax result of Virgin
Money Unit Trust
Managers Limited(1) (3) (1)
Gain on sale of 50% (less one share)
consideration in
Virgin Money Unit Trust Managers
Limited - 35
Operating and administrative expenses
Trademark licence fees to Virgin
Enterprises Limited(4) (6) (11)
Costs recharged to Virgin Money Unit
Trust Managers
Limited(1) 3 2
Donations net of costs recharged to
the Virgin Money
Foundation(5) (1) (2)
Total income statement (15) 8
(1) The Group has a joint venture with ASI, named Virgin Money Unit Trust
Managers Limited (UTM).
(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 GBPNil (31 March 2019: GBP0.2m, 30 September
2019: GBP0.1m), were charged to the Group sponsored scheme. Information
on the pension schemes operated by the Group is provided in note 3.8.
Pension contributions of GBP25m (31 March 2019: GBP55m, 30 September
2019: GBP83m) were made to the Scheme (note 2.4).
(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. Cash costs payable to VAA totalling GBP1m (31 March
2019: GBP3m, 30 September 2019: GBP2m) have been deferred on the balance
sheet.
(4) Licence fees of GBP6m were payable to Virgin Enterprises Limited for
the use of the Virgin Money brand trademark.
(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 GBP0.1m
(31 March 2019: GBP0.3m, 30 September 2019: GBP0.3m) and is included
in the total value disclosed above.
During the period to 31 March 2020 the Group did not pay any
ordinary dividends to Virgin Group Holdings Limited.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 5: Other notes (continued)
5.3 Notes to the statement of cash flows
Term Funding Debt securities
Scheme in issue Lease liabilities(1) Total
GBPm 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
Adjustment on transition to IFRS
16 - - 205 205
Revised 1 October 2019 7,308 9,591 205 17,104
Cash flows:
Issuances - 491 - 491
Redemptions - (876) - (876)
Repayment (200) - (15) (215)
Non-cash flows
Fair value adjustments and
associated unwind on acquired
TFS and debt securities in
issue 17 3 - 20
Movement in accrued interest (3) 25 2 24
Unrealised foreign exchange movements - 11 - 11
Other movements - - 1 1
At 31 March 2020 7,122 9,245 193 16,560
(1) The Group adopted IFRS 16 'Leases' on 1 October 2019. The
payment of principal amounts of lease liabilities is now included
as a deduction within financing activities whereas previously under
IAS 17 'Leases' operating lease charges were included as a
deduction within cash flow from operating activities. Interest on
lease liabilities is included within 'interest paid'.
5.4 Transition to IFRS 16 'Leases'
The Group's lease portfolio consists principally of leases for
offices and stores. The Group also leases equipment, but this is
generally of low value. Lease terms are negotiated on an individual
basis and contain a wide range of different terms and conditions,
although most are industry standard in nature.
The Group has adopted IFRS 16 Leases from 1 October 2019 and
elected to apply 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 retrospective approach, at transition,
lease liabilities have been measured at the present value of the
remaining lease payments, discounted at the Group's incremental
borrowing rate as at 1 October 2019. The weighted-average borrowing
rate applied to these lease liabilities on transition was 1.7%.
For the purposes of applying the modified retrospective
approach, the Group has elected 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;
-- apply the practical expedient to rely on its assessment as to
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;
and
-- 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.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 5: Other notes (continued)
5.4 Transition to IFRS 16 'Leases' (continued)
The impact of the adoption of IFRS 16 on the opening balance
sheet as at 1 October 2019 is shown in the table below:
As at 30 September Restated
2019 as at 1
Impact of October
IFRS 16 2019
GBPm GBPm GBPm
---------- ---------
Property, plant and equipment 145 194 339
Loans and advances to customers 73,095 6 73,101
Other assets 237 (6) 231
Provisions 459 (3) 456
Other liabilities 2,534 196 2,730
Equity 5,021 1 5,022
---------- ---------
The adoption of IFRS 16 has absorbed 10bps of the Group's CET1
capital, principally through the risk weighting of assets now
recognised on balance sheet.
Lease liabilities amounting to GBP205 million in respect of
leased properties previously accounted for as operating leases were
recognised at 1 October 2019. Offsetting this in the GBP196 million
movement in other liabilities on adoption is a GBP9 million
transfer of rent-free period accruals out of other liabilities on
transition.
The following is a reconciliation of operating lease commitments
disclosed at 30 September 2019 to the lease liability recognised at
1 October 2019:
GBPm
Undiscounted future minimum lease payments under operating
leases at 30 September 2019 414
Leases not yet commenced at 1 October 2019 (129)
Irrecoverable VAT included in future minimum lease payments (49)
Short-term leases recognised on a straight line basis as an
expense (2)
Lease prepayments (6)
Discounted at the incremental borrowing rate (24)
Other 1
Total lease liability recognised as at 1 October 2019 205
IFRS 16 amends the criteria applied to assess whether a
sub-lease is an operating lease or a finance lease. Changes to the
classification of sub-leases where the Group is lessor under IFRS
16 has resulted in certain sub-leases of surplus estate previously
classified as operating leases being reclassified as finance
leases. In those cases, any difference between the value of the
impaired right-of-use asset on transition and the sub-lease
receivable recognised on transition is recognised as a gain or loss
directly within equity.
Under IFRS 16, the operating lease expense previously recorded
in operating and administrative costs has been replaced by a
depreciation charge (also included within operating and
administrative costs), which is lower than the operating lease
expense recognised under IAS 17, and a separate interest expense,
recorded in 'interest expense'. While the decision to transition
using the modified retrospective approach impacts comparability
with prior periods within the Group's consolidated income
statement, the line item impact is not material.
There is no net cash flow impact arising from the adoption of
the new standard.
The Group's revised accounting policy is disclosed in Note
1.2.
Additional information
Measuring financial performance - glossary
Underlying adjustments
In 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 period on period. 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 period or
recurring non-underlying items:
6 months 6 months 6 months
to to to
31 Mar 31 Mar 30 Sep
2020 2019 2019 Reason for exclusion from the Group's current
Item GBPm GBPm GBPm underlying performance
Integration (61) (45) (111) These are part of the Group's publicised
and transformation three-year integration plan following the
costs acquisition of Virgin Money Holdings (UK)
PLC and comprise a number of one-off expenses
that are required to realise the anticipated
cost synergies. Also included are one-off
costs to support transformation. This programme
will improve our digital capability and
consequently enable super straightforward
efficiency. Costs are expected to be restructuring
in nature.
Acquisition (57) (67) (20) This consists principally of the unwind
accounting of the IFRS 3 fair value adjustments created
unwinds on the acquisition of Virgin Money Holdings
(UK) PLC in October 2018 (6 months to 31
Mar 2020: GBP46m charge, 6 months to 31
Mar 2019: GBP33m gain, 6 months to 30 Sep
2019: GBP10m charge) and the IFRS 9 impairment
impact on acquired assets (6 months to 31
Mar 2020: GBP5m charge, 6 months to 31 Mar
2019: GBP100m charge, 6 months to 30 Sep
2019: GBP3m charge) with other items amounting
to GBP6m (6 months to 31 Mar 2019: GBPNil,
6 months to 30 Sep 2019: GBP7m charge).
These represent either one-off adjustments
or are the scheduled reversals of the accounting
adjustments that arose following the fair
value exercise required by IFRS 3. These
will continue to be treated as non-underlying
adjustments over the expected three to five-year
period until they have been fully reversed.
Legacy conduct - (33) (400) These costs are historical in nature and
are not indicative of the Group's current
practices.
Other:
SME transformation (5) (17) (13) These costs are significant due to the unique
growth opportunities currently available
to the Group in respect of its Business
lending in relation to the RBS proposition.
UTM transition (4) - (1) These costs relate to UTM's transformation
costs costs principally for the build of a new
platform for administration and servicing.
The costs are one-off in nature as part
of the transition to the new JV proposition.
Intangible - (127) - The charge for the software write-off in
asset write-off the prior period was significant and arose
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 - 80 - The alignment of accounting practices was
EIR adjustments a one-off exercise arising from the acquisition.
Virgin Money - (55) - These costs related directly to the transaction
Holdings and comprised legal, advisory and other
(UK) PLC associated costs required to complete the
transaction transaction.
costs
Consent solicitation - - (18) One-off costs relating to the change in
obligor of senior debt from Virgin Money
Holdings (UK) PLC to CYBG PLC on 20 August
2019.
Gain on sale - - 35 A one-off gain recognised on the disposal
of UTM of 50% (less one share) of Virgin Money
Unit Trust Managers Limited.
GMP equalisation A one-off charge for GMP equalisation in
cost - (11) - the Group's defined benefit scheme.
Legacy restructuring - (2) (3) These legacy costs were significant in prior
and separation periods and related to the Sustain programme,
and demerger from NAB, both of which are
now complete.
Gain on disposal
of VocaLink - - 4
Total other (9) (132) 4
Additional information
Glossary
For a glossary of terms and abbreviations used within this
report refer to pages 281 to 285 of the Group Annual Report and
Accounts for the year ended 30 September 2019.
For terms not previously included within the Glossary, or where
terms have been redefined or amounts have been quantified, refer
below:
Cash and cash For the purposes of the statement of cash flows, cash
equivalents and cash equivalents comprise cash and non-mandatory
deposits with central banks and amounts due from other
banks with a maturity of less than three months.
Internal probability The rating applied as a result of mapping all internal
of default (PD) models that predict the probability of default onto a
ratings common scale.
Net interest margin Underlying net interest income as a percentage of average
(NIM) interest earning assets for a given period. Underlying
net interest income of GBP702m (30 September 2019: GBP1,433m)
is annualised and divided by average interest earning
assets for a given period of GBP86,847m (30 September
2019: GBP86,362m) (which is then adjusted to exclude
short-term repos used for liquidity management purposes).
As a result of the exclusions noted above, average interest
earning assets used as the denominator have reduced by
GBP24m (30 September 2019: GBPNil).
Statutory return Statutory loss after tax attributable to ordinary equity
on tangible equity holders of GBP18m (30 September 2019: loss of GBP253m),
(RoTE) annualised, as a percentage of average tangible equity
of GBP3,593m (30 September 2019: GBP3,727m) (average
total equity less intangible assets, AT1 and non-controlling
interests) for a given period.
Statutory basic Statutory loss after tax attributable to ordinary equity
earnings per share shareholders of GBP18m (30 September 2019: loss of GBP253m),
(EPS) divided by the weighted average number of ordinary shares
in issue for a given period of 1,440m shares (30 September
2019: 1,414m) (which includes deferred shares and excludes
own shares held or contingently returnable shares).
Underlying profit Underlying profit before tax of GBP120m (30 September
after tax attributable 2019: GBP539m) add underlying tax credit of GBP2m (30
to ordinary equity September 2019: less tax charge of GBP62m), less AT1
holders distributions of GBP40m (30 September 2019: GBP41m),
less distributions to non-controlling interests of GBPNil
(30 September 2019: GBP33m) and was equal to GBP82m (30
September 2019: GBP403m). 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.
Underlying RoTE Underlying profit after tax attributable to ordinary
equity holders of GBP82m, (30 September 2019: GBP403m),
annualised, as a percentage of average tangible equity
of GBP3,593m (30 September 2019: GBP3,727m) (average
total equity less intangible assets, AT1 and non-controlling
interests) for a given period.
Underlying basic Underlying profit after tax attributable to ordinary
EPS equity holders of GBP82m, (30 September 2019: GBP403m),
divided by the weighted average number of ordinary shares
in issue for a given period of 1,440m shares (30 September
2019: 1,414m) (which includes deferred shares and excludes
own shares held or contingently returnable shares).
Tangible net asset Tangible equity (total equity less intangible assets,
value (TNAV) per AT1 and non-controlling interests) as at the period end
share of GBP3,645m (30 September 2019: GBP3,590m) divided by
the number of ordinary shares in issue at the period
end of 1,443m (30 September 2019: 1,441m) (which includes
deferred shares of 6m (30 September 2019: 7m) and excludes
own shares held of 0.2m (30 September 2019: 0.5m)).
Additional information
Abbreviations
ACS Annual cyclical scenario
AIRB Advanced internal ratings-based
ASI Aberdeen Standard Investments
BBLS Bounce back loan scheme
CBILS Coronavirus business interruption
loan scheme
CET1 Common equity tier 1
CIR Cost to income ratio
CLBILS Coronavirus large business interruption
loan scheme
COVID-19 Corona Virus Disease 2019
CRE Commercial real estate
EBT Employee benefit trust
EEL Excess expected loss
EIR Effective interest rate
FIRB Foundation internal ratings-based
FV Fair value
ICAAP Internal capital adequacy assessment
process
IR Information request
JV Joint venture
LGD Loss given default
LIBOR London Inter-bank Offered Rate
LTI Loan to income
LTV Loan to value
MMR Mortgage market review
MREL Minimum requirement for own
funds and eligible liabilities
NSFR Net stable funding ratio
PD Probability of default
PMA Post model adjustment
PPI Payment protection insurance
RWA Risk weighted assets
SVR Standard variable rate
TFSME Term funding scheme with additional
incentives for SMEs
YoY Year-on-year
Additional information
Officers and professional advisers
Non-Executive Directors
Chairman Jim Pettigrew (1) (4)
Deputy Chairman and Senior Independent
Non-Executive Director David Bennett (1) (2) (3) (4)
Independent Non-Executive Directors Paul Coby (3)
Geeta Gopalan (2) (3)
Adrian Grace (1)
Fiona MacLeod (1) (3) (4)
Darren Pope (1) (2)
Dr Teresa Robson-Capps (2)
Tim Wade (2) (3) (4)
Non-Executive Director Amy Stirling
Executive Directors David Duffy
Ian Smith
Company Secretary Lorna McMillan
Group General Counsel James Peirson
Independent auditors Ernst & Young LLP
1 Bridgewater Place
Water Lane
Leeds
LS11 5QR
(1) Member of the Remuneration Committee
(2) Member of the Audit Committee
(3) Member of the Risk Committee
(4) Member of the Governance and Nomination Committee
VIRGIN MONEY UK PLC
Registered number 09595911 (England and Wales)
ARBN 609 948 281 (Australia)
Head Office: London Office: Registered Office:
30 St. Vincent Place Floor 15, The Leadenhall Jubilee House
Building
Glasgow 122 Leadenhall Street Gosforth
G1 2HL London Newcastle Upon Tyne
EC3V 4AB NE3 4PL
https://www.virginmoneyukplc.com/
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR SSSESIESSESI
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May 06, 2020 02:00 ET (06:00 GMT)
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