TIDMVMUK TIDM91XR
RNS Number : 2231U
Virgin Money UK PLC
28 July 2020
28 July 2020
Virgin Money UK PLC: Third Quarter 2020 Trading Update
Virgin Money UK PLC ("VMUK" or the "Group") confirms that
trading in the nine months to 30 June 2020 was in line with the
Board's expectations.
David Duffy, Chief Executive Officer:
"I am pleased with the way the Group has performed during the
pandemic. In a severely disrupted environment we are delivering on
what we set out in May; to safeguard the health and wellbeing of
our colleagues, customers and communities while protecting the
bank. Our Q3 financial results reflect lower demand from consumers
due to the pandemic, but strong demand from businesses for
Government-supported schemes, with the Group further increasing its
provisions to reflect the uncertain economic outlook while
maintaining a focus on margin, cost and capital management.
"Our priority remains on offering the right support for our
customers in need. We have now granted c.67k mortgage and c.53k
personal payment holidays, and we've supported c.25k business
customers with lending arrangements. We know that things may yet
get more difficult for many of our customers, but we are determined
to continue to support their needs where we can and to fulfil our
role in the economic recovery. I'm proud of the way our colleagues
have responded to the significant challenges of recent months, and
encouraged by the agility with which we have adapted our
operations.
"We have now recommenced our transformation and rebrand
activity, taking what we have learned through the pandemic to
deliver on our mission to disrupt the status quo as a full-service
digital bank."
Q3 Performance Summary
Q3 balances reflect economic activity and customer behaviour during
UK lockdown
* Customer deposits increased in Q3 by 4.8% to
GBP67.7bn primarily due to lower Personal customer
spending during lockdown and Business customers
maintaining higher levels of liquidity
* Q3 Mortgage portfolio reduction of (1.0)% to
GBP58.9bn reflected the effective closure of the new
purchase market under lockdown, partially offset by
improved retention rates
* Q3 Business lending growth of 5.7% to GBP8.8bn driven
by significant demand for the Government backed
lending schemes with GBP619m of BBLS and GBP248m of
CBILS lending provided at end June
* Q3 Personal lending reduction of (2.7)% to GBP5.2bn
primarily due to lower credit card balances
Net Interest Margin (NIM) declined in line with expectations
* NIM declined to 157bps (9 months annualised) with a
Q3 NIM of 147bps (Q2: 163bps) due to the immediate
asset repricing following the base rate reduction and
cost of holding excess customer deposits; liability
repricing actions will drive an improvement in NIM in
Q4 and beyond
* The Group continues to expect a FY20 NIM of
155-160bps
Asset quality in line with H1; reflects ongoing support mechanisms
* The Group has not yet seen any significant specific
provisions or credit losses in relation to the
pandemic given a backdrop of Government support and
VMUK forbearance measures
* The Group has updated its IFRS9 impairment models
incorporating more cautious economic scenarios (see
Appendix 1) and refined its overlays to reflect
payment holiday assumptions, resulting in a prudent
net increase in its provisions of GBP42m primarily in
Mortgages and Personal
* Total balance sheet credit provisions of GBP584m (H1:
GBP542m); coverage ratio of 79bps (H1: 75bps)
* Net cost of risk (9 months annualised) of 55bps (H1:
63bps); Q3 net cost of risk of 40bps
The Group's capital position remains resilient with a CET1 ratio
of 13.3%
* CET1 ratio increased c.30bps to 13.3% due to
c.GBP0.5bn of net reductions in RWAs primarily due to
a regulatory benefit from extending the "SME
Supporting Factor" RWA relief to larger exposures
* The PRA confirmed in July that VMUK's Pillar 2A CET1
requirement reduced from 2.9% to 2.4% equating to an
MDA threshold of 9.4%; c.GBP950m of CET1 management
buffer in addition to GBP584m of balance sheet credit
provisions, providing significant resilience for an
uncertain environment
Supporting our customers
(GBPbn) 30 Sep-19 31 Mar-20 30 Jun-20 Q3 growth YTD annualised
------------------- ---------- ---------- ---------- ---------- ---------------
Mortgages 60.1 59.5 58.9 (1.0)% (2.6)%
Business 7.9 8.3 8.8 5.7% 15.6%
o/w BBLS/CBILS n/a 0.0 0.9 n/a n/a
Personal 5.0 5.3 5.2 (2.7)% 4.4%
Customer lending 73.0 73.2 72.9 (0.4)% (0.1)%
Customer deposits 63.8 64.7 67.7 4.8% 8.3%
o/w relationship
deposits 21.4 22.3 24.7 10.8% 20.8%
------------------- ---------- ---------- ---------- ---------- ---------------
There was a significant increase in deposits of 4.8% in Q3
reflecting lower consumer spending under lockdown with growth in
relationship deposits of 10.8%, primarily in Personal and Business
current accounts. We have seen customer spending increase as
lockdown has eased and expect this to continue which should unwind
some of the Group's excess deposit position, but further actions
will be considered to manage the margin impact should it persist.
These significant deposit inflows have contributed to a reduction
in the Group's loan-to-deposit ratio to 108% (H1: 113%).
As expected, Mortgage balances reduced in the third quarter by
1.0%. Q3 saw little activity in the new purchase market given the
impacts of lockdown with limited physical surveys possible and
new-to-bank re-mortgage activity was also lower given social
distancing restrictions and subdued consumer confidence. These
impacts were partially mitigated by higher retentions. VMUK
continues to expect a muted Q4 given a lower pipeline entering the
quarter, but is seeing demand build into FY21.
Business lending growth of 5.7% in Q3 was driven by support for
customers through the Government-guarantee lending schemes
including GBP619m of BBLS on the balance sheet at end June and
GBP248m of CBILS. We also continue to support customers through our
own initiatives including capital repayment holidays, overdraft
extensions and ongoing expert relationship manager advice, with
c.25k customers now supported in total. Business lending (excluding
the Government schemes) reduced c.GBP0.4bn in the period due to a
reduction in working capital facilities.
Personal lending balances reduced by 2.7% in the period
primarily due to lower credit card balances. The impact of lockdown
has led to much lower spending on revolving credit facilities and
lower personal loan demand, although as expected balance transfer
lending balances have remained more stable (c.65% of cards
balances). Similarly, lower consumer spending resulted in a
significant reduction in non-interest income from debit and credit
card transactions, with spending down 25% and 55% respectively in
April/May on expected volumes, but returning to more normal levels
in July.
VMUK continues to actively support its Mortgage and Personal
customers through this difficult time with payment holidays ("PHs")
where appropriate, although the level of new requests has reduced
significantly since the peak in April. VMUK and the wider industry
has also agreed to extend PHs for a further 3 months to those
customers who evidence a requirement for them. However, the initial
cohort of PHs expiring suggests at this stage only a small
proportion of customers require an extension.
- c.67k Mortgage PHs granted to date at 17-Jul (30-Apr: c.60k)
or c.20% of balances; c.70% of customers have matured from their
1(st) PH with c.31k PHs in total still in force at 17-Jul
- c.42k Credit Card PHs granted to date at 17-Jul (30-Apr:
c.32k) or c.5% of balances; c.30% of customers have matured from
their 1(st) PH with c.32k PHs in total still in force at 17-Jul
- c.11k Personal Loans PHs granted to date at 17-Jul (30-Apr:
c.8k) or c.9% of balances; c.75% of customers have matured from
their 1(st) PH with c.4k PHs in total still in force at 17-Jul
NIM trajectory in line with expectations
The Group's NIM declined to 157bps (9 months annualised) down
from H1 of 162bps. As expected, Q3 NIM declined to 147bps (vs Q2 of
163bps) reflecting the impact of the recent base rate cut and the
associated timing mis-match between asset and deposit repricing, as
well as a temporary NIM drag from the cost of holding excess
deposits. As previously guided, the Group expects a NIM improvement
in Q4 as liability repricing actions take effect and excess deposit
balances start to unwind, and continues to expect a FY20 NIM of
155-160bps.
Following the reduction in Bank Base Rate to 0.1%, and noting
future market rate expectations, the Group concluded that its
5-year structural hedge had generated maximum value. In Q3 the
Group's term structural hedges were fully unwound, locking in
expected NII contributions from the hedges over the next 5 years.
In the future, the Group anticipates a more dynamic approach to
hedging these balances. Based on the current rate outlook, the
Group expects no significant adverse impact on NII in FY21 and
beyond compared to the 5-year rolling approach, but it provides the
Group with optionality should the rate environment improve.
Further credit provisions increase
The Group has not yet seen any significant credit losses nor
been required to make any significant specific provisions in
relation to the pandemic impact. It has updated its IFRS9 models
for all of its portfolios with a more cautious set of updated
economic assumptions from Oxford Economics (Appendix 1) and refined
its management overlays to reflect expectations in respect of the
behaviour of customers on payment holidays.
VMUK uses a probability-weighted combination of three economic
scenarios (i) Recovery Scenario (30% weighting), (ii) Pandemic
Shock (30%), and (iii) Pandemic Sustained Downside (40%). The
Recovery Scenario reflects a c.8% GDP shock in calendar 2020 and
recovery in 2021 and beyond. The Pandemic Shock scenario
incorporates a more severe c.13% GDP shock with peak unemployment
of c.10% in 2021 and HPI peak-to-trough of c.25%, but an economic
recovery from 2021. The Pandemic Sustained Downside scenario
incorporates a similar economic shock, but with a much slower
recovery including elevated unemployment and a more subdued house
price recovery.
The IFRS9 probability-weighted model outputs supplemented by the
payment holiday assumption overlays required a net additional
impairment provision of GBP42m, leaving the Group with GBP584m of
total balance sheet credit provisions. This ensures the Group
remains prudently provisioned for the economic environment. The
Group's Q3 P&L impairment charge of GBP74m is gross of
write-offs and recoveries in the period, and equates to a Q3 net
cost of risk of 40bps.
Credit provisions Credit provisions Lending at Coverage Annualised
at 31-Mar-20 at 30-Jun-20 30 Jun-20 ratio (bps) net cost
(GBPm) (GBPm) of risk (bps)
(GBPbn)
Mortgages 50 81 58.9 14 10
Business 261 254 8.8 321* 187
Personal 231 249 5.2 490 364
Total lending 542 584 72.9 79* 55
o/w stage
2 267 295 7.2 407
o/w stage
3 148 144 0.9 1670
--------------- ------------------ ------------------ ----------- ------------- ---------------
* Government guaranteed lending balances excluded for purpose of
coverage ratio calculation
The Group's total credit provision coverage ratio increased by
4bps to 79bps, with Personal increasing by 50bps to 490bps and
Mortgages by 5bps to 14bps, reflecting more cautious assumptions in
relation to the outlook for unemployment and HPI. Business coverage
of 321bps* remains broadly unchanged reflecting the significant
provision taken in H1 that was reaffirmed as appropriate in the
updated modelling.
Integration and Transformation
While the Group remains committed to our Integration and
Transformation programmes a majority of these activities remained
on hold during Q3 as we prioritised support for customers and
colleagues during the pandemic. As a result, exceptional items in
Q3 totalled GBP51m including lower restructuring and integration
costs of GBP19m, acquisition accounting charges of GBP28m and other
items of GBP4m.
On 1(st) July VMUK announced the recommencement of its
previously planned headcount reduction and branch closure
programme. This will deliver cost synergies in FY21, with
restructuring costs of c.GBP60m expected in Q4. The Group continues
to expect FY20 underlying operating costs of <GBP920m.
Supporting our Colleagues
The health and wellbeing of colleagues continues to be a
priority for the Group. We expect the current working model the
pandemic has brought about, whereby the majority of colleagues are
working from home, to remain in place for at least the remainder of
2020. Building on the successful implementation of this working
model, management has been engaging all colleagues across the Bank
in shaping our future working model to reflect the changing
attitudes and requirements of both customers and colleagues.
Supporting our Communities
The importance of Sustainability and Environmental, Social and
Governance (ESG) performance has increased further through the
pandemic and the Group remains focused on supporting its
communities. Virgin Money Giving, the Group's not-for-profit
fundraising website, processed donations 11% higher in Q3 than the
same period last year, while the Virgin Money Foundation has
pledged GBP1.25m to local community organisations in the North East
of England, Norfolk and Glasgow since March. The Group is also
refreshing and accelerating its Sustainability and ESG strategy and
will provide an update on the strategy and targets at its full year
results in November.
Well positioned for an uncertain outlook
The Group's capital position remains resilient with an IFRS9
transitional CET1 ratio of 13.3% at 30 June 2020 (12.7% IFRS9
fully-loaded), which increased c.30bps due to a net c.GBP0.5bn
reduction in RWAs to GBP24.7bn. This was driven by c.GBP0.7bn of
RWA reductions from EU-approved regulatory changes to the exposures
eligible for "SME Supporting Factor" relief as well as lower
volumes, partly offset by increased Mortgage RWAs due to model
updates. Strong Business lending growth in the period had a limited
RWA impact due to the Government guaranteed element attracting a
sovereign risk RWA of zero. The Group also retained strong Total
Capital and UK Leverage ratios of 19.1% and 4.9% respectively, and
a prudent liquidity position with LCR of 148%.
In June, VMUK successfully issued a EUR500m Euro-denominated
MREL senior instrument, improving the MREL ratio to 28.1%, which is
in line with the Group's expected Jan-22 Final MREL Requirement and
means future MREL issuance is focused on building a prudent
buffer.
In July, the Group received its updated P2A requirement with the
CET1 element reducing from 2.9% to 2.4% leaving the Group with a
CRD IV minimum CET1 capital requirement of 9.4% and a significant
management buffer of c.GBP950m in excess of its regulatory minimum
based on June capital levels. The Group also concluded the
triennial valuation of its defined benefit pension scheme. As at 30
September 2019 the valuation had improved from an actuarial deficit
of GBP290m to a surplus of c.GBP145m. As a consequence, the Group
is now committed to pay the GBP50m FY20 contribution that was
deferred to FY21, but thereafter is no longer required to make
further capital contributions to the scheme.
Looking ahead, the current EBA consultation on the treatment of
software intangibles, if implemented in its proposed form in the
UK, is expected to result in an increase in the Group's CET1
capital. This is currently anticipated to become effective during
the Group's financial Q4 and is estimated to be equivalent to a
c.30bps CET1 ratio improvement based on the Group's RWAs at the end
of June.
After initially pausing the majority of PPI processing activity
to focus on COVID-related customer support, the Group has
re-started the operation and is currently building capacity back
towards pre-COVID levels. All Information Requests (IRs) have now
been processed and based on latest projections it is expected the
programme will complete by December 2020. The Group has 68k
complaints left to assess and expects to complete the programme
within its current provision levels.
The UK economy is emerging from lockdown and we have seen
increased consumer spending and economic activity in recent weeks.
However the economic outlook remains highly uncertain and it may be
some months before the full extent of the impact of the lockdown on
the Group's customers is visible, once Government and other support
measures are withdrawn. The Group has set provisions based on
cautious economic assumptions, is preparing assiduously to manage
higher levels of customers in financial difficulty and continues to
closely monitor the performance of its portfolios. In addition, as
previously indicated, the Group continues to work through the
impact of the pandemic on our strategy and will update the market
in more detail alongside its full year results in November.
Appendix 1: Key Economic Scenarios (Source: Oxford Economics
provided on 21/05/2020)
See VMUK economic assumption charts and tables on PDF version at
following link:
http://www.rns-pdf.londonstockexchange.com/rns/2231U_1-2020-7-27.pdf
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
Announcement authorised for release by Lorna McMillan, Group
Company Secretary.
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',
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'believes', 'estimates', 'potential', 'possible', and similar words
or phrases. These forward looking statements, as well as those
included in any other material discussed at any presentation, are
subject to risks, uncertainties and assumptions about the Group and
its securities, investments, and the environment in which it
operates, including, among other things, the development of its
business and strategy, any acquisitions, combinations, disposals or
other corporate activity undertaken by the Group (including but not
limited to the integration of the business of Virgin Money Holdings
(UK) plc and its subsidiaries into the Group), trends in its
operating industry, changes to customer behaviours and covenant,
macroeconomic and/or geopolitical factors, the repercussions of the
outbreak of coronaviruses (including but not limited to the
COVID-19 outbreak), changes to its board and/ or employee
composition, exposures to terrorist activity, IT system failures,
cyber-crime, fraud and pension scheme liabilities, changes to law
and/or the policies and practices of the Bank of England, the FCA
and/or other regulatory and governmental bodies, inflation,
deflation, interest rates, exchange rates, changes in the
liquidity, capital, funding and/or asset position and/or credit
ratings of the Group, future capital expenditures and acquisitions,
the repercussions of the UK's referendum vote to leave the European
Union (EU), the UK's exit from the EU (including any change to the
UK's currency), Eurozone instability, and any referendum on
Scottish independence.
In light of these risks, uncertainties and assumptions, the
events in the forward looking statements may not occur. Forward
looking statements involve inherent risks and uncertainties. Other
events not taken into account may occur and may significantly
affect the analysis of the forward looking statements. No member of
the Group or their respective directors, officers, employees,
agents, advisers or affiliates gives any assurance that any such
projections or estimates will be realised or that actual returns or
other results will not be materially lower than those set out in
this document and/ or discussed at any presentation. All forward
looking statements should be viewed as hypothetical. No
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respective directors, officers, employees, agents, advisers or
affiliates undertakes any obligation to update or revise any such
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The information, statements and opinions contained in this
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or financial instruments or any advice or recommendation with
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END
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