TIDMVMUK TIDM91XR
RNS Number : 3943G
Virgin Money UK PLC
25 November 2020
Virgin Money UK PLC
Full Year 2020
Financial Results
Announcement
BASIS OF PRESENTATION
Virgin Money UK PLC ('Virgin Money', 'VMUK' or 'the Company'), formerly
known as CYBG PLC ('CYBG') (the Company was renamed on 30 October 2019),
together with its subsidiary undertakings (which together comprise 'the
Group'), operate under the Clydesdale Bank, Yorkshire Bank, B and Virgin
Money brands. This results announcement covers the results of the Group
for the year ended 30 September 2020. The term 'Virgin Money' is used
throughout this results announcement either in reference to the Group,
or when referring to the acquired business of Virgin Money Holdings
(UK) PLC or subsequent integration of the acquired business, within
the newly combined Group.
Statutory basis
Statutory information is set out on page 16 and within the financial
statements.
Pro forma results: On 15 October 2018, the Company acquired all the
voting rights in Virgin Money Holdings (UK) PLC by means of a scheme
of arrangement under Part 26 of the UK Companies Act 2006, with the
transaction being accounted for as an acquisition of Virgin Money Holdings
(UK) PLC.
We believe that it is helpful to 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 12 months to 30
September 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 129.
Alternative performance measures (APMs)
The financial key performance indicators (KPIs) used by management in
monitoring the Group's performance and reflected throughout this results
announcement are determined on a combination of bases (including statutory,
regulatory and alternative performance measures), as detailed at 'Measuring
financial performance - glossary' on pages 127 to 128. APMs are closely
scrutinised to ensure that they provide genuine insights into the Group's
progress; however statutory measures are the key determinant of dividend
paying capability.
Certain figures contained in this document, including financial information,
may have been subject to rounding adjustments and foreign exchange conversions.
Accordingly, in certain instances, the sum or percentage change of the
numbers contained in this document may not conform exactly to the total
figure given.
FORWARD LOOKING STATEMENTS
The information in this document may include forward-looking
statements, which are based on assumptions, expectations,
valuations, targets, estimates, forecasts and projections about
future events. These can be identified by the use of words such as
'expects', 'aims', 'targets', 'seeks', 'anticipates', 'plans',
'intends', 'prospects', 'outlooks', 'projects', 'forecasts',
'believes', 'estimates', 'potential', 'possible', and similar words
or phrases. These forward-looking statements, as well as those
included in any other material discussed at any presentation, are
subject to risks, uncertainties and assumptions about the Group and
its securities, investments and the environment in which it
operates, including, among other things, the development of its
business and strategy, any acquisitions, combinations, disposals or
other corporate activity undertaken by the Group (including but not
limited to the integration of the business of Virgin Money Holdings
(UK) PLC and its subsidiaries into the Group), trends in its
operating industry, changes to customer behaviours and covenant,
macroeconomic and/or geo-political factors, the repercussions of
the outbreak of coronaviruses (including but not limited to the
COVID-19 outbreak), changes to its Board and/or employee
composition, exposures to terrorist activity, IT system failures,
cybercrime, fraud and pension scheme liabilities, changes to law
and/or the policies and practices of the Bank of England, the
Financial Conduct Authority 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, the UK's exit from the
EU (including any change to the UK's currency), Eurozone
instability, and any referendum on Scottish independence.
In light of these risks, uncertainties and assumptions, the
events in the forward-looking statements may not occur.
Forward-looking statements involve inherent risks and
uncertainties. Other events not taken into account may occur and
may significantly affect the analysis of the forward-looking
statements. No member of the Group or their respective directors,
officers, employees, agents, advisers or affiliates gives any
assurance that any such projections or estimates will be realised
or that actual returns or other results will not be materially
lower than those set out in this document and/or discussed at any
presentation. All forward-looking statements should be viewed as
hypothetical. No representation or warranty is made that any
forward-looking statement will come to pass. No member of the Group
or their respective directors, officers, employees, agents,
advisers or affiliates undertakes any obligation to update or
revise any such forward-looking statement following the publication
of this document nor accepts any responsibility, liability or duty
of care whatsoever for (whether in contract, tort or otherwise) or
makes any representation or warranty, express or implied, as to the
truth, fullness, fairness, merchantability, accuracy, sufficiency
or completeness of, the information in this document.
The information, statements and opinions contained in this
document do not constitute or form part of, and should not be
construed as, any public offer under any applicable legislation or
an offer to sell or solicitation of any offer to buy any securities
or financial instruments or any advice or recommendation with
respect to such securities or other financial instruments.
Virgin Money UK PLC 2020 Full Year Results Highlights
David Duffy, Chief Executive Officer:
"It has been an extraordinary year of disruption for all of us.
Our priority has been to support our customers and colleagues
through this period, and we will continue to do so during the
challenging economic environment ahead. I'm proud of the way we've
adapted how we work this year to continue serving our customers,
while looking after our colleagues and protecting the bank for the
future.
"While we are yet to see any material impacts of the pandemic on
the credit quality of our loan book, our results reflect a cautious
and conservative approach to the coming period as we refine our
assessment of the uncertain economic outlook and the impact of the
second lockdown. Although the vaccine news is a strong cause of
hope for the future, the economic benefits are still some way off
when considering the immediate reality of current restrictions and
so have not yet been factored into our near-term forecasts.
"Looking into 2021, we are well underway in rolling out our full
suite of Virgin Money products and services across personal and
business, underpinned by our unique brand proposition and leading
digital capabilities. This progress, as well as the steps we have
already taken to transform and simplify our business, mean we are
well positioned to emerge from the pandemic as an agile, innovative
and disruptive force in UK banking."
Supporting our customers, colleagues & communities
-- Virgin Money has continued to provide customers with valuable
support at this difficult time:
o c.67k Mortgage payment holidays granted to date (c.20% of
balances); c.4% of balances currently on an active payment holiday
with 98% of customers who have matured from their holiday period
having returned to payment
o c.58k Personal payment holidays granted to date (c.6% of
balances); c.1% of balances currently on an active payment holiday
with 93% of customers who have matured from their holiday period
having returned to payment
o Supported c.30k businesses with lending support including
c.GBP1.2bn of Government-backed loans disbursed
-- c.6k of our c.9k colleagues enabled to work from home;
enhanced safety and wellbeing support for those in
offices/branches
-- c.GBP900k distributed to local charities supporting the
COVID-19 effort by the Virgin Money Foundation; our not-for-profit
Virgin Money Giving platform continues to support fundraising
efforts across the UK and helped over 20k charities raise
>GBP100m
FY20 financial highlights
-- Balance sheet reflects COVID-19 impacts; lending contraction
of 0.7% to GBP72.5bn and deposit growth of 5.8% to GBP67.5bn:
o Business lending growth of 13.6% to GBP8.9bn due to GBP1.2bn
of Government-backed lending (BBLS/CBILS/CLBILS)
o Personal lending growth of 3.9% to GBP5.2bn with the strong H1
growth tempered by lower demand in H2
o Mortgage lending declined 3.0% to GBP58.3bn with disciplined
pricing in H1 and UK lockdown market impacts in H2
o Relationship deposits grew 20.3% to GBP25.7bn as consumer
savings increased significantly under lockdown and businesses
generally deposited the proceeds from Government-guaranteed lending
into short-term cash accounts
-- Underlying pre-provision operating profit of GBP625m is 10%
lower YoY primarily due to NIM compression and base rate cuts:
o FY NIM of 1.56% within guidance; Q4 NIM of 1.52% up vs. Q3 of
1.47% reflecting deposit repricing actions
o Non-interest income of GBP191m primarily reflects lower H2
activity based fees partially offset by a GBP16m H1 gilts gain
o Operating costs of GBP917m down 3% YoY with net cost
reductions of GBP30m despite incurring c.GBP14m of COVID costs
-- Credit impairment charge of GBP501m (68bps cost of risk)
reflecting a cautious approach to an uncertain economic
environment
o The Group has deliberately adopted an updated and more
conservative set of economic scenarios and weightings reflecting
the uncertain economic outlook and heightened risks ahead; a 5%
weighting was applied to the Upside scenario, 50% to Base and 45%
to Downside; this resulted in a weighted-average GDP decline
assumption of 15% in 2020, average unemployment of 8.6% in 2021
with a peak of 10% and a peak-to-trough HPI decline of 22%
o The IFRS 9 models have also been supplemented with post-model
adjustments in relation to the Group's expected payment holiday
outcomes and economic dynamics that may not be fully captured in
inputs or models
o The Group now has considerable on-balance sheet provisions of
GBP735m; total coverage ratio of 102bps includes 23bps for
Mortgages, 537bps for Credit Cards, 824bps for Personal Loans &
Overdrafts, and 391bps for Business
o No deterioration in asset quality to date with lower arrears
across most portfolios reflecting Government support and
forbearance: Mortgage arrears of 0.4%, Credit Cards of 0.8%,
Personal Loans of 0.4% and Business of 0.3%
-- Underlying profit before tax of GBP124m is down 77% YoY
primarily due to the significant impairment charge recognised
-- Statutory loss after tax of GBP141m is inclusive of GBP292m
of exceptional items, including GBP139m of integration &
transformation costs, GBP113m of acquisition accounting unwind and
GBP26m of conduct charges (non-PPI related)
Well positioned for an uncertain outlook
-- Resilient capital base: transitional CET1 ratio of 13.4% with
c.GBP950m of management buffer in excess of the MDA of 9.5%;
-- Strong liquidity & funding position: LCR of 140% and 107% loan-to-deposit ratio
-- Strengthened our sustainability strategy: unveiled clear
principles and 2030 aspirations as we seek to 'be a force for
good'
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 high degree of certainty at present; it is
therefore not appropriate at this stage to give firm medium-term
guidance and so the Group's previous FY22 targets are withdrawn
pending more certainty in the economic environment.
-- FY21 guidance: NIM broadly flat on FY20 levels and
non-interest income to remain subdued; underlying operating costs
of <GBP875m inclusive of c.GBP10-15m of COVID costs; cost of
risk lower than FY20 assuming no further deterioration in
outlook
-- Medium-term outlook: The Board continues to believe that
Virgin Money has a clear path to delivering a double digit
statutory RoTE over time and this will support future capital
returns to shareholders; the improvement in returns will be driven
by: normalisation of impairments and exceptional costs; ensuring we
continue to reduce our cost base to reflect the future operating
environment; optimising our balance sheet mix; and delivering a
more efficient capital base over time.
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
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 full year financial
results starting at 08:30 GMT (19:30 AEDT) and this will be webcast
live and is available at:
https://webcast.openbriefing.com/virginmoney-fy/
A recording of the webcast 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
2020 2019 Change
GBPm GBPm %
Underlying net interest income 1,351 1,433 (6)
Underlying non-interest income 191 206 (7)
Total underlying operating income 1,542 1,639 (6)
Underlying operating and administrative expenses (917) (947) (3)
----- --- ------
Underlying operating profit before impairment losses 625 692 (10)
Total impairment losses on credit exposures (501) (153) 227
-------------------------------------------------------- ------- ----- --- ------ ------
Underlying profit on ordinary activities before
tax 124 539 (77)
- Integration and transformation costs (139) (156) (11)
- Acquisition accounting unwinds (113) (87) 30
- Legacy conduct costs (26) (433) (94)
- Other items (14) (128) (89)
-------------------------------------------------------- --- --- ----- --- ------ ------
Statutory/pro forma loss on ordinary activities
before tax (168) (265) (37)
Tax credit 27 58 (53)
-------------------------------------------------------- --- --- ----- --- ------ ------
Statutory/pro forma loss after tax (141) (207) (32)
-------------------------------------------------------- --- --- ----- --- ------ ------
Key performance indicators(1)
Pro forma
2020 2019 Change
Profitability:
Net interest margin 1.56% 1.66% (10)bps
Underlying return on tangible equity
(RoTE) 0.6% 10.8% (10.2)%pts
Underlying cost to income ratio (CIR) 59% 57% 2%pts
Underlying return
on assets 0.09% 0.54% (45)bps
Underlying earnings per share (EPS) 1.4p 28.1p (26.7)p
(1) For a definition of each of the KPIs, refer to 'Measuring financial
performance - glossary' on pages 127 to 128. The KPIs include statutory,
regulatory and alternative performance measures.
Business and financial review
Financial Performance - underlying basis
Key performance indicators (continued)
As at: 2020 2019 Change
Asset quality
Cost of risk 0.68% 0.21% 47bps
Total provision to customer loans 1.02% 0.50% 52bps
Indexed loan to value ratio (LTV) of
mortgage
portfolio (1) 57.3% 57.2% 0.1%pts
------------------------------------------- -------------------------------------- ---------
Regulatory Capital:
Common equity tier 1 (CET1) ratio (IFRS 9
transitional) 13.4% 13.3% 0.1%pts
CET1 ratio (IFRS 9 fully loaded) 12.2% 12.9% (0.7)%pts
Total capital ratio 20.2% 20.1% 0.1%pts
Minimum requirement for own funds and
eligible
liabilities (MREL) ratio 28.4% 26.6% 1.8%pts
Capital Requirement Directive IV (CRD IV)
leverage
ratio 4.8% 4.3% 0.5%pts
UK leverage ratio 4.9% 4.9% -%pts
Tangible net asset value (TNAV) per share 244.2p 249.2p (5.0)p
Funding and Liquidity:
Loan to deposit
ratio (LDR) 107% 114% (7)%pts
Liquidity coverage ratio
(LCR) 140% 152% (12)%pts
Net stable funding ratio
(NSFR) 131% 128% 3%pts
(1) 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
2020 2019 Change
GBPm GBPm %
Customer loans 72,457 72,979 (0.7)
of which Mortgages 58,290 60,079 (3.0)
of which Personal 5,219 5,024 3.9
of which Business 8,948 7,876 13.6
Other financial assets 15,608 16,391 (4.8)
Other non-financial assets 2,194 1,629 34.7
Total assets 90,259 90,999 (0.8)
Customer deposits 67,511 63,787 5.8
of which relationship
deposits(1) 25,675 21,347 20.3
of which non-linked
savings 20,729 20,197 2.6
of which term deposits 21,107 22,243 (5.1)
Wholesale funding 14,227 18,506 (23.1)
Other liabilities 3,589 3,685 (2.6)
Total liabilities 85,327 85,978 (0.8)
Ordinary shareholders'
equity 4,017 4,106 (2.2)
Additional Tier 1 (AT1)
equity 915 915 -
Equity 4,932 5,021 (1.8)
Total liabilities and
equity 90,259 90,999 (0.8)
----------------------------- --------------- --------------- ---------------
Risk Weighted Assets
(RWAs) 24,399 24,046 1.5
----------------------------- --------------- --------------- ---------------
(1) Current account and linked savings balances.
Business and financial review
Chief Executive Officer's review
Supporting our stakeholders
Our primary focus has been to provide the very best support to
our customers, colleagues and communities, but we have also
continued to make strategic progress in a uniquely challenging
environment
"I am extremely proud of the Purpose-led support we have
provided to our customers, colleagues and communities throughout
this year" David Duffy, CEO
Dear stakeholder,
Without doubt, 2020 has been a uniquely challenging year for all
of us. My priority from the outset has been to make sure that
Virgin Money responds to the crisis in a way that reflects our
Purpose and our Virgin Values. That means offering our customers
the right support to navigate through the challenges the pandemic
has brought about, protecting the health and well-being of our
colleagues, while at the same time safeguarding our business for
the future. We are committed to providing support for all of our
customers during these difficult and uncertain times.
I am proud of how my colleagues have responded to these
challenges and confident that we are building an organisation that
reflects our Purpose of 'Making you happier about money'.
Supporting our customers, colleagues and communities
In Mortgages, we have granted c.67k payment holidays while in
Personal, we have granted c.58k payment holidays, with >90% of
these customers who have matured from their payment holiday having
now returned to regular payments. In Business, our relationship
managers have been proactively supporting customers with advice and
financing solutions, while our participation in the various
government-guaranteed lending schemes has seen us lend c.GBP1.2bn
to provide much needed liquidity to businesses. You can find out
more about our divisional customer support on pages 28-33 in our
Annual Report & Accounts.
Our colleagues are critical in how we have been able to support
our customers and their safety has been our first priority
throughout. We took a decision early in the crisis not to furlough
any colleagues, and we continue to work hard to make sure those
critical colleagues who need to be in our branches or offices
receive the best support possible. We have more details on our
colleagues on page 11 in our Annual Report & Accounts.
Our strong heritage of community support also stepped up during
the pandemic, with the Virgin Money Foundation making c.GBP900k of
funding available for local charities responding to COVID-19.
Virgin Money Giving (VMG) was an official fundraising partner of
the 2.6 Challenge (which took place in lieu of the postponed Virgin
Money London Marathon), helping support more than 3,000 charities
to raise more than GBP10m, and our not-for-profit VMG platform
continued to support fundraising efforts across the UK.
Pre-provision operating performance impacted by UK lockdowns
We reported a resilient first half pre-provision operating
performance, but the second half has been impacted by the
unprecedented deterioration in the economic environment.
Our balance sheet reflects this in different ways across the
portfolios with a c.3% year-on-year contraction in our Mortgage
book due to disciplined pricing in the first half in a competitive
(pre-COVID-19) environment and the impact of lockdown on demand in
the second half. In Business, our total book has grown by c.14%,
but this is solely due to the government-guaranteed lending schemes
where we have lent c.GBP1.2bn, with our underlying
non-government-guaranteed lending down slightly across the year. In
Personal, our c.4% lending growth reflects a strong first half and
the resilience of our balance transfer credit card portfolio in the
second half. In deposits, similar to most other banks, we have seen
a significant increase in the year, up c.6%, with our relationship
deposits increasing 20% as consumer spending slowed dramatically
and a lot of businesses simply deposited government-guaranteed
lending proceeds as cash.
As a consequence, the Group's total income reduced 6%
year-on-year reflecting lower lending volumes, lower activity based
fees and the margin impact of the base rate cut as well as excess
liquidity costs. While we continued to reduce our underlying cost
base, down 3%, with c.GBP30m of net reductions after absorbing
GBP14m of additional COVID-19 costs, pre-provision operating profit
reduced by 10%.
Significant impairment provision drives a statutory loss
While it is clear that the near-term economic outlook is
challenging, we have not yet seen significant specific provisions
or credit losses in relation to the pandemic. However, the Board
has chosen to apply conservative economic scenarios and weightings,
supplemented by expert judgement credit risk overlays, in assessing
its expected credit loss provisioning. In total, the Group has
taken a substantial GBP501m provision charge during the year to
significantly increase the Group's on-balance sheet credit
provision to GBP735m, providing robust levels of coverage across
all of our portfolios. This sizeable provision charge has led to a
significantly reduced underlying profit before tax of GBP124m, down
77% year-on-year. Together with GBP292m of exceptional costs that
primarily relate to our restructuring programmes and acquisition
accounting unwind, the Group has reported a GBP141m statutory loss
after tax for the year.
Robust balance sheet for an uncertain environment
Importantly our balance sheet remains robust as we enter a
period of economic stress with an expected increase in credit
losses. We have a defensive lending portfolio comprising 81% of
prime, high-quality Mortgages, 12% of well diversified
relationship-driven business lending and 7% of high-quality
Personal lending. We also retain a resilient capital base with a
transitional CET1 ratio of 13.4% and c.GBP950m of CET1 management
buffer, which is in addition to our GBP735m of credit provisions.
We continue to maintain a strong liquidity position with a
Liquidity Coverage Ratio (LCR) of 140% and are prudently funded
with a 107% loan-to-deposit ratio (LDR). You can find out more
about our financial performance and balance sheet strength in the
CFO Review on pages 7 to 17.
Business and financial review
Chief Executive Officer's review
Strategic progress during the year
During the year, we have continued to enhance our digital
propositions through several major new releases to our online
platforms which has enabled new features and capability, while our
new API connectivity to a key mortgage intermediary sourcing system
improves efficiency for our broker partners and us.
Although we did pause our rebrand activity planned for earlier
in the year due to the UK lockdown, we have sought to strategically
leverage our brand where possible through our extremely successful
partnership that delivered the UK's first socially-distanced music
festival in Newcastle over the summer and our 'Money on Your Mind'
campaign. Both activities attracted widespread coverage across
traditional media and social media creating great brand
awareness.
In Mortgages, we launched our innovative Home Buying Coach app
which supports first-time buyers through a mix of tools,
calculators and content to help make buying a new home a happier
experience. The app has been well received with over 10k downloads
already and we expect it to be a great customer engagement tool
over time.
In Personal, we launched the first-ever digital Virgin Money
Current Account which is gaining good traction with customers and
was rated as "Outstanding" by Moneyfacts with a perfect five-star
score. More recently, we launched our market-leading basic bank
account, the 'M Account', which forms a vital part of our financial
inclusion strategy, and we also launched the Virgin Money Personal
Loan product as another important step in our integration
journey.
In Business, we were delighted to be awarded a GBP35 million
grant from the BCR's Capability and Innovation Fund (CIF), which we
will match-fund, and invest into enhancing our proposition to
support us in becoming a true disruptor in the SME banking market
and to offer a credible alternative to the incumbent banks under
the Virgin brand.
In recognition of the progress we are making, our teams won
several customer service awards this year. This includes 'Best
Credit Card provider' for a third year in a row by the British
Banking Award, the 'Mortgage Service Award' in the Simples Awards
from Compare the Market and several awards at the UK Customer
Experience Awards including a superb Gold in the 'Use of insight
and feedback' category in recognition of our innovative 'Money on
Your Mind' initiative.
You can find out more about our strategic progress on pages 8-13
in our Annual Report & Accounts.
Enhancing our ESG approach
The events of 2020 have underscored the moral and commercial
imperative for creating a sustainable business. As society
continues to adjust to these new challenges, I believe we have an
opportunity - and an obligation - to play a strong role in helping
customers and communities navigate the road ahead. From
transitioning to a greener economy and reimagining customer's
business models, to developing more inclusive products and
supporting fundraising in a digital age - we are working hard to be
a force for good in society.
Our sustainability agenda is an integral part of delivering our
Purpose of 'Making you happier about money' and is being embedded
in everything we do. We are all on a journey to learn how best to
do that, and I believe our refreshed ESG strategy provides a
framework to accelerate the difference we are able to make to the
global issues facing our planet and the local issues facing our
communities. You can find out more on our sustainability approach
on pages 16-21 in our Annual Report & Accounts.
Outlook
While the outlook remains very uncertain and the range of
potential outcomes is wide, Virgin Money enters this period from a
position of strength. Over the coming months, we anticipate an
increase in specific credit losses as unemployment starts to rise
and as the government stimulus reduces, and we expect limited
customer demand for lending. We recognise the very recent news of
potential vaccines, but believe it is too early to incorporate this
into our near-term forecasts at present. Our primary focus will
remain on supporting all of our stakeholders, while progressing our
strategic delivery through the completion of our transformation and
rebrand activity, as well as the launch of exciting new
propositions such as our new Virgin Money Business Current Account
(BCA), our cashback and loyalty programmes, and a host of
innovative new partnerships.
In the medium term, the Board believes that, assuming no
significant further deterioration in expectations for the economic
outlook or change in interest rates, Virgin Money has a clear path
to delivering a double digit statutory RoTE over time, supporting
future capital returns to investors. The improvement in returns
will be built on: the normalisation of impairments and exceptional
costs; ensuring we continue to reduce our cost base to reflect the
future operating environment; optimising our balance sheet mix; and
delivering a more efficient capital base over time, and we aim to
come back with more specific guidance once the medium-term outlook
has stabilised.
Finally, I have been inspired by the lengths our colleagues have
gone to in supporting our customers and communities in difficult
circumstances this year and want to thank them for their immense
efforts, personal resilience and dedication. 2021 will no doubt
require a similar level of commitment from us all to continue
providing the right support and to deliver on our strategic
ambitions. I also want to take the opportunity to extend my very
best wishes to all of our customers, colleagues and investors in
remaining safe and well.
David Duffy
Chief Executive Officer
24 November 2020
Business and financial review
Chief Financial Officer's review
Cautious approach in an unprecedented environment
2020 has been a challenging year and our financial results
reflect the cautious approach we have taken in assessing the
economic outlook and future credit losses
"2020 has been unprecedented in the challenges it has created
for the banking industry and this is reflected in our financial
performance for the year." Enda Johnson, Interim Group CFO
Financial Highlights
Statutory loss after Underlying profit before Underlying RoTE
tax tax
GBP(141)m GBP124m 0.6%
2019: GBP(179)m 2019: GBP539m 2019: 10.8%
-------------------- ------------------------ --------------------
NIM Underlying CIR Cost of risk
1.56% 59% 68bps
2019: 1.66% 2019: 57% 2019: 21bps
-------------------- ------------------------ --------------------
CET1 ratio Loan growth Relationship deposit
growth
13.4% (0.7)% +20.3%
2019: 13.3% 2019: +2.9% 2019: +7.1%
Business and financial review
Chief Financial Officer's review
Review of the year
2020 has been a uniquely challenging year for the banking
industry and our business, and this is reflected in our financial
performance for the year. We have been primarily focused on
supporting our customers, colleagues and communities, while at the
same time ensuring the stability of the bank. Despite the
challenges, we did continue to execute on some key integration
milestones, while delaying delivery of some of our strategic,
transformation activity. Importantly, we have also taken a cautious
approach to our credit impairment provisioning for what is likely
to be a severe economic shock with an expected rise in specific
credit losses in the period to come.
Balance sheet impacted by the pandemic
The COVID-19 pandemic has had very different impacts across our
various lending segments, demonstrating the value of a diverse
portfolio. Total customer lending was down 0.7% in the year to
GBP72.5bn primarily due to a reduction in the mortgage book as we
maintained our discipline in a competitive market in the first
half, with demand in the second half reducing substantially owing
to the pandemic restrictions. This was partly offset by increased
balances in Business with GBP1.2bn of incremental lending primarily
under the government-guaranteed BBLS and CBILS lending schemes, and
growth in Personal from a strong first half performance and
resilience of the balance transfer credit card portfolio in the
second half. Total customer deposits increased 5.8% to GBP67.5bn
reflecting both consumer savings behaviour under lockdown and
businesses depositing government-guaranteed lending proceeds for
liquidity.
Pre-provision operating profit impacted by income headwinds
Our Net Interest Margin (NIM) of 1.56% (FY19: 1.66%) was
delivered within our guidance range as it stabilised towards the
end of the year following the base rate reductions, but which
nonetheless reduced Net Interest Income (NII) 6% year-on-year.
Non-interest income was also down 7% in the period largely due to
lower activity-based fees and the impact of the 'high cost of
credit review' in our Personal division. Total income was therefore
down 6% on FY19 at GBP1,542m. Operating costs of GBP917m were 3%
lower on the prior year, despite absorbing GBP14m of COVID-19
related costs. The challenging income environment led to an
increase in our cost:income ratio to 59% and resulted in a 10%
year-on-year reduction in pre-provision profit.
Significant impairment provisions drive a statutory loss
The Group took a cautious approach to assessing its IFRS 9
impairment provisions by applying deliberately conservative
economic assumptions and scenario weightings, coupled with expert
judgement credit risk overlays, to increase the Group's on-balance
sheet provisions to GBP735m and a total coverage ratio of 102bps.
This has led to the Group recognising GBP501m of impairment charges
(68bps cost of risk) inclusive of write-offs in the period. This
sizeable provision charge primarily explains the 77% year-on-year
reduction in underlying profit to GBP124m compared to FY19
(GBP539m), with an underlying RoTE of 0.6% (FY19: 10.8%)
After exceptional costs of GBP292m, including GBP139m of
integration and transformation costs and GBP113m of acquisition
accounting unwind, the Group recorded a statutory loss after tax of
GBP141m.
Robust capital, liquidity and funding position
Importantly though, the Group's balance sheet remains robust as
we enter a period of economic stress with a transitional CET1 ratio
of 13.4%. The Group therefore retains a significant CET1 management
buffer in excess of its Capital Requirements Directive IV (CRD IV)
minimum CET1 requirement of 9.5%, equating to c.GBP950m, in
addition to the Group's GBP735m of on-balance sheet credit
provisions. The Group also maintains a strong liquidity position
with an LCR of 140% and a stable funding position with a
loan-to-deposit ratio of 107%.
Conclusion
2020 has been a difficult year for all, but I am happy with the
way our colleagues have risen to the challenge of supporting our
customers and communities, while ensuring the stability of the
bank. Our conservative provisioning assumptions mean we have robust
coverage levels going into a period of economic stress.
In the medium term, the Group believes that, assuming no
significant further deterioration in expectations for the economic
outlook or change in interest rates, Virgin Money has a clear path
to delivering double digit statutory returns on tangible equity
over time. The improvement in returns will be built on: the
normalisation of impairments and exceptional costs; ensuring we
continue to reduce our cost base to reflect the future operating
environment; optimising our balance sheet mix; and delivering a
more efficient capital base over time.
Basis of preparation note
Statutory basis: The statutory results are set out at the end of this
section on page 16.
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 129.
Pro forma comparative results: 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 year.
Business and financial review
Chief Financial Officer's review
Income
2020 2019
Summary for the year ended 30 September GBPm GBPm Change
---------------------------------------- ------ ------ -------
Underlying net interest income 1,351 1,433 (6)%
Underlying non-interest income 191 206 (7)%
Total underlying operating income 1,542 1,639 (6)%
Net interest margin 1.56% 1.66% (10)bps
Average interest earning assets 86,826 86,362 1%
---------------------------------------- ------ ------ -------
Overview
Income was 6% lower than FY19 at GBP1,542m, primarily reflecting
the impact of the pandemic in the second half of the year and rate
changes. NII was the key driver falling 6% versus FY19 to
GBP1,351m. NIM was 10bps lower year-on-year at 1.56% and as
expected this was primarily driven by the remaining front versus
back book mortgage margin compression, the impact of the base rate
cut and excess liquidity costs due to elevated deposit levels.
NII and NIM
Asset yields fell 19bps in the year with mortgage pricing
remaining the primary contributor. 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 FY19, while average balances also declined slightly during the
year. We remained selective in terms of our participation in the
market in the first half while the second half was impacted by the
pandemic restrictions. The more recent improvement in mortgage
spreads will be beneficial and should be seen in the FY21 results
given the typical completion time for mortgages.
In Business, a 40bps reduction in yields was primarily due to
lower LIBOR rates and the impact of the Group's new lending being
primarily lower-yielding government-guaranteed lending through the
BBLS and CBILS. The strong average balance sheet growth associated
with this largely offset the lower yield to drive a stable NII
performance in the period.
In Personal, growth in average balances drove an NII improvement
while yields expanded 19bps primarily due to the seasoning of the
credit card book which performed favourably against our effective
interest rate (EIR) assumptions. Elsewhere, the average yield on
the Group's liquid assets fell 27bps reflecting the BoE base rate
reduction.
Liability yields decreased 9bps relative to FY19, reflecting the
impact of the BoE base rate cut and proactive repricing as we
continued our strategy of optimising our deposit mix. Consumer and
business pandemic-related savings behaviours saw an increase in
average balances across lower yielding current accounts and savings
products, despite the yields on both reducing. While on a spot
basis our term deposit book reduced, average balances were broadly
stable reflecting the more back-ended repricing activity during the
year evidenced in the lower yield.
Wholesale funding costs reduced during the year primarily due to
a significant reduction in average balances following the Group's
initial Term Funding Scheme (TFS) repayments, a reduction in repo
funding and lower secured residential mortgage-backed securities
(RMBS) funding owing to the Group's elevated customer deposit
balances. The average yield reduced primarily due to rate
reductions following the BoE base rate cut and optimisation of the
funding stack.
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. During Q3 the
Group's term structural hedges were fully unwound, locking in
expected NII contributions from the hedges over the next 5 years.
The Group has offset future uncertainty around the path for base
rates through the designation of a portion of the Group's CET1
management buffer to the risk, by agreeing a set of predefined
triggers that could result in the Group amending its policy which
are reviewed monthly and by measuring different base rate
sensitivities as part of its stress testing framework. Based on the
current rate outlook, the Group expects no significant adverse
impact on NII in FY21 to having maintained a 5-year rolling
approach, but it does make the Group more rate sensitive in
relation to both an increase or decrease in base rate. The prospect
of negative rates in the UK remains highly uncertain not least
because of the operational challenges regarding implementation, the
interplay with 0% product floors and because of uncertainty on
market and competitor reaction to such a move.
In FY21 we anticipate a NIM that is broadly flat on the FY20
level (1.56%), assuming no change in the interest rate environment.
This reflects more favourable mortgage pricing, the structural
maturity profile of our mortgage book and deposit re-pricing
opportunities.
Non-interest income
Non-interest income declined 7% year-on-year to GBP191m. This
included a GBP16m one-off gilt sales gain during FY20, a fair value
gain of GBP12m (vs. a GBP15m loss in FY19), partly offset by the
absence of c.GBP20m of fee income earned from the Investments
business that was transferred into a joint venture (JV) with
Aberdeen Asset Management PLC (AAM) in FY19.
Excluding these impacts, divisional non-interest income of
GBP161m reduced GBP37m (down 19%) year-on-year. This is largely due
to a reduction in Personal fee income of GBP31m comprising a GBP16m
impact from the implementation of the changes required in response
to the 'high cost of credit review' and GBP13m from lower credit
card transaction fee income primarily due to the effects of
lockdown spending reductions. Mortgage non-interest income reduced
GBP5m due to lower originations as a result of the pandemic
restrictions on the mortgage market. Business fee income was
broadly stable during the period, but benefited from a one-off
GBP4m gain in relation to a growth finance business sale
participation fee, absent which it would have been down slightly
reflecting lower activity based fees.
With the second-half impact on non-interest income a reflection
of lower activity levels and with uncertainty as to how quickly
this rebounds, coupled with a further UK lockdown currently in
force at the time of writing, it is expected that non-interest
income will remain subdued.
Business and financial review
Chief Financial Officer's review
Average balance sheet 2020 2019
----------------------------- ------------------------------------ ------------------------------------
Interest Interest
Average income/ Average Average income/ Average
balance (expense) yield/(rate) balance (expense) yield/(rate)
GBPm GBPm % GBPm GBPm %
----------------------------- --------- ---------- ------------- --------- ---------- -------------
Interest earning assets
Mortgages 59,464 1,446 2.43 60,288 1,551 2.57
Business lending(1) 8,296 313 3.77 7,542 314 4.17
Personal lending 5,366 423 7.88 4,670 359 7.69
Liquid assets 11,968 62 0.52 12,298 98 0.79
Due from other banks 1,727 5 0.30 1,564 13 0.86
Swap income/other - (78) n/a - (11) n/a
Other interest earning
assets 5 - n/a - - -
----------------------------- --------- ---------- ------------- --------- ---------- -------------
Total average interest
earning assets 86,826 2,171 2.50 86,362 2,324 2.69
----------------------------- --------- ---------- ------------- --------- ---------- -------------
Total average non-interest
earning assets 3,696 3,545
----------------------------- --------- ---------- ------------- --------- ---------- -------------
Total average assets 90,522 89,907
----------------------------- --------- ---------- ------------- --------- ---------- -------------
Interest bearing liabilities
Current accounts 12,301 (13) (0.10) 11,570 (19) (0.16)
Savings accounts 27,430 (227) (0.83) 24,366 (214) (0.88)
Term deposits 22,175 (348) (1.57) 22,877 (370) (1.62)
Wholesale funding 15,972 (228) (1.42) 19,427 (288) (1.48)
Other interest bearing
liabilities 180 (5) n/a - - -
----------------------------- --------- ---------- ------------- --------- ---------- -------------
Total average interest
bearing liabilities 78,058 (821) (1.05) 78,240 (891) (1.14)
Total average non-interest
bearing liabilities 7,633 6,590
----------------------------- --------- ---------- ------------- --------- ---------- -------------
Total average liabilities 85,691 84,830
Total average equity 4,831 5,077
Total average liabilities
and average equity 90,522 89,907
----------------------------- --------- ---------- ------------- --------- ---------- -------------
Net interest income 1,350 1.56 1,433 1.66
----------------------------- --------- ---------- ------------- --------- ---------- -------------
(1) Includes loans designated at fair value through profit or
loss (FVTPL).
Costs
2020 2019
For the year ended 30 September GBPm GBPm Change
---------------------------------------------- ----- ----- ------
Personnel expenses 336 365 (8)%
Depreciation and amortisation expenses 139 111 25%
Other operating and administrative expenses 442 471 (6)%
---------------------------------------------- ----- ----- ------
Total underlying operating and administrative
expenses 917 947 (3)%
Underlying CIR 59% 57% 2%pts
---------------------------------------------- ----- ----- ------
Overview
Underlying operating expenses reduced 3% year-on-year to GBP917m
with the cost:income ratio of 59% increasing slightly due to the
challenging operating environment and adverse COVID-19-related
income impacts during the year.
Net cost reductions of GBP30m in the year were inclusive of
c.GBP14m of incremental COVID-19-related costs including GBP7m of
investment in systems to accommodate payment holidays and BBLS, and
the remainder being extra resource to support customers.
Much of the underlying cost reductions in the year came from
lower personnel costs, down 8%, as the Group continued with its
integration programmes to reduce headcount and remove duplicate
costs.
Other operating and administrative expenses also reduced by 5%
as we started to realise third-party spend savings and operational
cost reductions from the integration programme progress, but this
was partly offset by the COVID-19-related system costs.
Depreciation and amortisation increased primarily as a result of
adoption of IFRS 16 with c.GBP25m of amortisation on lease
right-of-use assets replacing the rent expense previously
recognised
We expect to achieve further net cost reductions in FY21
underpinned by the completion of our integration programme with
incremental cost savings from headcount reductions, third-party
spend and property. However, we do anticipate incurring c.GBP10-15m
of ongoing COVID-19 related costs in FY21. The Group is therefore
targeting an underlying operating cost base of <GBP875m in FY21,
down from GBP917m in FY20.
Business and financial review
Chief Financial Officer's review
Impairments
Credit Credit Gross % of loans % of loans
provisions provisions lending in in
at at at Coverage Net cost Stage Stage
30 September 30 September 30 September ratio of risk 2 at 3 at
2019 2020 2020 2020 2020 30 September 30 September
GBPm GBPm GBPbn bps bps 2020 2020
--------------------- ------------- ------------- ------------- ---------- -------- ------------- -------------
Mortgages 40 131 58.6 23 16 14% 0.9%
Personal 175 301 5.6 591 423 15% 1.2%
Of which credit
cards 145 222 4.5 537 355 12% 1.2%
Of which personal
loans and
overdrafts 30 79 1.1 824 721 28% 1.4%
Business 147 303 8.7 391 (1) 212 44% 3.2%
--------------------- ------------- ------------- ------------- ---------- -------- ------------- -------------
Total 362 735 72.9 10 2 68 18% 1.2%
Of which Stage
2 168 465 12.8 366
Of which Stage
3 115 134 0.9 1,574
--------------------- ------------- ------------- ------------- ---------- -------- ------------- -------------
(1) Government-guaranteed loan balances excluded for purposes of
calculating the Business division coverage ratio.
Overview
The Group has increased its on-balance sheet credit provisions
to GBP735m to ensure appropriate levels of provision coverage
across its portfolios, with a total coverage ratio of 102bps. This
resulted in the Group recording a total impairment charge of
GBP501m in FY20 (68bps cost of risk) inclusive of write-offs.
Conservative economic weightings and overlays
The Group has taken a cautious approach to assessing its
impairment provisions in order to set aside appropriate portfolio
provision coverage for the anticipated economic deterioration and
increase in credit losses that is expected over the coming period.
The Group has updated its IFRS 9 accounting models with the latest
economic scenarios from Oxford Economics and selected a
conservative weighting skewed heavily towards the more adverse
economic scenarios, partly to reflect the high degree of
uncertainty over the path of the virus in 2021 including the
potential for further lockdowns. The weightings applied were a 5%
weighting to the upside scenario, 50% to the base scenario and 45%
to the downside. The weighted economic scenario includes a c.15%
GDP trough in 2020, peak unemployment of c.10% in calendar Q1'21
and a peak-to-trough house price decline of 22%. This resulted in a
significant increase in the Group's modelled and individually
assessed ECL to GBP549m (FY19: GBP313m).
To supplement the models, the Group also applied expert credit
risk judgement through post-model adjustments (PMAs). These are
designed to account for factors that the models cannot incorporate
or where the sensitivity is not as would be expected under what is
an unprecedented economic stress scenario. Through this process,
the Group prudently applied PMAs of GBP186m (FY19: GBP49m)
comprising overlays in relation to the Group's expected payment
holiday experience and the evolving macroeconomic dynamics that may
not be fully captured in inputs or models.
As expected, the IFRS 9 model updates and overlays resulted in
significant portfolio stage migration, with loans classified as
Stage 2 increasing from 6% of the portfolio to 18% at 30 September
2020. Importantly though, 98% of Stage 2 lending balances remain
<30DPD as the stage migration largely reflects the modelled PD
migration impact from the economic updates and overlays
applied.
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. The impairment provisions
recognised during the year reflect the Group's best estimate of the
level of provisions required for future credit losses as calibrated
under the Group's conservative weighted economic assumptions and
following the application of expert credit risk judgement
overlays.
The Group has therefore significantly increased its provision
coverage levels across all of its portfolios. In Mortgages, the
coverage ratio of 23bps is deemed appropriate for the high-quality
portfolio of lending we possess. Our Personal lending book coverage
ratio of 591bps includes 537bps of coverage for our high-quality,
affluent-customer-led credit card portfolio and 824bps of coverage
for our personal loans and overdrafts book, with the much larger
weighting of credit cards dampening our total Personal coverage
level relative to some peers' total unsecured portfolios. In
Business, our coverage ratio of 391bps reflects our sub-investment
grade SME lending book, while the 44% of Stage 2 lending balances
(FY19: 30%) is reflective of our conservative assumptions and our
early adoption of the European Banking Authority (EBA) future
requirement to keep forborne assets in Stage 2 for a minimum of two
years.
Payment holidays
Virgin Money continues to actively support its Mortgage and
Personal customers through this difficult time with payment
holidays where appropriate, although the level of new requests
reduced significantly after the peak in April. Across the
portfolios we have only c.1-4% of portfolio balances on a payment
holiday and of those payment holidays that have matured the vast
majority of customers (>90%) have returned to payments, with
only a small proportion currently requiring further support. The
key payment holiday statistics are set out below.
Outlook
The Group's recognition of significant impairment charges in
FY20 reflects the conservative weighted economic scenarios and
expert judgement overlays applied, ahead of an expected
deterioration in the future economic environment. Current
expectations are that, subject to no further material deterioration
in the economic outlook, the Group's FY21 cost of risk will be
lower than that for FY20.
Total % of matured % of matured
Total balances balances payment payment holiday
of payment of payment holiday customers
Payment holidays status holidays holidays Representing customers requiring
granted Representing still % of returning support or
Product to date % of balances in force balances to payment in arrears
------------------------ --------------- -------------- ----------- ------------ ------------ ----------------
Mortgages GBP11.9bn 20% GBP2.5bn 4% 98% 2%
Credit Cards GBP219m 5% GBP31m 1% 92% 8%
Personal Loans GBP103m 11% GBP26m 3% 95% 5%
------------------------ --------------- -------------- ----------- ------------ ------------ ----------------
Business and financial review
Chief Financial Officer's review
Exceptional items and statutory loss
2020 2019
GBPm GBPm
----------------------------------------------------------- ------ ------
Underlying profit on ordinary activities before tax 124 539
Exceptional items
- Integration and transformation costs (139) (156)
- Acquisition accounting unwinds (113) (87)
- Legacy conduct costs (26) (433)
- Other items (14) (128)
----------------------------------------------------------- ------ ------
Loss on ordinary activities before tax (168) (265)
Add Virgin Money Holdings (UK) PLC pre-acquisition loss(1) - 33
----------------------------------------------------------- ------ ------
Statutory loss on ordinary activities before tax (168) (232)
Tax credit 27 53
----------------------------------------------------------- ------ ------
Statutory loss for the year (141) (179)
----------------------------------------------------------- ------ ------
Underlying RoTE 0.6% 10.8%
----------------------------------------------------------- ------ ------
Statutory RoTE (6.2)% (6.8)%
----------------------------------------------------------- ------ ------
Tangible Net Asset Value (TNAV) per share 244.2p 249.2p
----------------------------------------------------------- ------ ------
(1) In order to reconcile the 2019 pro forma loss to the
statutory loss, the pre-acquisition results of Virgin Money
Holdings (UK) PLC are removed.
Overview
The Group's underlying profit before tax was GBP124m (FY19:
GBP539m) down significantly year-on-year primarily due to the
significant impairment provision charge recognised of GBP501m. The
Group therefore made a statutory loss after tax of GBP141m after
deducting GBP292m of exceptional costs incurred during the year, as
well as a tax credit of GBP27m. The exceptional item charges
incurred in FY20 were however significantly lower than FY19 due to
the non-recurrence of significant one-off acquisition costs and
legacy PPI conduct charges.
Underlying RoTE of 0.6% was significantly lower than the prior
year of 10.8%, reflecting the lower underlying profit due to the
sizeable impairment provision. Statutory RoTE was therefore
negative after reflecting the integration & transformation
costs and acquisition accounting unwind charges incurred. TNAV per
share reduced 5p in FY20 to 244.2p, with TNAV build of 34p from
underlying pre-provision profit after tax being more than offset by
28p of impairment provision charges and a net 11p adverse impact
from other movements including exceptional item charges partly
offset by a pension scheme actuarial gain.
Integration and transformation costs
Due to the impact of COVID-19, the Group delayed some of its
planned restructuring activity in the first half, but recommenced
the majority of the programmes in the final quarter. This led to
spend of GBP139m in the period primarily relating to the
integration programmes. This spend has supported the delivery of
net cost savings in FY20 and will also deliver run-rate savings
into FY21. The Group expects to continue its integration and
transformation programmes in FY21 and anticipates a further
c.GBP75m of costs during the year to deliver this.
Acquisition accounting unwinds
The Group recognised fair value acquisition net accounting
adjustments at the time of the Virgin Money acquisition that would
be unwound through the income statement over the remaining life of
the related assets and liabilities (c.5 years). GBP113m was charged
in FY20 which included the reclassified fair value unwind related
to legacy Virgin Money hedges which had previously been recognised
in underlying non-interest income. The Group now expects a further
c.GBP150m of total acquisition accounting unwind charges over the
next five years, which is expected to see the majority of this
charge incurred over the next 1-2 years.
Legacy conduct
The Group raised GBP26m of further provisions in relation to
non-PPI customer redress matters in the year, relating to several
outstanding legacy issues, none of which is material in its own
right. No further payment protection insurance (PPI) related
provisions were recognised in FY20 and the Group has made good
progress in processing its outstanding PPI complaints and
information requests during the year. The Group has processed all
of its information requests and now has just c.30k complaints left
to review, which it expects to complete by the turn of the calendar
year and in line with its current provision estimate.
Other items
The Group incurred GBP14m of other one-off exceptional costs
during the year, primarily reflecting the growth opportunity
projects relating to the RBS switching scheme and set-up costs
relating to the AAM JV.
Taxation
On a statutory basis, the tax credit was GBP27m on a pre-tax
loss of GBP168m, an effective rate of 16%. The overall credit is
less than the statutory rate of 19% due to the impact of
non-deductible expenses (tax effect of GBP5m). The banking
surcharge is not payable this period. Included within the overall
credit is GBP37m related to changes in the corporation tax rate and
a further GBP15m related to tax on Additional Tier 1 (AT1)
distributions now reflected via the income statement (in prior
periods tax related to AT1 distributions was recorded via changes
in equity). These credits were offset by a reduction of GBP51m in
the value of tax losses recognised, reflecting a fall in forecast
profits against which such losses can be recognised. On an
underlying basis, the Group tax charge was GBP24m on underlying
profits of GBP124m, an effective rate of 19%. As outlined above,
the impact of the rate change and AT1 credits is offset by the
reduction in asset for losses recognised, resulting in an effective
rate that matches the statutory mainstream tax rate.
Outlook
The Group expects its profitability to improve going forward as
the provision charge normalises, assuming no further deterioration
in the economic environment, and the exceptional charges reduce in
line with expectations. The gap between underlying and statutory is
also expected to decrease significantly over the medium term.
Business and financial review
Chief Financial Officer's review
Balance sheet
As at 30 September 2020 2019 Change
------------------------- ------- ------ --------
Mortgages 58,290 60,079 (3.0)%
Personal 5,219 5,024 3.9%
Business 8,948 7,876 13.6%
of which BBLS 809 - n/a
of which CBILS 334 - n/a
------------------------- ------- ------ --------
Total customer lending 72,457 72,979 (0.7)%
------------------------- ------- ------ --------
Relationship deposits(1) 25,675 21,347 20.3%
Non-linked savings 20,729 20,197 2.6%
Term deposits 21,107 22,243 (5.1)%
------------------------- ------- ------ --------
Total customer deposits 67,511 63,787 5.8%
------------------------- ------- ------ --------
Wholesale funding 14,227 18,506 (23.1)%
of which TFS 4,108 7,342 (44.0)%
of which TFSME 1,300 - n/a
LDR 107% 114% (7)%pts
LCR 140% 152% (12)%pts
------------------------- ------- ------ --------
(1) Current account and linked savings balances.
Overview
The Group's balance sheet during FY20 has been impacted by the
pandemic in very different ways across our portfolios. At an
aggregate level our total customer lending has reduced by 0.7% to
GBP72.5bn primarily due to a contraction in our Mortgage book,
while our total customer deposits have increased by 5.8% to
GBP67.5bn reflecting pandemic-related consumer and business
behaviours.
Customer lending and deposit balances
In our Mortgages business, balances declined 3.0% to GBP58.3bn
as we actively chose to maintain our pricing discipline in a
competitive (pre-COVID-19) environment in the first half, while the
second half was impacted by the UK lockdown restrictions on the
housing market. The house purchase market has picked up
significantly during the second half of the year and while the
Group is participating in this increased flow, the benefit will not
be seen until FY21 given the typical mortgage completion
timeframes.
Personal lending growth of 3.9% to GBP5.2bn 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, with good growth in our
personal loan book also due to our digital originations. Our credit
card lending balances have remained more resilient than the market
due to our high proportion of balance transfer card balances which
make up a significant proportion of our portfolio and are more
stable at times of tempered demand. Credit card activity slowed
significantly during lockdown with volumes c.55% lower than usual
in April/May, and while spending did improve over the summer it is
still not back to pre-pandemic levels and is expected to remain
muted particularly if future lockdowns are imposed.
Business lending increased 13.6% to GBP8.9bn, although this
growth was solely due to the government-guaranteed lending schemes
(BBLS/CBILS/CLBILS) through which the Group lent GBP1.2bn to
businesses to provide much needed liquidity. Underlying business
lending shrank slightly by GBP0.1bn reflecting lower BAU
demand.
Customer deposit balances grew 5.8% in the period to GBP67.5bn.
The growth came primarily in relationship deposits which rose 20.3%
to GBP25.7bn as consumer spending slowed dramatically under
lockdown and businesses generally deposited government-guaranteed
lending proceeds into cash accounts for liquidity. Elsewhere, we
continued to optimise the deposit base with a 5.1% reduction in
term deposits.
Wholesale funding and liquidity
The Group maintains a strong funding and liquidity position and
has no reliance on short-term wholesale funding. The 12%pts
reduction in the LCR over the period highlights the Group's ability
to operate more efficiently, while continuing to comfortably exceed
both regulatory requirements and more prudent internal risk
appetite metrics. In addition to its liquid asset buffer averaging
c.GBP12bn over the past 12 months, the Group has a significant
amount of pre-positioned collateral eligible for use in a range of
central bank facilities, ensuring a substantial buffer in the event
of any sudden outflows.
Supplementing the customer deposit position, we ensure
appropriate diversification in our funding through a number of
well-established wholesale funding programmes. In January, we
successfully completed the issuance of further mortgage-backed
securities from the Group's Lanark programme, raising GBP500m
equivalent. This was supported by GBP475m of Tier 2 subordinated
debt issuance in September which strengthened the Group's capital
stack, as well as EUR500m of senior unsecured debt issuance in June
as we continue to build a buffer over our final MREL
requirements.
During the period, the Group repaid GBP3.2bn of its TFS
drawings, leaving GBP4.1bn outstanding. At the same time, the Group
drew GBP1.3bn from the BoE's new TFSME, extending the duration and
optimising our funding flexibility to support customers through
this period of stress.
Total wholesale funding reduced to GBP14.2bn during the year
(FY19: GBP18.5bn), principally as a result of the growth in
customer deposits allowing us to optimise the funding stack. This
resulted in a 7%pts reduction in the Group's LDR over the period to
107%.
Outlook
As we look into FY21, we expect muted lending demand reflecting
the anticipated deterioration in the economy, while the trajectory
for deposits is more uncertain and will depend on the extent to
which consumers & businesses need to utilise the savings they
have built.
Business and financial review
Chief Financial Officer's review
Capital
As at 30 September 2020 2019 Change
--------------------------------- ------ ------ ---------
CET1 ratio (IFRS 9 transitional) 13.4% 13.3% 0.1%pts
CET1 ratio (IFRS 9 fully loaded) 12.2% 12.9% (0.7)%pts
Total capital ratio 20.2% 20.1% 0.1%pts
MREL ratio 28.4% 26.6% 1.8%pts
UK leverage ratio 4.9% 4.9% -%pts
RWAs (GBPm) 24,399 24,046 1.5%
of which Mortgages (GBPm) 9,484 8,846 7.2%
of which Business (GBPm) 6,716 7,124 (5.7)%
of which Personal (GBPm) 4,151 4,042 2.7%
--------------------------------- ------ ------ ---------
Overview
The Group has maintained a robust capital position with a CET1
ratio (IFRS 9 transitional basis) of 13.4% and a total capital
ratio of 20.2%. The significant impairment provision charges
recognised during the year have largely been offset by IFRS 9
transitional relief and Excess Expected Loss (EEL) deductions on a
transitional basis. The Group's CET1 ratio on an IFRS 9 fully
loaded basis did however reduce to 12.2%.
Capital requirements
Following completion of the Group's ICAAP, the PRA updated the
capital requirements for the Group. The Pillar 2A CET1 requirement
was reduced from 2.9% to 2.5% and the Group's fully-loaded CRD IV
minimum CET1 capital requirement is now 9.5%.
CET1 capital
The Group's transitional CET1 ratio increased by 8bps in the
period. Pre-provision underlying profit generated CET1 of 165bps,
with the 121bps of impairment provision charges offset by 119bps of
IFRS 9 transitional relief and EEL deduction. RWA growth in the
period consumed 19bps of CET1 and included the adverse mortgage
model changes of 29bps offset by the SME supporting factor relief
of 39bps. After AT1 distributions of 28bps, the Group generated
116bps of underlying CET1 capital. The Group also incurred
exceptional item charges including restructuring costs and
acquisition accounting unwind totalling 82bps along with other
charges of 26bps.
RWAs
RWAs increased c.GBP0.4bn (1.5%) during the period, largely
reflecting the impact of implementing the planned Mortgage model
changes that increased RWAs by c.GBP0.5bn, offset by a reduction in
Business RWAs primarily due to the impact of the SME supporting
factor relief that reduced RWAs by c.GBP0.7bn. RWAs in the Personal
portfolio broadly tracked lending volumes, with non-credit RWAs
stable.
CET1 ratio in-year movements 2020
---------------------------------------------------------------------- ------
Opening CET1 ratio (IFRS 9 transitional) 13.3%
Pre-provision capital generated (bps) 165
Impairment provision charge (bps) (121)
Impairment provision regulatory adjustments(1) (bps) 119
RWA growth(2) (bps) (19)
AT1 distributions (bps) (28)
---------------------------------------------------------------------- ------
Underlying capital generated (bps) 116
---------------------------------------------------------------------- ------
Integration and transformation costs (bps) (47)
Acquisition accounting unwind (bps) (35)
Other (bps) (26)
---------------------------------------------------------------------- ------
Net capital generated (bps) 8
---------------------------------------------------------------------- ------
Closing CET1 ratio (IFRS 9 transitional) 13.4%
---------------------------------------------------------------------- ------
(1) Impairment provision regulatory adjustments include IFRS 9 transitional
relief of 82bps and movements in EEL of 37bps.
(2) Includes mortgage model changes of (29)bps and SME supporting factor
relief of 39bps.
Robust capital position in the face of economic uncertainty
The significant impairment provisions taken during the year to
increase the Group's on-balance sheet provisions to GBP735m means
that the Group holds appropriate levels of provision coverage as we
go into a period of economic stress with an expected increase in
credit losses. In addition, the Group also retains a significant
CET1 management buffer of c.GBP950m in excess of its CRD IV
regulatory requirement, providing further potential loss-absorbing
capacity. The Board has concluded that it is prudent to conserve
capital and has not proposed an ordinary dividend for FY20, but
still has an ambition to deliver a sustainable and progressive
dividend over time.
MREL
The Group's MREL ratio increased to 28.4%, comfortably exceeding
both its interim and expected 2022 end-state MREL requirement. This
means future MREL issuance is focused on building a prudent
management buffer over the expected end-state MREL requirement,
with GBP0.5bn to GBP0.75bn of further MREL eligible senior
unsecured issuance planned in FY21.
Outlook
Looking into 2021, the Group anticipates RWA inflation and a
reduction in IFRS 9 transitional relief through ratings migrations
as the economy deteriorates, but expects partial offsets through
RWA efficiency opportunities including the move to IRB for credit
cards, business model updates and hybrid mortgage models. The
in-year transitional CET1 ratio trajectory will be impacted by the
timing of the RWA inflation, but the RWA opportunities and expected
EBA software intangible benefit mean we currently expect to finish
the year around c.13% on a transitional CET1 ratio basis. The Group
is also preparing for the ACS stress test in 2021 which will be an
important input into the Group's medium term capital targets.
Business and financial review
Chief Financial Officer's review
Guidance reflects level of economic uncertainty
FY21 financial guidance
Net Interest Margin (NIM)
Broadly flat on FY20 level
-------------------------------------------
Underlying costs
<GBP875m (incl. GBP10-15m of COVID costs)
-------------------------------------------
Cost of risk
Lower than FY20 level
Medium-term outlook:
The Board believes that, assuming no significant further deterioration
in expectations for the economic outlook or change in interest rates,
Virgin Money has a clear path to delivering double digit statutory returns
on tangible equity over time. Specific medium-term guidance will be provided
when there is more certainty on the forward economic trajectory.
Outlook
Given the unprecedented nature of COVID-19, the exact economic
outlook for the UK is clearly evolving and remains hard to predict
with any high degree of certainty at this stage. We recognise the
very recent news of a potential vaccine but have determined that it
is too early to incorporate this in our near-term forecasts at
present.
The implications of the future reduction in the various UK
government economic support measures and the impact of current
lockdown restrictions are unclear at present, while the threat of
further future lockdowns remains. The outcome of these will be key
in determining the size of the shock to GDP, future unemployment
levels and the associated shape of any recovery. The UK's Brexit
negotiations are also not yet concluded and there is still a risk
of a no-deal outcome that would adversely impact the economy
further and could lead to a more prolonged downturn and consequent
slower 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 customers, colleagues and
communities. Given the aforementioned uncertainties and fluidity of
the operating environment, while it is possible for the Group to
give indicative financial guidance for FY21, it is not appropriate
at this stage to give firm medium-term guidance.
FY21 financial guidance
While the Group's NIM reduced in FY20 due to the continued
compression in mortgage margins and the BoE base rate cut, in FY21
we anticipate a NIM that is broadly flat on the FY20 level (1.56%)
assuming no change in the rate environment. This reflects more
favourable mortgage pricing, the structural maturity profile of our
mortgage book and deposit re-pricing opportunities.
With the second-half impact on non-interest income a reflection
of lower activity levels and with uncertainty as to how quickly
this rebounds, coupled with a further UK lockdown currently in
force at the time of writing, it is expected that non-interest
income will remain subdued.
On costs, we expect to achieve further net cost reductions in
FY21 underpinned by the completion of our integration programme
with incremental cost savings from headcount reductions,
third-party spend and property, but we do currently anticipate
incurring c.GBP10-15m of ongoing COVID-19 related costs in FY21.
The Group is therefore targeting an underlying operating cost base
of <GBP875m in FY21, down from GBP917m in FY20.
On cost of risk, the Group's recognition of significant
impairment charges in FY20 reflects the conservative weighted
economic scenarios and expert judgement overlays applied, ahead of
an expected deterioration in the future economic environment.
Current expectations are that, subject to no further material
deterioration in the economic outlook, the Group's FY21 cost of
risk will be lower than FY20.
Medium-term expectations
In the medium term, the Group believes that, assuming no
significant further deterioration in expectations for the economic
outlook or change in interest rates, Virgin Money has a clear path
to delivering double digit statutory returns on tangible equity
over time. The improvement in returns will be built on: the
normalisation of impairments and exceptional costs; ensuring we
continue to reduce our cost base to reflect the future operating
environment; optimising our balance sheet mix; and delivering a
more efficient capital base over time.
On capital, while in the near term we expect to continue
operating with a significant buffer (currently 390bps) in excess of
our MDA threshold of 9.5%, over the medium term as economic
conditions stabilise we intend to operate a dynamic CET1 ratio
target. This will comprise an appropriate management buffer in
excess of our MDA threshold that will be calibrated to ensure that
the Group remains well capitalised taking into account regulatory
developments including next year's ACS stress test, the prevailing
risk environment and an ability to withstand stresses at all
times.
The Group also understands the importance of capital returns to
our shareholders, and we believe that the delivery of our strategy
will allow Virgin Money to consistently generate significant
capital over time that can be redeployed into both returns
accretive growth and returns to shareholders.
Enda Johnson
Interim Group Chief Financial Officer
24 November 2020
Business and financial review
Chief Financial Officer's review
Summary income statement (statutory basis)
2020 2019 Change
For the year ended 30 September GBPm GBPm %
------------------------------------------------- -------- ------- ------
Net interest income 1,283 1,514 (15)
Non-interest income 160 235 (32)
------------------------------------------------- -------- ------- ------
Total operating income 1,443 1,749 (17)
Operating and administrative expenses (1,104) (1,729) (36)
------------------------------------------------- -------- ------- ------
Operating profit before impairment losses 339 20 1,595
Impairment losses on credit exposures (507) (252) 101
------------------------------------------------- -------- ------- ------
Statutory loss on ordinary activities before tax (168) (232) (28)
Tax credit 27 53 (49)
------------------------------------------------- -------- ------- ------
Statutory loss after tax (141) (179) (21)
------------------------------------------------- -------- ------- ------
The Group has recognised a statutory loss after tax of GBP141m
(30 September 2019: loss of GBP179m). The statutory loss in 2020
was due to the significant increase in impairment provision charges
due to COVID-19, coupled with several ongoing exceptional items
including integration and transformation costs, and acquisition
accounting unwind charges. In 2019 the statutory loss largely
reflected the significant one-off costs relating to the acquisition
of Virgin Money Holdings (UK) PLC and PPI conduct charges. The
Group continues to expect that the difference between underlying
and statutory profit will reduce over time as we deliver our
strategy and the exceptional charges related to the integration
reduce.
Key Performance Indicators(1)
12 months 12 months
to to
30 Sep 30 Sep
2020 2019 Change
------------------------------- --------- --------- --------
Profitability
Statutory RoTE (6.2)% (6.8)% 0.6%pts
Statutory CIR 76% 99% (23)%pts
Statutory return on assets (0.16)% (0.23)% 0.07%pts
Statutory basic loss per share (15.3)p (17.9)p 2.6p
------------------------------- --------- --------- --------
(1) For a definition of each of the KPIs, refer to 'Measuring
financial performance - glossary' on pages 127 to 128. The KPIs
include statutory, regulatory and alternative performance
measures.
Business and financial review
Chief Financial Officer's 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 129.
Integration
and Acquisition
Statutory transformation accounting Legacy Underlying
results costs unwinds conduct Other basis
2020 income statement GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- --------------- ----------- -------- ------
Net interest income 1,283 - 68 - - 1,351
Non-interest income 160 - 28 - 3 191
----------------------------------- --------- --------------- ----------- -------- ------ ----------
Total operating income 1,443 - 96 - 3 1,542
Total operating and administrative
expenses before impairment
losses (1,104) 139 11 26 11 (917)
----------------------------------- --------- --------------- ----------- -------- ------ ----------
Operating profit before
impairment losses 339 139 107 26 14 625
Impairment losses on credit
exposures (507) - 6 - - (501)
----------------------------------- --------- --------------- ----------- -------- ------ ----------
(Loss)/profit on ordinary
activities before tax (168) 139 113 26 14 124
----------------------------------- --------- --------------- ----------- -------- ------ ----------
Financial performance measures
RoTE (6.2%) 3.3% 2.6% 0.6% 0.3% 0.6%
CIR 76.5% (8.1)% (6.6)% (1.5)% (0.8)% 59.5%
Return on assets (0.16)% 0.12% 0.10% 0.02% 0.01% 0.09%
Basic EPS (15.3)p 7.9p 6.5p 1.5p 0.8p 1.4p
----------------------------------- --------- --------------- ----------- -------- ------ ----------
Include
Virgin Integration
Money and
pre- Pro transfor- Acquisition
Statutory acquisition forma mation accounting Legacy Underlying
results results results costs unwinds conduct Other basis
2019 income statement GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ------------ ----------- ----------- -------- -----
Net interest income 1,514 22 1,536 - (23) - (80) 1,433
Non-interest income 235 9 244 - - - (38) 206
---------------------------- --------- ------------ -------- ----------- ----------- -------- ----- ----------
Total operating income 1,749 31 1,780 - (23) - (118) 1,639
Total operating and
administrative
expenses before impairment
losses (1,729) (60) (1,789) 156 7 433 246 (947)
---------------------------- --------- ------------ -------- ----------- ----------- -------- ----- ----------
Operating profit/(loss)
before impairment losses 20 (29) (9) 156 (16) 433 128 692
Impairment losses on credit
exposures (252) (4) (256) - 103 - - (153)
---------------------------- --------- ------------ -------- ----------- ----------- -------- ----- ----------
(Loss)/profit on ordinary
activities before tax (232) (33) (265) 156 87 433 128 539
---------------------------- --------- ------------ -------- ----------- ----------- -------- ----- ----------
Financial performance
measures
RoTE (6.8)% (0.7)% (7.5)% 3.5% 2.0% 9.9% 2.9% 10.8%
CIR 99% 1% 100% (10)% 1% (26)% (8)% 57%
Return on assets (0.23)% (0.03)% (0.26)% 0.15% 0.09% 0.43% 0.13% 0.54%
Basic EPS (17.9)p (1.7)p (19.6)p 9.3p 5.1p 25.7p 7.6p 28.1p
---------------------------- --------- ------------ -------- ----------- ----------- -------- ----- ----------
Risk Management
Introduction
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'.
The Group's approach to and management of risk is defined in the
Group's Risk Management Framework (RMF). Integral to the RMF is the
identification of principal risks, the process by which the Group
sets its risk appetite which is the nature and extent of risk it is
willing to assume to achieve its strategic objectives. The
framework identifies ten principal risks: operational risk; people
risk; financial risk; model risk; credit risk; technology risk;
regulatory and compliance risk; conduct risk; financial crime risk;
and strategic and enterprise risk. Climate risk is recognised as a
cross-cutting risk type that manifests through other principal
risks.
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.
COVID-19 is impacting individuals, businesses and communities
and has increased the Group's risk profile. The measures introduced
to support the economy create new operational, conduct,
enforceability and financial risks for the Group. These risks are
being managed and will be monitored over time.
Further detail on the Group's risks and how they are managed is
available in the 2020 Annual Report & Accounts.
Risk Management
Credit risk
At a time of unprecedented challenge for the UK economy, our
lending portfolios remain well positioned.
While 2020 has undoubtedly been a difficult year, the shape and
credit quality of our lending portfolio meant we were well
positioned to face the economic challenges brought about by
COVID-19. We started the year with a well-diversified portfolio,
with 82% of our lending portfolio from a low LTV mortgage book, 11%
from a business lending portfolio in solidly performing sectors,
and the remaining 7% from a high quality personal lending
portfolio, and this mix remained largely constant through the year.
We adhered to our principles of managing our lending portfolio with
a controlled risk appetite and prudent approach to underwriting
with additional changes to our underwriting criteria introduced in
response to the economic events.
The emergence of COVID-19 towards the end of the first half of
the year and the resulting lockdown inevitably put pressure on all
businesses and individuals, however the additional support
available in the form of government backed lending and payment
holidays has undoubtedly eased the immediate pressures.
Nevertheless, our assessment of the economic environment is
cautious given the risks to the downside which remain and we have
applied prudent macroeconomic forecasts and conservative weightings
to those forecasts which has caused us to reassess the likelihood
of future loss in our lending portfolio and resulted in us
increasing our provision for future expected credit losses, both at
the half year and year end. Accordingly, we have recorded an
underlying impairment charge of GBP501m in the year to 30 September
2020, an increase of GBP348m from the prior year charge of GBP153m.
We have kept this position under close watch throughout the year
and updated our view on a quarterly basis.
A key indicator of the underlying quality of the lending
portfolio is the movement in staging over time and the levels of
arrears in the portfolios. Arrears levels have remained largely
stable across all portfolios as government interventions and
payment holiday support has been deployed. Whist we have seen a
deterioration in staging with 81% of the Group's lending portfolio
now in stage 1 at 30 September 2020 (2019: 93%), this is
principally due to probability of default (PD) migration rather
than arrears, with the level of the portfolio < 30 DPD remaining
stable at 98.5% (2019: 98.6%). Stage 3 balances have similarly
remained stable. In summary, whilst an element of migrations to
stage 2 reflect a level of financial difficulty for certain
customers, stage migrations in the year have generally been
reflective of more negative macroeconomic forecasts rather than a
deterioration in the underlying quality of our book. Furthermore, a
significant proportion of customers who have taken advantage of the
COVID-19 payment holidays available have already resumed their
normal payment patterns and we will continue to closely monitor
these customers going forward.
In setting our provision for expected future credit losses at
the year end, we have adopted prudent macroeconomic forecasts and
weightings and deployed these within our credit models. Where it
has not been possible to fully quantify new or emerging risks in
modelled outcomes, or we have assessed limitations in our models,
expert judgement has been applied to determine an appropriate level
of additional post-model adjustments (PMAs); the level of PMAs is
inevitably higher this year at GBP186m (2019: GBP49m) due largely
to the impact of COVID-19 variables which, given the unprecedented
nature of the economic shock, could not be fully incorporated into
the latest models. In combination, these factors ensure the Group
has suitably provided against expected future losses, with a
provision of GBP735m at 30 September 2020 (2019: GBP362m). This
increased level of provision results in overall coverage of 1.02%
(2019: 0.50%), which we consider to be balanced and appropriate for
our portfolio at the present time.
Notwithstanding the level of prudence we have exercised in
measuring ECLs this year, and the recent announcement regarding
positive progress in the development of a COVID-19 vaccine, the
economic outlook remains challenging. We will continue to monitor
and assess the quality of our credit portfolios as we navigate
through these difficult times.
The Credit risk report which now follows has been structured
into the sections below in order to further explain our
considerations:
-- Managing risk within our portfolios: addresses the various
frameworks, policies, approaches and mitigations deployed to manage
and oversee credit risk;
-- Measuring credit risk within our portfolios: covers the
Group's approach to ECL methodologies and calculations as well as
the approach to credit estimates and judgements, including
PMAs;
-- Portfolio performance: summarises the key credit performance
measures and influencing factors set out at Group level, supported
by commentary on each of the three divisions: Mortgages, Personal,
and Business, and
-- Supporting our customers in times of need: informs the
various support mechanisms the Group has deployed to support
customers.
A range of technical tables and analysis is also included.
Group credit highlights
30 Sep 30 Sep
2020 2019
(audited) (audited)
GBPm GBPm
------------------------------------------------------------ ---------- ----------
Underlying impairment charge on credit exposures 501 153
------------------------------------------------------------ ---------- ----------
Impairment provisions: Modelled 496 266
PMA 186 49
Individually assessed 53 47
------------------------------------------------------------ ---------- ----------
Impairment provisions held on credit exposures 735 362
------------------------------------------------------------ ---------- ----------
Risk Management
Credit risk
Managing risk within our credit portfolios
Risk appetite
The Group controls its levels of credit risk by placing limits
on the amount of risk it is willing to take in order to achieve its
strategic objectives. This involves a defined set of qualitative
and quantitative limits in relation to its credit risk
concentrations to one borrower, or group of borrowers, and to
geographical, product and industry segments. The management of
credit risk within the Group is achieved through ongoing approval
and monitoring of individual transactions, regular asset quality
reviews and the independent oversight of credit decisions and
portfolios.
The COVID-19 pandemic continues to present significant risks to
the Group's credit portfolios. However, the Group remains focused
on supporting customers and colleagues through the exceptional
challenges that have crystallised over the past few months. The
FY2021 RAS will continue to consider the impact of COVID-19,
remaining agile, focused and responsive, to ensure we are
addressing new and developing risks in a safe and controlled
manner.
Measurement
The Group uses a range of statistical models, supported by both
internal and external data, to measure credit risk exposures. These
models underpin the IRB approval for the mortgage and business
portfolios and the standardised approach for the personal
portfolios. Further information on the measurement and calculation
of ECL and the Group's approach to the impairment of financial
assets can be found on page 22.
The Group's portfolios are subject to regular stress testing.
Stress test scenarios are regularly prepared to assess the adequacy
of the Group's impairment provision and the impact on RWAs and
capital. Management will consider how each stress scenario may
impact on different components of the credit portfolio. The primary
method applied uses migration matrices, modelling the impact of PD
rating migrations and changes in portfolio default rates to changes
in macroeconomic factors to obtain a stressed position for the
credit portfolios. Loss given default (LGD) is stressed based on a
range of factors, including property price movements.
Mitigation
The Group maintains a dynamic approach to credit management and
takes necessary steps if individual issues are identified or if
credit performance has, or is expected to, deteriorate due to
borrower, economic or sector-specific weaknesses.
The mitigation of credit risk within the Group is achieved
through approval and monitoring of individual transactions and
asset quality, analysis of the performance of the various credit
risk portfolios, and independent oversight of credit portfolios
across the Group. Portfolio monitoring techniques cover such areas
as product, industry or geographic concentrations and delinquency
trends.
There is regular analysis of the borrower's ability to meet
their interest and capital repayment obligations with early support
and mitigation steps taken where required. Credit risk mitigation
is also supported, in part, by obtaining collateral and corporate
and personal guarantees where appropriate.
Other mitigating measures are described below.
Credit assessment and mitigation
Credit risk is managed in accordance with lending policies, the
Group's risk appetite and the RMF. Lending policies and performance
against risk appetite are reviewed regularly.
The Group uses a variety of lending criteria when assessing
applications for mortgage and personal customers. The approval
process uses credit scorecards, as well as manual underwriting, and
involves a review of an applicant's previous credit history using
information held by credit reference agencies.
The Group also assesses the affordability of the borrower under
stressed scenarios including increased interest rates. In addition,
the Group has in place quantitative thresholds, such as maximum
limits on the level of borrowing to income and the ratio of
borrowing to collateral. Some of these limits relate to internal
approval levels and others are hard limits above which the Group
will reject the application.
For residential mortgages, the Group's policy is to accept only
standard applications with a LTV less than 95%. The Group has
maximum percentage LTV limits which depend upon the loan size.
Product types such as BTL and residential interest-only mortgages
are controlled by transactional limits covering both LTV and
value.
For business customers, credit risk is further mitigated by
focusing on business sectors where the Group has specific expertise
and through limiting exposures on higher value loans and to certain
sectors. When making credit decisions for business customers the
Group will routinely assess the primary source of repayment, most
typically the cash generated by the customer through its normal
trading cycle. Secondary sources of repayment are also considered
and while not the focus of the lending decision, collateral will be
taken when appropriate. The Group seeks to obtain security cover
and, where relevant, guarantees from borrowers.
Specialist expertise
Credit quality is managed and monitored by skilled teams
including, where required, specialists who provide dedicated
support for customers experiencing financial difficulty. Credit
decisions utilise credit scoring techniques and manual
underwriting, as appropriate. These tasks are performed by skilled
and competent specialists acting within agreed delegated authority
levels set in accordance with their experience and
capabilities.
Credit strategy and policy
Credit risks associated with lending are managed through the
application of detailed lending policies and standards which
outline the approach to lending, underwriting criteria, credit
mandates, concentration limits and product terms.
Significant credit risk strategies and policies are reviewed and
approved annually by the Credit Risk Committee. For complex credit
products and services, the Chief Credit Officer and Credit Risk
Committee provide a policy framework which identifies, quantifies
and mitigates risks including, but not limited to, those that have
arisen as a result of the impacts of COVID-19. These policies and
frameworks are delegated to, and disseminated under, the guidance
and control of the Board and senior management, with appropriate
oversight through governance committees.
Specialist teams oversee credit portfolio performance as well as
adherence to credit risk policies and standards. Activities include
targeted risk-based reviews, providing an assessment of the
effectiveness of internal controls and risk management practices.
Bespoke assignments are also undertaken in response to emerging
risks and regulatory requirements. Independent assurance reviews
are regularly undertaken by Internal Audit.
Risk Management
Credit risk
Portfolio oversight
The Group's credit portfolios, and the key benchmarks,
behaviours and characteristics by which those portfolios are
managed, are regularly reviewed. This entails the production and
analysis of regular portfolio monitoring reports for review by
senior management.
Controls over rating systems
The Group has a Model Risk Oversight team that sets common
minimum standards. The standards are designed to ensure risk models
and associated rating systems are developed consistently and are of
sufficient quality to support business decisions and meet
regulatory requirements. The Group performs an annual
self-assessment of its ratings systems to ensure ongoing CRR
compliance supported by all three lines of defence.
The Group also utilises other instruments and techniques across
its wider balance sheet. These are summarised below:
Derivatives
The Group maintains control limits on net open derivative
positions. At any one time, the amount subject to credit risk is
limited to the current fair value of instruments that are
favourable to the Group (i.e. assets where their fair value is
positive) which, in relation to derivatives, may only be a small
fraction of the contract, or notional values used to express the
volume of instruments outstanding. This credit risk is managed as
part of the customer's overall exposure together with potential
exposures from market movements.
Master netting agreements
The Group further restricts its exposure to credit losses by
entering into master netting arrangements with counterparties with
whom it undertakes a significant volume of transactions. Master
netting arrangements do not generally result in an offset of
balance sheet assets and liabilities, as transactions are usually
settled on a gross basis. However, credit risk associated with the
favourable contracts is reduced by a master netting arrangement to
the extent that, if any counterparty failed to meet its obligations
in accordance with the agreed terms, all amounts with the
counterparty are terminated and settled on a net basis. Derivative
financial instrument contracts are typically subject to the
International Swaps and Derivatives Association (ISDA) master
netting agreements, as well as Credit Support Annexes, where
relevant, around collateral arrangements attached to those ISDA
agreements. Derivative exchange or clearing counterparty agreements
exist where contracts are settled via an exchange or clearing
house.
Collateral
Collateral held as security and other credit enhancements can be
summarised as follows:
Residential mortgages
Residential property is the Group's main source of collateral on
mortgage lending and means of mitigating loss in the event of the
default risk inherent in its residential mortgage portfolios. All
lending activities are supported by an appropriate form of
valuation using either professional or indexed (subject to policy
rules and confidence levels) valuations.
Commercial property
Commercial property is the Group's main source of collateral on
business lending and means of mitigating loss in the event of
default. Collateral for the majority of commercial loans comprises
first legal charges over freehold or long leasehold property
(including formal Companies House registration where appropriate).
All commercial property collateral is subject to an independent,
professional valuation when taken and thereafter subject to
periodic review in accordance with policy requirements.
Non-property related collateral
In addition to residential and commercial property based
security, the Group also takes other forms of collateral when
lending. This can involve obtaining security against the underlying
loan through the use of cash collateral and/or netting agreements,
both of which reduce the original exposure by the amount of
collateral held, subject to volatility and maturity adjustments
where applicable.
The Group provides asset-backed lending in the form of asset and
receivables finance. Security for these exposures is held in the
form of direct recourse to the underlying asset financed.
Further detail on collateral can be found on pages 32-33.
Monitoring
Credit policies and procedures, which are subject to ongoing
review, are documented and disseminated in a form that supports the
credit operations of the Group.
Credit Risk Committee: The Credit Risk Committee ensures that
the credit RMF and associated policies remain effective. The
Committee has oversight of the quality, composition and
concentrations of the credit risk portfolio and considers
strategies to adjust the portfolio to react to changes in market
conditions.
RAS measures: Measures are monitored monthly and reviewed
bi-annually, at a minimum, or where specific action is merited, for
example RAS was amended at pace in response to COVID-19. Regular
review ensures that the measures accurately reflect the Group's
risk appetite, strategy and concerns relative to the wider macro
environment. All measures are subject to extensive engagement with
the Executive Leadership Team and the Board and are subject to
endorsement from executive governance committees prior to Board
approval. Regulatory engagement is also scheduled as
appropriate.
Risk concentration: Concentration of risk is managed by
counterparty, product, geographical region and industry sector. In
addition, single name exposure limits exist to control exposures to
a single counterparty. Concentrations are also considered through
the RAS process, focusing particularly on comparing the portfolio
against market benchmarks.
Single large exposure excesses: All excesses are reported to the
Transactional Credit Committee and the Chief Credit Officer. Any
exposure which continues, or is expected to continue, beyond 30
days will also be submitted to the Transactional Credit Committee
with proposals to correct the exposure within an agreed period, not
to exceed 12 months.
Risk Management
Credit risk
Forbearance
Forbearance is considered to take place when the Group grants
concessions to assist customers who are experiencing, or who are
about to experience, difficulties in meeting their financial
commitments to the Group. The Group's forbearance policies and
definitions comply with the guidance established by the EBA for
financial reporting. Forbearance concessions include the granting
of more favourable terms and conditions than those provided either
at drawdown of the facility, or which would not ordinarily be
available to other customers with a similar risk profile.
Forbearance parameters are regularly reviewed and refined as
necessary to ensure they are consistent with the latest industry
guidance and prevailing practice, as well as ensuring that they
adequately capture and reflect the most recent customer behaviours
and market conditions.
Measuring risk within our credit portfolios
The Group adopts two approaches to the measurement of credit
risk:
Individually assessed approach
A charge is taken to the consolidated income statement when an
individually assessed provision has been recognised or a direct
write-off has been applied to an asset balance.
Collectively assessed approach
The Group uses a combination of strategies and statistical
models that utilise internal and external data to measure the
exposure to credit risk within the portfolios and to calculate the
level of ECL. This is supplemented by management judgement in the
form of PMAs where necessary.
At each reporting date, the Group assesses financial assets
measured at amortised cost, as well as loan commitments and
financial guarantees not measured at fair value through profit or
loss, for impairment. The impairment loss allowance is calculated
using an ECL methodology and reflects: (i) an unbiased and
probability weighted amount; (ii) the time value of money which
discounts the impairment loss; and (iii) reasonable and supportable
information that is available without undue cost or effort about
past events, current conditions and forecasts of future economic
conditions.
The calculated ECL is determined using the following
classifications:
Classification ECL calculation Description
period
-------------- --------------- ---------------------------------------------------------
Stage 12 months A loan that is not credit-impaired on initial recognition
1 and has not experienced a significant increase in
credit risk (SICR).
Stage Lifetime If a significant increase in credit risk has occurred
2 since initial recognition, the loan is moved to stage
2 but is not yet deemed to be credit-impaired.
Stage Lifetime If the loan is credit-impaired it is moved to stage
3 3.
-------------- --------------- ---------------------------------------------------------
In addition to the above stages, purchased or originated
credit-impaired (POCI) financial assets are those which are
assessed as being credit-impaired upon initial recognition. Once a
financial asset is classified as POCI, it remains there until
derecognition irrespective of its credit quality. POCI financial
assets are included within those financial assets in Stage 3 with
corresponding values disclosed by way of footnote to the relevant
tables. The Group regards the date of acquisition as the
origination date for purchased portfolios.
A Stage 2 ECL is required where a SICR has been identified, such
as a deterioration in PD since origination, subject to the 30 days
past due (DPD) backstop, with Stage 3 required where there is
credit impairment subject to the 90 DPD backstop.
ECL methodology is based upon the combination of PD, LGD and
exposure at default (EAD) estimates that consider a range of
factors that impact on credit risk and the level of impairment loss
provisioning. The Group uses reasonable and supportable forecasts
of future economic conditions in estimating the ECL allowance. The
methodology and assumptions used in the ECL calculation are
reviewed regularly and updated as necessary.
ECLs under IFRS 9 use economic forecasts, models and judgement
to provide a forward-looking assessment of the required provisions.
PMAs have been used to address known limitations in the Group's
models or data. Due to the current severe economic conditions,
government and Group interventions to support customers, and
uncertainty arising from COVID-19, the Group has not relied upon
modelled outcomes alone. Following detailed analysis, expert credit
judgement has been applied, resulting in additional PMAs to ensure
the ECL calculation reflects the full set of plausible
circumstances including data limitations, customer support
measures, rapidly changing customer behaviours and the emerging
nature of COVID-19 risks.
Further detail on the accounting policy applied to ECLs can be
found in note 3.2 to the financial statements.
Portfolio performance
How our portfolios have performed
Credit risk exposures are classified into mortgage, personal and
business portfolios. In terms of loans and advances, credit risk
arises both from amounts loaned and commitments to extend credit to
customers. To ensure appropriate credit limits exist, especially
for business lending, a single large exposure policy is in place
and forms part of the risk appetite measures that are monitored and
reported on a monthly basis. The overall composition and quality of
the credit portfolio is monitored and regularly reported to the
Board and, where required, to the relevant supervisory
authorities.
Exposures are also managed in accordance with the large exposure
reporting requirements of the CRR. Unless otherwise noted, the
amount that best represents the maximum credit exposure at the
reporting date is the carrying value of the financial asset.
Risk Management
Credit risk
Maximum exposure to credit risk (audited)
The table below shows the maximum exposure to credit risk
including derivatives. The maximum exposure is shown gross, before
the effect of mitigation through the use of master netting and
collateral agreements. The table also shows the maximum amount of
commitments from the Group's banking operations.
30 Sep 30 Sep
2020 2019
(audited) (audited)
GBPm GBPm
---------------------------------------------------------------- ---------- ----------
Cash and balances with central banks (note 3.4) 9,107 10,296
Financial instruments at fair value through other comprehensive
income (FVOCI) (note 3.7) 5,080 4,328
Due from other banks 927 1,018
Other financial assets at fair value (note 3.5) 203 267
Derivative financial assets (note 3.6) 318 366
Loans and advances to customers (note 3.1) 72,430 73,095
---------------------------------------------------------------- ---------- ----------
88,065 89,370
Financial guarantees (note 5.1) 95 113
Other credit commitments (note 5.1) 16,775 15,158
---------------------------------------------------------------- ---------- ----------
Maximum credit risk exposure 104,935 104,641
---------------------------------------------------------------- ---------- ----------
All Treasury-related financial assets are classed as Stage 1
financial assets under IFRS 9.
Included within cash and balances with central banks is GBP7.2bn
of cash held with the BoE (2019: GBP8.4bn). Due from other banks is
all with senior investment grade counterparties. Financial
instruments at FVOCI and the credit rating of counterparties are
discussed in note 3.7.
Concentration of lending assets
The following tables show the levels of concentration of the
Group's loans and advances.
30 Sep 30 Sep
2020 2019
(audited) (audited)
Gross loans and advances to customers(1) GBPm GBPm
----------------------------------------------------------- ---------- ----------
Property - mortgage 58,652 60,391
Instalment loans to individuals and other personal lending
(including credit cards) 5,550 5,280
Agriculture, forestry, fishing and mining 1,634 1,494
Manufacturing 884 793
Wholesale and retail 961 766
Property - construction 339 167
Financial, investment and insurance 97 104
Government and public authorities 19 30
Other commercial and industrial 4,789 4,221
----------------------------------------------------------- ---------- ----------
72,925 73,246
Impairment provisions on credit exposures (735) (362)
Fair value hedge adjustment 240 211
----------------------------------------------------------- ---------- ----------
72,430 73,095
----------------------------------------------------------- ---------- ----------
(1) The Group has a portfolio of fair valued business loans of
GBP190m (2019: GBP253m) loans and advances to customers (note 3.1)
which are classified separately as financial assets at fair value
through profit or loss on the balance sheet. At 30 September 2020
the most significant concentrations of exposure were in
agriculture, forestry, fishing and mining (29%), real estate (28%),
health and social work (18%), and government and public authorities
(9%).
Risk Management
Credit risk
30 Sep 30 Sep
2020 2019
(audited) (audited)
Contingent liabilities and credit-related commitments GBPm GBPm
----------------------------------------------------------- ---------- ----------
Property - mortgage 3,088 2,642
Instalment loans to individuals and other personal lending
(including credit cards) 9,674 9,069
Agriculture, forestry, fishing and mining 375 302
Manufacturing 692 582
Wholesale and retail 563 472
Property - construction 136 119
Financial, investment and insurance 173 103
Government and public authorities 348 350
Other commercial and industrial 1,821 1,632
----------------------------------------------------------- ---------- ----------
16,870 15,271
----------------------------------------------------------- ---------- ----------
Key credit metrics
30 Sep 30 Sep
2020 2019
(audited) (audited)
GBPm GBPm
----------------------------------------------- ---------- ----------
Impairment provisions held on credit exposures
Mortgage lending 131 40
Personal lending 301 175
Business lending 303 147
----------------------------------------------- ---------- ----------
Total impairment provisions 735 362
----------------------------------------------- ---------- ----------
Pro forma
30 Sep 30 Sep
2020 2019
(audited) (unaudited)
GBPm GBPm
---------------------------------------------------- ---------- ------------
Underlying impairment charge on credit exposures
Mortgage lending 95 4
Personal lending 223 124
Business lending 183 25
---------------------------------------------------- ---------- ------------
Total underlying impairment charge 501 153
---------------------------------------------------- ---------- ------------
Asset quality measures:
Underlying impairment charge(1) to average customer
loans (cost of risk) 0.68% 0.21%
Stage 3 assets to customer loans 1.19% 1.09%
Total provision to customer loans(2) 1.02% 0.50%
Stage 3 provision to Stage 3 loans 15.62% 14.32%
---------------------------------------------------- ---------- ------------
(1) Inclusive of gains/losses on assets held at fair value and
elements of fraud loss but excludes the acquisition accounting
impact on impairment losses shown on page 129.
(2) This includes the government-backed portfolio of Bounceback
Loans (BBLs), Coronavirus Business Interruption Loans (CBILs) and
Coronavirus Large Business Interruption Loans (CLBILs).
Group credit performance
Total loans and advances to customers decreased by GBP0.3bn in
the year, reflecting the Group's focus on supporting existing
customers, muted demand for new borrowing and the impact of
changing customer behaviours as lending was paid down more rapidly.
Mortgage lending decreased by GBP1.7bn, offset by a GBP1.1bn
increase in business lending and a GBP0.3bn increase in personal
lending.
The Group's impairment provision increased by GBP373m to GBP735m
during the year, primarily due to the Group's assessment of the
impact of COVID-19 on future credit losses. This assessment adopts
multiple forward-looking, macroeconomic scenarios with higher
probability weights applied to a worsening economic outlook. In
addition, PMAs have been applied where required.
The Group's underlying impairment charge has increased from
GBP153m to GBP501m during the year mainly due to the use of revised
economic scenarios in credit impairment models and the application
of judgement based PMAs to reflect emerging COVID-19 risks.
Increases are most evident in the personal and business portfolios,
reflecting their heightened sensitivity to significant
deterioration in unemployment and GDP forecasts.
As at 30 September 2020 the Group's cost of risk was 68bps (30
September 2019: 21bps), further reflecting the pessimistic economic
outlook.
Underlying credit portfolio performance remains stable, as
evidenced by the proportion of Stage 3 loans to total customer
loans of 1.19% (2019: 1.09%). There has been no material
deterioration in asset quality measures, arrears and default levels
remain low, and forbearance levels remain static. This is due to a
combination of customer support measures, controlled risk appetite
and a continued focus on responsible lending decisions. Customer
support measures include participating in government-backed loan
schemes and offering payment holidays, augmented by other temporary
fiscal stimulus such as furlough and HMRC payment deferrals.
Further commentary on the types of customer support provided can be
found in the divisional commentary on pages 28-33 in the Group's
Annual Report & Accounts. The proportion of total provisions to
total customer loans has increased to 1.02% (30 September 2019:
0.50%) reflecting the expectation that additional losses will
emerge as the level of COVID-19 support subsides and the economy
hardens.
Risk Management
Credit risk
Mortgage credit performance
30 Sep 30 Sep
2020 2019
------------------------------------- ------------- -----------
Gross loans and advances GBP58.7bn GBP60.4bn
Impairment charge GBP95m GBP4m
Cost of risk 16bps 1bps
Provision to customer loan ratio/GBP 23bps/GBP131m 7bps/GBP40m
% Loans in Stage 2 13.9% 3.0%
% Loans in Stage 3 0.9% 0.8%
% Forborne loans 1.08% 0.98%
90+ DPD 0.43% 0.32%
LTV of mortgage portfolio 57.3% 57.2%
------------------------------------- ------------- -----------
Portfolio and impairment (Pages 23, 34-35)
The Group's mortgage lending has reduced from GBP60.4bn to
GBP58.7bn in the year to 30 September 2020, reflective of
underlying contraction in the portfolio. This aligns with the
divisional strategy to maintain disciplined pricing in a
competitive environment and reflects the effect of lockdown on the
UK housing market, particularly in the second half of the financial
year. Demand for new mortgage lending was muted and the Group
focused on providing much needed support for existing
customers.
The impairment provision has increased by GBP91m to GBP131m as
at 30 September 2020. This gives rise to a provision to customer
loan coverage ratio of 23bps, an increase of 16bps from 2019.
Consistent with the other portfolios, this reflects the adoption of
a prudent approach to setting impairment provisions in expectation
of future economic deterioration and heightened credit losses due
to the impact of COVID-19.
The mortgage portfolio continues to evidence strong underlying
credit quality, with no material deterioration in asset quality
measures. This is supported by prudent risk appetite setting,
robust credit underwriting disciplines and a continued focus on
responsible lending.
It remains unclear how the residential property market and
mortgage customers will react post COVID-19, and the extent to
which house prices could be impacted. This could affect customers'
ability to pay and the level of security provided, which is a
significant factor in limiting losses. Regional and social
differences may begin to emerge as the UK recovers from the impact
of COVID-19 with certain households potentially disproportionately
affected. This level of granular detail cannot be fully reflected
within the macroeconomic forecasts and models and requires a
detailed level of judgement and expertise to estimate the potential
impact on ECL.
The impairment charge has increased by GBP91m to GBP95m in the
year to 30 September 2020. GBP29m of this increase relates to the
adoption of more conservative forward-looking macroeconomic
scenarios with higher probability weights applied to a worsening
economic outlook. Further analysis, with appropriate expert
judgement, determined that PMAs should also be applied to address
impacts on calculation inputs or model sensitivities. This resulted
in a further GBP62m increase in ECL, GBP43m of which relates to the
longer-term implications for customers who have taken a payment
holiday. Analysis indicates that a proportion of these customers
are expected to experience difficulty in returning to their
contractual repayment profile leading to a level of forbearance,
delinquency or potentially default. Further PMAs have also been
raised to address the risk of high house prices relative to income,
heightened sensitivity for BTL customers and for certain customers
with a high indebtedness index.
IFRS 9 staging (Pages 34-41)
Despite the application of more negative economic forecasts and
additional PMAs, 85.2% of mortgage lending remains classed as Stage
1 (2019: 96.2%). The reduction during the year reflects the
expected COVID-19 impact on customers. This has led to a
corresponding increase of 10.9% in Stage 2 to 13.9% (2019: 3.0%).
Stage migrations reflect updated macroeconomic forecasts,
triggering a more negative outlook and increasing the volume of
mortgage customer accounts exhibiting SICR. The migration to Stage
2 also recognises, through PMAs, that some customers with payment
holidays will have experienced a SICR.
Mortgage IFRS 9 PDs are driven by underlying internal credit
scores adjusted for forward-looking macroeconomics. Of the Stage 2
mortgage balances, 87% are as a result of PD deterioration
influenced by revised macroeconomic forecasts. The changes in PD
grades observed at 30 September 2020 do not reflect any
deterioration in credit scores but rather the migration to more
conservative macroeconomic forecasts. While there has been a
reduction from 92% (2019) to 81% of assets classed as 'Strong', the
proportion of assets classed as 'Good' has increased to 14% (2019:
5%), with the result that over 95% of the mortgage portfolio still
remains 'Good' or better.
The proportion of mortgages classified as Stage 3 remains modest
and stable at 0.9% (2019: 0.8%).
Asset quality, collateral and LTV (Pages 32)
The mortgage portfolio remains very well secured with 83% of
mortgages, by loan value, having an indexed LTV less than 75%, with
an average portfolio LTV of 57.3% (2019: 57.2%). The proportion of
the portfolio over 90% LTV has remained stable at 1.9% (2019: 2.1%)
and the proportion over 80% LTV has increased only slightly to
11.1% as at 30 September 2020 (30 September 2019: 10.7%).
90+ DPD arrears as at September 2020 of 0.43% (2019: 0.32%)
remains low and less than the market average of 0.8%. Mild
deterioration in arrears was observed prior to COVID-19, in line
with industry experience. Further deterioration in delinquency has
occurred due to COVID-19 as customers have moved through arrears
however a moratorium on repossessions has prevented action being
taken resulting in a small number of loans being in arrears longer
than would typically be expected under normal circumstances. The
underlying arrears for the year continues to evidence a stable
portfolio, with improving bureau scores and reduced customer
indebtedness, accepting that payment holidays will have benefitted
customers and there will be challenges ahead.
Risk Management
Credit risk
Payment holidays (Page 28)
20% of mortgage customers, by balance, applied for and were
granted a payment holiday. Of the payment holidays which have
matured by 30 September 2020, 98% of customers have resumed payment
in line with previously contracted terms with only 2% requiring
further support or having moved into arrears. Only 4% of customers,
by balance, have an active payment holiday in force at 30 September
2020. The Group will continue to support customers in line with
their needs and revised regulatory guidance.
Forbearance (Page 29-30)
A key indicator of underlying mortgage portfolio health is the
level of forbearance granted. As at 30 September 2020, forbearance
totalled GBP636m (5,621 customers), an increase from the 30
September 2019 position of GBP589m (5,061 customers). This
represents 1.08% of total mortgage balances (2019: 0.98%).
Forbearance remains an important metric, reflecting the volume and
value of concessions granted to customers on a non-commercial
basis. The increase in forbearance is driven by additional volumes
of tailored arrangements. The majority of customers benefitting
from these arrangements are expected to return to fully performing
status when the temporary support arrangements expire. Payment
holidays granted in line with regulation have not been classified
as forbearance.
Personal credit performance
30 Sep 2020 30 Sep 2019
------------------------ --------------------------------------------- ---------------------------------------------
Credit Loans Total Credit Loans Total
cards & overdrafts personal cards & overdrafts personal
------------------------ -------------- ------------- -------------- -------------- ------------- --------------
Gross loans and advances GBP4.5bn GBP1.1bn GBP5.6bn GBP4.2bn GBP1.1bn GBP5.3bn
Impairment charge GBP153m GBP70m GBP223m GBP107m GBP17m GBP124m
Cost of risk 355bps 721bps 423bps 290bps 192bps 271bps
Provision to customer 537bps/GBP222m 824bps/GBP79m 591bps/GBP301m 342bps/GBP145m 322bps/GBP30m 339bps/GBP175m
loan ratio/GBP
% Loans and advances in
Stage 2 11.6% 28.0% 14.8% 8.9% 4.4% 8.0%
% Loans and advances in
Stage 3 1.2% 1.4% 1.2% 1.3% 1.4% 1.3%
% Forborne loans 0.63% 0.88% 0.67% 0.53% 1.10% 0.70%
90+ DPD 0.38% 0.52% 0.41% 0.54% 0.67% 0.57%
------------------------ -------------- ------------- -------------- -------------- ------------- --------------
Portfolio and impairment (Pages 23, 34-35)
Of the GBP5.6bn total personal lending, the majority is credit
cards at GBP4.5bn, with the balance comprising personal loans and
overdrafts. The modest year-on-year growth in the portfolio
reflects the changed environment, more muted demand for credit and
customers' prudent action in response to COVID-19, paying down
lending where they have been able to do so. Arrears levels remain
stable as customers continue to behave responsibly and benefit from
the various forms of government support, including payment
holidays. Most customers who have sought a payment holiday have now
reverted to normal terms. Further detail is provided on page
28.
The impairment provision has increased by GBP126m to GBP301m as
at 30 September 2020, driving an increase in the provision coverage
ratio of 252bps to 591bps. GBP36m of the increase results from the
modelled application of more negative macroeconomic forecasts, with
the remaining increase due to additional PMAs. GBP23m of the PMAs
reflect the longer-term implications for customers who have taken a
payment holiday. Analysis indicates that a proportion of these
customers are expected to experience difficultly in returning to
the contractual repayment profile leading to a level of
forbearance, delinquency and potentially default currently masked
by support measures. GBP17m relates to an assumption that the sale
or future recovery value of unsecured written-off debt will
potentially reduce and result in an adjustment being required to
loss given default assumptions in the ECL calculation, and GBP14m
relates to the assumption that improvements in customer risk
profiles through bureau data inputs are temporary and therefore not
reflective of the longer-term expectations. The majority of the
residual PMA increase is to address a lack of sensitivity in the
modelled outcome, particularly for the personal loan portfolio.
Cost of risk for the year of 423bps (2019: 271bps) is reflective
of this higher allowance.
IFRS 9 staging (Pages 34-41)
The adoption of more negative economic forecasts and additional
PMAs has driven movement from Stage 1 to Stage 2, with Stage 2
increasing by 6.8% to 14.8% (2019: 8.0%) requiring additional
allowance for lifetime loss. 84% of the portfolio remains in Stage
1.
Personal portfolio PD is most sensitive to the rate of
unemployment, which is forecast to peak at c.10%. The increased
forecast assumption results in a deterioration in PD, influencing
the migration of customer loans into Stage 2. Of the Stage 2
Personal balances, 77% are as a result of PD deterioration
influenced by revised macroeconomic forecasts (2019: 41%). Stage 3
personal lending remains modest and stable at 1.2% (2019:
1.3%).
Asset quality
Asset quality has been assisted by the credit strategies
deployed during the year to control and, where determined, tighten
origination controls. The total credit cards arrears balance of
1.4% is supported by payment holidays and prudent customer
behaviours (2019: 1.7%). The majority of payment holidays have now
matured, and customers have returned to normal payment terms. New
lending continues to focus on segments with lower levels of
economic volatility with portfolio level exposures to
non-homeowners, lower age demographics and self-employed remaining
low.
Lending performance also remains strong with 90+ DPD measures at
a cyclical low point of 0.41% (2019: 0.57%).
Payment holidays (Page 28)
5% of credit card customers were granted a payment holiday.
Where those holidays have matured, 92% of customers have reverted
to repay in line with previously contracted terms and 8% have
either sought additional support or fallen into arrears. Of the 11%
of personal loan customers granted a payment holiday, 95% of those
which have matured have reverted to normal terms with 5% seeking
further support or in arrears. 1% of credit cards customers and 3%
of personal loan customers had an active payment holiday
arrangement in place at 30 September 2020. The Group will continue
to support customers in line with their needs and revised
regulatory guidance.
Risk Management
Credit risk
Forbearance (Pages 29-30)
Limited forbearance is exercised in relation to personal loans
and overdrafts, with a modest reduction to GBP8.4m (0.88% of the
personal lending portfolio) from GBP11.5m (1.10%) at 30 September
2019. As at 30 September 2020, credit cards forbearance totalled
GBP27m (6,309 customers), an increase from the 30 September 2019
position of GBP24m (5,522 customers). This represents 0.63% of
total credit cards balances (2019: 0.53%). The increase in credit
cards forbearance is driven by additional volumes of payment
arrangements. The level of impairment coverage on forborne loans
has increased to 47.2% from 41.3% at 30 September 2019 reflecting a
more prudent approach to ECL. Payment holidays granted in line with
regulation have not been classified as forbearance.
Business credit performance
30 Sep 30 Sep
2020 2019
---------------------------------------- -------------- --------------
GBP8.7bn
Gross loans and advances (1) GBP7.6bn
Impairment charge GBP183m GBP25m
Cost of risk 212bps 30bps
Provision to customer loan ratio/GBP(2) 391bps/GBP303m 193bps/GBP147m
% Loans in Stage 2 44.2% 30.2%
% Loans in Stage 3 3.2% 3.6%
% Forborne loans 5.92% 6.38%
90+ DPD 0.27% 0.47%
---------------------------------------- -------------- --------------
(1) Inclusive of government backed loan schemes.
(2) Coverage ratio excludes government-backed loan schemes.
Portfolio and impairment (Pages 23, 34-35)
Business lending has increased by GBP1.1bn during the year to
GBP8.7bn as at 30 September 2020 (2019: GBP7.6bn). This includes
lending under government-backed loan schemes, which contributed to
GBP1.2bn of portfolio growth in the year. Further information can
be found on p129.
There has been no significant deterioration in underlying asset
quality measures. The Group entered the pandemic with a defensively
positioned portfolio biased away from sectors expected to
experience disruption such as Hospitality and Retail, towards
sectors expected to be resilient, such as Agriculture and Health
& Social Care.
The impairment provision has increased by GBP156m to GBP303m as
at 30 September due to the expectation of greater pressures on the
portfolio in 2021 from COVID-19 and Brexit. The impairment charge
for the year to 30 September 2020 was GBP183m giving a cost of risk
of 212bps.
The resultant coverage ratio of provisions to customer loans of
391bps increased by 198bps from 2019, reflective of the composition
of the Group's generally sub-investment grade SME portfolio.
Historically selective risk appetite choices have limited exposures
to more sensitive sectors such as Hospitality, Retail, Travel,
Construction and Commercial Real Estate. Even in the absence of
increased default or arrears experience, the prudent economic
forecasts applied caused PDs across the business portfolio to
worsen with the accompanying increase in coverage reflective of the
impact of COVID-19 through increased PDs including further
migrations from 12-month to lifetime loss coverage.
The Group does not hold any level of PMA for business lending as
at 30 September 2020. The policies and frameworks in place to
identify business customers experiencing financial difficulty are
operating effectively, meaning internal rating systems respond
appropriately as levels of customer difficulty heighten. The
overall level of modelled provision for business loans is assessed
as sufficient in the context of the portfolio shape and strength,
and considering the extensive number of sector and segment reviews
undertaken in recent months. Regular customer and portfolio level
analysis is completed to ensure early identification of business
customers likely to experience financial difficulty. This enables
prompt relationship manager engagement with customers and
appropriate early support interventions.
IFRS 9 staging (Pages 34-41)
The application of the revised, more negatively biased, forecast
economic scenarios has resulted in heightened portfolio stage
migration with 44.2% of balances in Stage 2 (2019: 30.2%). This
reflects the Group's prudent assumptions and the early adoption of
the EBA requirements to retain forborne assets in Stage 2 for a
minimum of two years. Business migration to Stage 2 can result from
a range of triggers. Since 30 September 2019, there has been a
notable shift with economic forecasts weighing more heavily and 75%
of balances in Stage 2 now associated with a deterioration in PD as
a result of forward-looking economic forecasts, most notably GDP.
As at 30 September 2019, deterioration was more typically
associated with discrete internal ratings downgrades and only 2% of
Stage 2 migrations were a consequence of forward-looking economic
indicators. Business loans in Stage 3 remain modest and stable at
3.2% (2019: 3.6%).
The PDs for business lending combine both internal ratings
information and forward-looking economic forecasts. These economic
forecasts, which include double-digit GDP falls in 2020 and a
relatively weak recovery, are the material drivers of the PD and
stage migrations across the year. The deteriorations in PD and
staging have not been driven to any material extent by observed
evidence of impairment through either internal downgrades or the
emergence of arrears or defaults. While the proportion of assets
classed as 'Strong' has reduced to 11% (FY19: 32%), assets classed
as 'Good' have increased to 73% (2019: 62%), and over 84% of the
business portfolio still remains 'Good' or better.
Risk Management
Credit risk
Asset quality
Asset quality is notably influenced by the support provided to
customers, including government-backed loan schemes, and the
Group's prudent risk appetite and risk frameworks which seek to
ensure early identification of customers in difficulty. The early
identification and escalation of customers evidencing deteriorating
positions ensures the Group is intervening early and providing
appropriate types of support to changing customer
circumstances.
Arrears measures are stable to improving, with 90+ DPD of 0.27%
as at 30 September 2020 (2019: 0.47%). During the year, the
proportion of business customer accounts classed as categorised
(watch, default and impaired), by value, has increased from 8.13%
to 8.61% of the total business book. The Group has clear strategies
in place to work with each customer and the marginal increase
reflects the lack of significant increase in the proportion of
customers evidencing financial distress.
Payment holidays (Page 28)
23% of eligible customers took advantage of a repayment holiday
and, of those which have matured, 98% have returned to regular
payment by 30 September 2020. Only 1% of business customer
balances, equating to GBP108m, have an active payment holiday in
force at 30 September 2020. Of the initial population granted a
holiday, 2% have sought further support or have fallen into
arrears. The Group will continue to support customers in line with
their needs and revised regulatory guidance.
Forbearance (Page 31)
Business portfolio forbearance has increased from GBP509m (368
customers) at 30 September 2019 to GBP539m (368 customers) at 30
September 2020. Forbearance remains an important metric, reflecting
the volume and value of concessions granted to customers on a
non-commercial basis. Moves in forbearance reflect the proportion
of business customers requiring support on non-standard terms and
evidencing financial difficulty. As a percentage of the business
portfolio, forborne balances have reduced to 5.92% (2019: 6.38%)
while impairment coverage, in line with actions taken on expected
credit losses, has increased to 14.3% (2019: 10.87%). The majority
of forbearance arrangements relate to term extensions allowing
customers a longer term to repay their obligations in full than
initially contracted. Payment holidays granted in line with
regulation have not been classified as forbearance.
Supporting our customers in times of need
During the year, the Group participated in the various UK
Government-backed loan schemes for businesses, in addition to
offering payment holidays to mortgage, personal and business
customers.
Government backed loan schemes
The following loan schemes were introduced by the government in
April and May 2020, with changes made to their operation announced
in September 2020:
Bounce Back Loans (BBLs): loans of between GBP2,000 and
GBP50,000 are available under this scheme with a fixed rate of
lending available for up to ten years, with no repayments due in
the first year. Changes to the scheme included customers applying
to pay interest only for six months (up to a maximum of three
applications) with the additional potential for a six-month payment
holiday for both capital and interest payments (this can only be
requested where the customer has already made six repayments of
principal). The government guarantees 100% of the lending.
Coronavirus Business Interruption Scheme (CBILs): loans of over
GBP50,000 to a maximum of GBP5m are available under this scheme.
They attract a variable rate of lending with no arrangement fees or
interest paid by the borrower in the first 12 months. The
government pays the fees and interest and guarantees 80% of the
lending. The maximum loan term is six years.
Coronavirus Large Business Interruption Scheme (CLBILs): loans
of over GBP50,000, up to a maximum of GBP200m (in aggregate) are
available under this scheme with a variable rate of lending and
terms of between three months and three years. The government
guarantees 80% of the lending.
The Group has the following lending under these schemes as at 30
September 2020:
Drawn Average % of total
No of balance loan size Business
(Unaudited) customers (GBPm) (GBPm) lending
------------ ---------- -------- ---------- ----------
BBLs 28,077 809 0.03 9%
CBILs 907 334 0.37 3%
CLBILs 3 20 6.59 Immaterial
------------ ---------- -------- ---------- ----------
The deadline for applications for loans under the schemes is 31
January 2021.
Payment holidays
The Group continues to actively support customers through
COVID-19, offering payment holidays where appropriate, although the
level of new requests has reduced significantly since the peak in
April 2020. Following the announcement of further national COVID-19
restrictions at the end of October 2020, the Group will continue to
align with all applicable FCA guidance in respect of payment
holidays and anticipates extending their availability to impacted
customers requesting a payment holiday prior to the 31 January 2021
deadline.
Payment holidays
currently in force
Payment holidays at end September Of matured payment
granted to date 2020 holidays
------------- -------------------- --------------------- -----------------------
Total % of Total % of % Further
balances Total balances Total % Resumed treatment/
(Audited) GBPm balances GBPm balances repayment arrears
------------- --------- --------- ---------- --------- ---------- -----------
Mortgages 11,908 20% 2,525 4% 98% 2%
Credit cards 219 5% 31 1% 92% 8%
Personal 103 11% 26 3% 95% 5%
Business 2,072 23% 108 1% 98% 2%
------------- --------- --------- ---------- --------- ---------- -----------
Risk Management
Credit risk
Forbearance
The Group makes every effort to treat customers fairly and
aligns its forbearance practices to that principle. While
forbearance alone is not necessarily an indicator of impaired
status, it is a trigger for a review of the customer's credit
profile and forbearance is only granted when there is a realistic
prospect of the customer repaying all facilities in full. If there
is any concern over future cash flows and the Group incurring a
loss, then forborne loans will also be classified as impaired in
accordance with the Group's impairment policy.
As a consequence of the Group's decision to early adopt the EBA
probationary rules relative to forbearance, exposures classified as
forborne and performing at the date forbearance is granted continue
to be reported as subject to forbearance for a minimum period of
two years from that date (the probation period). Exposures
classified as forborne, which are non-performing when customers
were granted forbearance, cannot exit non-performing status for a
minimum of 12 months from the date forbearance was granted and
cannot exit forbearance status for a further two years from the
date of returning to performing status (three years in total).
Forbearance frameworks are reviewed on a regular basis to ensure
the operational processes remain appropriate and, where required,
system changes are made to enhance forbearance data capture.
The Group has identified a number of situations that in
isolation are not considered to be forbearance:
-- facilities that have been temporarily extended pending review
and where no concession has been granted for reasons relating to
the actual or apparent financial stress of a customer;
-- a reduction in asset quality to a level where actual, or
apparent, financial stress is not evident;
-- where changes are made to the terms of a borrower's interest
structure or repayment arrangement on a commercial basis; and
-- late provision of financial information, in the absence of
other indicators of financial difficulty, is not in all cases
considered a non-commercial breach of non-financial covenants.
Where the Group has made a demand for repayment, the customer's
facilities have been withdrawn or where a debt repayment process
has been initiated, the exposure is classified as forborne if the
debt is subject to any of the mentioned forbearance
concessions.
Customers who requested COVID-19 related support, including
payment holidays, and who were not the subject of any wider SICR
triggers, or who were otherwise assessed as having the ability in
the medium term to be viable and meet risk appetite criteria, were
not considered to have been granted forbearance.
Where the Group has identified customers who require remedial
action to return them within risk appetite over the medium term, or
who were showing signs of financial stress before COVID-19, such
customers are considered to have been granted forbearance with
exposures categorised as Stage 2 and subject to a lifetime ECL
assessment.
Mortgage and Personal forbearance
The Group utilises various forbearance measures for mortgage and
personal customers, specific to the individual customer and their
circumstances. Customers may potentially be subject to more than
one forbearance strategy at any one time where this is considered
to be the most appropriate course of action.
Debt management for mortgage customers in financial
difficulty
To support customers who are encountering financial
difficulties, cases are managed on an individual basis, with the
circumstances of each customer considered separately and the action
taken judged as being affordable and sustainable for the customer.
Operationally, the provision and review of such assistance is
controlled by various methods. These include the application of an
appropriate policy framework, controls around the execution of
policy, regular review of the different treatments to confirm that
they remain appropriate, monitoring of customers' performance,
including the level of payments received, and management visibility
of the nature and extent of assistance provided and the associated
risk.
Help is provided through specialist teams, such as the Financial
Care Team, where tailored repayment programmes can be agreed.
Customers are actively supported and referred to free money advice
agencies when they have multiple credit facilities, including those
at other lenders that require restructuring.
One component of the Group's approach is to contact customers
showing signs of financial difficulty to discuss their
circumstances and offer solutions to prevent their accounts falling
into arrears.
Risk Management
Credit risk
The following table summarises the level of forbearance in
respect of the Group's mortgage and credit card portfolios at each
balance sheet date. All balances subject to forbearance are classed
as either Stage 2 or Stage 3 for ECL purposes.
Impairment allowance
on
Total loans and advances loans and advances
subject to forbearance subject to forbearance
measures measures
---------------------------------- ----------------------------- -------------------------
Gross
Number carrying Impairment
of amount % of total allowance Coverage
As at 30 September 2020 (audited) loans GBPm portfolio GBPm %
---------------------------------- ------ --------- ---------- ------------- ----------
Mortgages
Formal arrangements 1,194 145 0.25 7.2 4.94
Temporary arrangements 792 100 0.17 5.2 5.21
Payment arrangement 1,475 141 0.24 2.8 1.96
Payment holiday 1,454 157 0.26 2.3 1.45
Interest only conversion 379 64 0.11 0.4 0.58
Term extension 163 13 0.02 0.1 0.89
Other 28 3 0.01 - 1.13
Legal 136 13 0.02 1.0 7.87
---------------------------------- ------ --------- ---------- ------------- ----------
Total mortgage forbearance 5,621 636 1.08 19.0 2.98
---------------------------------- ------ --------- ---------- ------------- ----------
Personal - credit cards
Payment arrangement 6,309 27 0.63 12.5 47.23
---------------------------------- ------ --------- ---------- ------------- ----------
Total cards forbearance 6,309 27 0.63 12.5 47.23
---------------------------------- ------ --------- ---------- ------------- ----------
As at 30 September 2019 (audited)
---------------------------------- ----- --- ---- ---- -----
Mortgages
Formal arrangements 1,352 157 0.26 4.4 2.83
Temporary arrangements 913 119 0.20 3.1 2.62
Payment arrangement 1,118 113 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 - credit cards
Payment arrangement 5,522 24 0.53 9.5 41.30
---------------------------------- ----- --- ---- ---- -----
Total cards forbearance 5,522 24 0.53 9.5 41.30
---------------------------------- ----- --- ---- ---- -----
The increase in mortgage forbearance is primarily driven by
payment arrangements, typically where an account is in arrears and
the agreement to adjust payments gives a path to clear the overdue
amounts. Short-term payment holidays have also increased with the
vast majority returning to fully performing status at the end of
the agreed term.
When all other avenues of resolution, including forbearance,
have been explored, the Group will take steps to repossess and sell
underlying collateral. In the year to 30 September 2020, there were
57 repossessions of which 21 were voluntary (12 months to 30
September 2019: 66 including 14 voluntary).
The increase in credit cards forbearance is the result of
payment arrangements being extended to customers where COVID-19
payment holidays were not deemed to be a suitable solution.
Other Personal lending forbearance
The Group currently exercises limited forbearance strategies in
relation to current accounts and personal loans. The Group has
assessed the total loan balances subject to forbearance on other
types of personal lending to be GBP8.4m as at 30 September 2020 (30
: GBP11.5m), representing 0.88% of the personal lending portfolio
(2019: 1.10%).
Impairment provisions on forborne balances totalled GBP3.4m as
at 30 September 2020 (2019: GBP3.6m) providing overall coverage of
40.59% (2019: 31.58%).
Risk Management
Credit risk
Business forbearance
Forbearance is considered to exist for business customers where
one or more concession is granted on a non-commercial basis. The
Group reports business forbearance at a customer level and at a
value which incorporates all facilities and the related impairment
allowance, irrespective of whether each individual facility is
subject to forbearance. Authority to grant forbearance measures for
business customers is held by the Group's Strategic Business
Services unit and is exercised, where appropriate, on the basis of
detailed consideration of the customer's financial position and
prospects.
Where a customer is part of a larger group, forbearance is
exercised and reported across the Group at the individual entity
level. Where modification of the terms and conditions of an
exposure meeting the criteria for classification as forbearance
results in derecognition of loans and advances from the balance
sheet and the recognition of a new exposure, the new exposure shall
be treated as forborne.
The tables below summarise the total number of arrangements in
place and the loan balances and impairment provisions associated
with those arrangements. All balances subject to forbearance are
classed as either Stage 2 or Stage 3 for ECL purposes.
Impairment allowance
on
Total loans and advances loans and advances
subject to forbearance subject to forbearance
measures measures
---------------------------------- --------------------------------- -------------------------
Gross
Number carrying Impairment
of amount % of total allowance Coverage
customers GBPm portfolio GBPm %
---------------------------------- ---------- --------- ---------- ------------- ----------
As at 30 September 2020 (audited)
Term extension 199 211 2.31 27.5 13.05
Deferral of contracted capital
repayments 92 115 1.26 23.1 20.08
Reduction in contracted interest
rate 2 1 0.01 0.1 6.75
Alternative forms of payment 1 - - - 64.36
Debt forgiveness 2 4 0.05 0.2 4.66
Refinancing 15 6 0.07 1.8 29.37
Covenant breach/reset/waiver 57 202 2.22 24.4 12.10
---------------------------------- ---------- --------- ---------- ------------- ----------
Total business forbearance 368 539 5.92 77.1 14.30
---------------------------------- ---------- --------- ---------- ------------- ----------
As at 30 September 2019 (audited)
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
---------------------------------- ---------- --------- ---------- ------------- ----------
The number of business customers granted forbearance as at 30
September 2020 remained at 368, with the associated gross carrying
value increasing by GBP30m (6%). Customers within the forbearance
portfolio have received GBP23m of COVID-19 related support loans:
GBP17m CBIL and GBP6m BBL. In addition, business customers have
been supported with 63 Capital Repayment Holidays (CRH) accounting
for GBP147m of the exposure, with two customers (GBP29m exposure)
being granted a second CRH. There are only seven newly forborne
connections (GBP1.7m exposure) where the impact of COVID-19 is the
primary driver of trading deterioration.
The table incudes a portfolio of financial assets at fair value.
The gross value of fair value loans subject to forbearance as at 30
September 2020 is GBP7m (30 September 2019: GBP8m), representing
0.08% of the total business portfolio (30 September 2019: 0.11%).
The credit risk adjustment on these amounts totalled GBP0.7m (30
September 2019: GBP0.6m), a coverage of 9.77% (30 September 2019:
6.94%).
The contractual amount outstanding on loans and advances that
were written off during the reporting period or still subject to
enforcement activity was GBP4.1m.
Risk Management
Credit risk
Collateral
The Group evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Group upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held
can vary, but may include:
-- specific charges over defined assets of the counterparty;
-- a floating charge over all assets and undertakings of an entity;
-- specific or interlocking guarantees; and
-- loan agreements which include affirmative and negative
covenants and, in some instances, guarantees of counterparty
obligations.
Generally, the Group does not take possession of collateral it
holds as security or call on other credit enhancements that would
result in recognition of an asset on its balance sheet.
It is the Group's policy to dispose of repossessed properties
with the proceeds used to reduce or repay the outstanding balance.
The Group does not occupy repossessed properties for its own
business use.
Mortgage lending by average LTV (audited)
The LTV ratio of mortgage lending, coupled with the relationship
of the debt to customers' income, is integral to the credit quality
of these loans. The table below sets out the indexed LTV analysis
of the Group's mortgage stock:
September
2020 Stage 1 Stage 2 Stage 3 (2) Total
Loans ECL Loans ECL Loans ECL Loans ECL
LTV (1) GBPm % GBPm GBPm % GBPm GBPm % GBPm GBPm % GBPm
----------- ------- ---- ------ ---- ----- ----- ---- ----- ------- ---- -----
Less than
50% 18,495 37% 2 2,705 33% 6 214 41% 4 21,414 37% 12
50% to 75% 23,215 46% 5 3,754 46% 40 192 37% 6 27,161 46% 51
76% to 80% 2,896 6% 1 641 8% 12 33 7% 2 3,570 6% 15
81% to 85% 2,336 5% 2 437 6% 12 21 4% 2 2,794 5% 16
86% to 90% 2,131 4% 2 428 5% 15 19 4% 2 2,578 4% 19
91% to 95% 798 2% 1 170 2% 8 9 2% 1 977 2% 10
96% to 100% 56 0% 0 21 0% 1 6 1% 1 83 0% 2
Greater
than 100% 43 0% 1 10 0% 1 22 4% 4 75 0% 6
49,970 100% 14 8,166 100% 95 516 100% 22 58,652 100% 131
----------- ------- ---- ----- ------ ---- ----- ----- ---- ----- ------- ---- -----
(1) LTV of the mortgage portfolio is defined as mortgage
portfolio weighted by balance. Currently the Clydesdale Bank PLC
portfolio is indexed using the MIAC Acadametrics indices at a given
date, while the Virgin Money Holdings (UK) PLC portfolio is indexed
using the Markit indices. The Group view is a combined summary of
the two portfolios.
(2) Stage 3 includes GBP86m of purchased or originated credit
impaired (POCI) gross loans and advances.
September
2019 Stage 1 Stage 2 Stage 3 (1) Total
Loans ECL Loans ECL Loans ECL Loans ECL
LTV (1) GBPm % GBPm GBPm % GBPm GBPm % GBPm GBPm % GBPm
----------- ------- ---- ------ ---- ----- ----- ---- ----- ------- ---- -----
Less than
50% 21,644 37% 1 682 38% 1 195 42% 3 22,521 37% 5
50% to 75% 26,778 46% 2 816 45% 4 177 38% 8 27,771 46% 14
76% to 80% 3,518 6% 1 117 7% 1 23 5% 2 3,658 6% 4
81% to 85% 2,635 5% 1 75 4% 1 22 5% 3 2,732 5% 5
86% to 90% 2,382 4% 1 73 4% 1 12 3% 2 2,467 4% 4
91% to 95% 1,016 2% 0 29 2% 1 9 2% 2 1,054 2% 3
96% to 100% 79 0% 0 5 0% 0 7 1% 1 91 0% 1
Greater
than 100% 68 0% 0 8 0% 0 21 4% 4 97 0% 4
58,120 100% 6 1,805 100% 9 466 100% 25 60,391 100% 40
----------- ------- ---- ----- ------ ---- ----- ----- ---- ----- ------- ---- -----
(1) Stage 3 includes GBP101m of POCI gross loans and
advances.
Risk Management
Credit risk
The Group also operates a policy of obtaining security against
the underlying loan via the use of guarantees, which can be either
limited or unlimited, making the guarantor liable for only a
portion or all of the debt.
The following table shows the total non-property collateral held
by sector at 30 September 2020 in terms of cash, guarantees (these
guarantors are predominantly other financial institutions who are
considered to be of a high credit quality) and netting. The
exposure amount shown below is the total gross exposure (before any
credit risk mitigation and after credit conversion factors have
been applied where applicable) for arrangements which have some
form of associated collateral held against it and is not the total
exposure for each asset class, as this is disclosed elsewhere in
this section.
Debt Other
Cash Guarantee Netting securities physical Total Exposure
2020 (audited) GBPm GBPm GBPm GBPm collateral Receivables GBPm GBPm
---------------------------- ------ --------- ------- ----------- ----------- ----------- ------ --------
Exposure classes
Corporates 8 926 76 - 487 648 2,145 2,359
---------------------------- ------ --------- ------- ----------- ----------- ----------- ------ --------
Total IRB approach 8 926 76 - 487 648 2,145 2,359
---------------------------- ------ --------- ------- ----------- ----------- ----------- ------ --------
Central governments or
central banks 5,410 - - - - - 5,410 7,420
Regional governments or
local authorities - - 155 - - - 155 155
Public sector entities - - - - - - - -
Financial institutions - - - 295 - - 295 360
Corporates - 170 - - - - 170 170
Secured by mortgages on
residential real estate - - - - - - - -
Secured by mortgages on
commercial real estate - - - - - - - -
Exposures in default - 1 - - - - 1 1
---------------------------- ------ --------- ------- ----------- ----------- ----------- ------ --------
Total standardised approach 5,410 171 155 295 - - 6,031 8,106
---------------------------- ------ --------- ------- ----------- ----------- ----------- ------ --------
Total 5,418 1,097 231 295 487 648 8,176 10,465
---------------------------- ------ --------- ------- ----------- ----------- ----------- ------ --------
2019 (audited)
---------------------------- ------ --------- ------- ----------- ----------- ----------- ------ --------
Corporates 12 - 69 - - - 81 203
---------------------------- ------ --------- ------- ----------- ----------- ----------- ------ --------
Total IRB approach 12 - 69 - - - 81 203
---------------------------- ------ --------- ------- ----------- ----------- ----------- ------ --------
Central governments or
central banks 3,809 - - - - - 3,809 5,695
Regional governments or
local authorities - - 110 - - - 110 110
Institutions - - - 304 - - 304 360
Corporates 4 6 - - - - 10 10
Secured by mortgages on
residential real estate - - - - - - - 2
Secured by mortgages on
commercial real estate - - - - - - - 1
Exposures in default - - - - - - - -
---------------------------- ------ --------- ------- ----------- ----------- ----------- ------ --------
Total standardised approach 3,813 6 110 304 - - 4,233 6,178
---------------------------- ------ --------- ------- ----------- ----------- ----------- ------ --------
Total 3,825 6 179 304 - - 4,314 6,381
---------------------------- ------ --------- ------- ----------- ----------- ----------- ------ --------
The increase in cash collateral held and corresponding exposure
is due to movements within the liquid asset portfolio and similar
transactions outstanding at 30 September 2020 (including TFS
drawings), reflected within central governments or central banks.
The debt securities collateral held continues to be in relation to
a repo where UK Gilts were placed as security.
Lending backed by government guarantees in response to COVID-19
can be seen within the Guarantee column.
Following PRA approval during the year, the Group moved to
recognise Asset Finance and Invoice Finance collateral, being other
physical collateral and receivables respectively, as being eligible
collateral from a credit risk mitigation perspective in relation to
the foundation internal ratings-based (FIRB) approach.
Corporates is the largest sector utilising other risk mitigation
techniques, with all five methods utilised dependent on credit
quality. The extent to which these will be used is dependent on the
specific circumstances of the customer.
Risk Management
Credit risk
Credit quality of loans and advances as at 30 September 2020
(audited)
The following tables highlight the distribution of the Group's
gross loans and advances, ECL and coverage by IFRS 9 stage
allocation.
Gross loans and advances(1) ECL and coverage
Personal
-------------- ------- ------ -------
Business
Mortgages Cards Loans & Overdrafts Combined (2) Total
--------------- -------------- -------------------- -------------- -------------- ---------------
As at
September
2020 GBPm % GBPm % GBPm % GBPm % GBPm % GBPm %
-------------- ------- ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Stage 1 49,970 85.2% 3,893 87.2% 767 70.6% 4,660 84.0% 4,589 52.6% 59,219 81.2%
Stage 2 <
30 DPD 7,976 13.6% 512 11.4% 298 27.4% 810 14.6% 3,845 44.1% 12,631 17.3%
Stage 2 >
30 DPD 190 0.3% 7 0.2% 6 0.6% 13 0.2% 10 0.1% 213 0.3%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Stage 2 -
total 8,166 13.9% 519 11.6% 304 28.0% 823 14.8% 3,855 44.2% 12,844 17.6%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Stage 3 (3) 516 0.9% 52 1.2% 15 1.4% 67 1.2% 279 3.2% 862 1.2%
58,652 100.0% 4,464 100.0% 1,086 100.0% 5,550 100.0% 8,723 100.0% 72,925 100.0%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
ECLs
Stage 1 14 10.7% 48 21.6% 22 27.8% 70 23.3% 52 17.1% 136 18.5%
Stage 2 <
30 DPD 84 64.1% 141 63.5% 44 55.7% 185 61.4% 176 58.1% 445 60.6%
Stage 2 >
30 DPD 11 8.4% 6 2.7% 3 3.8% 9 3.0% - 0.0% 20 2.7%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Stage 2 -
total 95 72.5% 147 66.2% 47 59.5% 194 64.4% 176 58.1% 465 63.3%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Stage 3 (3) 22 16.8% 27 12.2% 10 12.7% 37 12.3% 75 24.8% 134 18.2%
131 100.0% 222 100.0% 79 100.0% 301 100.0% 303 100.0% 735 100.0%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Coverage
Stage 1 0.03% 1.34% 3.22% 1.64% 1.42% 0.24%
Stage 2 <
30 DPD 1.06% 29.73% 16.67% 25.03% 4.60% 3.56%
Stage 2 >
30 DPD 5.98% 76.86% 74.28% 75.83% 5.12% 9.73%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Stage 2 -
total 1.17% 30.40% 17.64% 25.81% 4.61% 3.66%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Stage 3 (3) 4.31% 57.48% 79.43% 62.05% 26.77% 15.74%
0.23% 5.37% 8.24% 5.91% 3.91% 1.03%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
(1) Excludes loans designated at fair value through profit and
loss, balances due from customers on acceptances, accrued interest
and deferred and unamortised fee income.
(2) Business coverage has been adjusted to exclude
government-backed loans.
(3) Stage 3 includes POCI for gross loans and advances of GBP86m
for Mortgages and GBP4m Personal; and ECL of GBPNil for Mortgages
and (GBP2m) for Personal.
Risk Management
Credit risk
Gross loans and advances(1) ECLs and coverage
Personal
-------------- -------
Mortgages Cards Loans & Overdrafts Combined Business Total
--------------- -------------- -------------------- --------------
As at
September
2019 GBPm % GBPm % GBPm % GBPm % GBPm % GBPm %
-------------- ------- ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Stage 1 58,120 96.2% 3,806 89.8% 981 94.2% 4,787 90.7% 5,018 66.2% 67,925 92.7%
Stage 2 <
30 DPD 1,637 2.7% 353 8.3% 39 3.7% 392 7.4% 2,280 30.1% 4,309 5.9%
Stage 2 >
30 DPD 168 0.3% 25 0.6% 7 0.7% 32 0.6% 5 0.1% 205 0.3%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Stage 2 -
total 1,805 3.0% 378 8.9% 46 4.4% 424 8.0% 2,285 30.2% 4,514 6.2%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Stage 3 (2) 466 0.8% 54 1.3% 15 1.4% 69 1.3% 272 3.6% 807 1.1%
60,391 100.0% 4,238 100.0% 1,042 100.0% 5,280 100.0% 7,575 100.0% 73,246 100.0%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
ECLs
Stage 1 6 15.0% 42 29.0% 11 36.7% 53 30.3% 20 13.6% 79 21.8%
Stage 2 <
30 DPD 5 12.5% 65 44.8% 6 20.0% 71 40.6% 72 49.0% 148 40.9%
Stage 2 >
30 DPD 4 10.0% 12 8.3% 4 13.3% 16 9.1% - 0.0% 20 5.5%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Stage 2 -
total 9 22.5% 77 53.1% 10 33.3% 87 49.7% 72 49.0% 168 46.4%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Stage 3 (2) 25 62.5% 26 17.9% 9 30.0% 35 20.0% 55 37.4% 115 31.8%
40 100.0% 145 100.0% 30 100.0% 175 100.0% 147 100.0% 362 100.0%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Coverage
Stage 1 0.01% 1.11% 1.30% 1.11% 0.40% 0.12%
Stage 2 <
30 DPD 0.29% 18.49% 15.55% 18.22% 3.13% 3.41%
Stage 2 >
30 DPD 2.26% 46.91% 67.99% 51.18% 2.27% 9.68%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Stage 2 -
total 0.47% 20.35% 23.16% 20.64% 31.30% 3.69%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
Stage 3 (2) 5.36% 48.15% 67.90% 50.72% 19.99% 14.25%
0.07% 3.42% 3.22% 3.39% 1.93% 0.50%
-------------- ------- ------ ------ ------ --------- --------- ------ ------ ------ ------ ------- ------
(1) Excludes loans designated at fair value through profit and
loss, balances due from customers on acceptances, accrued interest
and deferred and unamortised fee income.
(2) Stage 3 includes POCI for gross loans and advances of
GBP103m for Mortgages and GBP8m Personal; and ECL of (GBP1m) for
Mortgages and (GBP2m) for Personal.
Risk Management
Credit risk
Stage 2 balances
There can be a number of reasons that require a financial asset
to be subject to a Stage 2 lifetime ECL calculation other than
reaching the 30 DPD backstop. The following table highlights the
relevant trigger point leading to a financial asset that is not
>30 DPD being in Stage 2:
Personal
----------------- ------ ------ -------
Mortgages Cards Loans & Overdrafts Combined Business Total
------------ ---------- -------------------- ---------- ------------ -------------
At 30 September
2020 GBPm % GBPm % GBPm % GBPm % GBPm % GBPm %
----------------- ------ ---- ---- --------- --------- ---- ---- ------ ---- ------- ----
PD deterioration 7,085 87% 342 66% 293 96% 635 77% 2,883 75% 10,603 82%
Forbearance 174 2% 14 3% 3 1% 17 2% 353 9% 544 4%
AFD or Watch
List (1) 13 0% - - - - - - 586 15% 599 5%
> 30 DPD 190 2% 7 1% 6 2% 13 2% 10 0% 213 2%
Other (2) 704 9% 156 30% 2 1% 158 19% 23 1% 885 7%
----------------- ------ ---- ---- ---- --------- --------- ---- ---- ------ ---- ------- ----
8,166 100% 519 100% 304 100% 823 100% 3,855 100% 12,844 100%
----------------- ------ ---- ---- ---- --------- --------- ---- ---- ------ ---- ------- ----
ECLs
PD deterioration 65 68% 86 59% 42 89% 128 66% 103 58% 296 64%
Forbearance 3 3% 5 3% 2 5% 7 4% 31 18% 41 9%
AFD or Watch
List (1) - - - - - - - - 37 21% 37 8%
> 30 DPD 11 12% 6 4% 3 6% 9 5% - - 20 4%
Other (2) 16 17% 50 34% - - 50 25% 5 3% 71 15%
----------------- ------ ---- ---- ---- --------- --------- ---- ---- ------ ---- ------- ----
95 100% 147 100% 47 100% 194 100% 176 100% 465 100%
----------------- ------ ---- ---- ---- --------- --------- ---- ---- ------ ---- ------- ----
Personal
----------------- ------ ------ ------
Mortgages Cards Loans & Overdrafts Combined Business Total
------------ ---------- -------------------- ---------- ------------ ------------
At 30 September
2019 GBPm % GBPm % GBPm % GBPm % GBPm % GBPm %
----------------- ------ ---- ---- --------- --------- ---- ---- ------ ---- ------ ----
PD deterioration 809 45% 137 36% 35 76% 172 41% 1,512 66 2,493 55%
Forbearance 214 12% 6 2% 3 7% 9 2% 292 13% 515 11%
AFD or Watch
List (1) 13 1% - - - - - - 446 20% 459 10%
> 30 DPD 168 9% 25 7% 7 15% 32 8% 5 0% 205 5%
Other (2) 601 33% 210 55% 1 2% 211 49% 30 1% 842 19%
----------------- ------ ---- ---- ---- --------- --------- ---- ---- ------ ---- ------ ----
1,805 100% 378 100% 46 100% 424 100% 2,285 100% 4,514 100%
----------------- ------ ---- ---- ---- --------- --------- ---- ---- ------ ---- ------ ----
ECLs
PD deterioration 3 33% 25 32% 5 50% 30 35% 33 46% 66 39%
Forbearance 1 11% 1 1% 1 10% 2 2% 17 24% 20 12%
AFD or Watch
List (1) - - - - - - - - 19 26% 19 11%
> 30 DPD 4 45% 12 16% 4 40% 16 18% - - 20 12%
Other (2) 1 11% 39 51% - - 39 45% 3 4% 43 26%
----------------- ------ ---- ---- ---- --------- --------- ---- ---- ------ ---- ------ ----
9 100% 77 100% 10 100% 87 100% 72 100% 168 100%
----------------- ------ ---- ---- ---- --------- --------- ---- ---- ------ ---- ------ ----
(1) Approaching Financial Difficulty (AFD) and Watch markers are
early warning indicators of customers who may be approaching
financial difficulties. If these indicators are not reversed they
may lead to a requirement for more proactive management by the
Group.
(2) Other includes eCRS (internal rating scale) changes as well
as a number of smaller value drivers.
Risk Management
Credit risk
Credit risk exposure, by internal PD rating, by IFRS 9 stage
allocation (audited)
The distribution of the Group's credit exposures by internal PD
rating is analysed below.
Gross carrying amount
------------------- ------------- --------------------------------
Stage Stage Stage
1 2 3 (1) Total
GBPm GBPm GBPm GBPm
------------------- ------------- ------- ------ ------ -------
As at 30 September
2020
Mortgages PD range
Strong 0 - 0.74 44,038 3,785 - 47,823
Good 0.75 - 2.49 5,246 2,879 - 8,125
Satisfactory 2.50 - 99.99 686 1,502 - 2,188
Default 100 - - 516 516
------------------- ------------- ------- ------ ------ -------
Total 49,970 8,166 516 58,652
------------------- ------------- ------- ------ ------ -------
Personal
Strong 0 - 2.49 4,144 183 - 4,327
Good 2.50 - 9.99 500 478 - 978
Satisfactory 10.00 - 99.99 16 162 - 178
Default 100 - - 67 67
------------------- ------------- ------- ------ ------ -------
Total 4,660 823 67 5,550
------------------- ------------- ------- ------ ------ -------
Business
Strong 0 - 0.74 791 152 - 943
Good 0.75 - 9.99 3,674 2,733 - 6,407
Satisfactory 10.00 - 99.99 124 970 - 1,094
Default 100 - - 279 279
------------------- ------------- ------- ------ ------ -------
Total 4,589 3,855 279 8,723
------------------- ------------- ------- ------ ------ -------
As at 30 September
2019
Mortgages PD range
Strong 0 - 0.74 55,057 833 - 55,890
Good 0.75 - 2.49 2,648 455 - 3,103
Satisfactory 2.50 - 99.99 415 517 - 932
Default 100 - - 466 466
------------------- ------------- ------- ------ ------ -------
Total 58,120 1,805 466 60,391
------------------- ------------- ------- ------ ------ -------
Personal
Strong 0 - 2.49 4,197 50 - 4,247
Good 2.50 - 9.99 553 231 - 784
Satisfactory 10.00 - 99.99 37 143 - 180
Default 100 - - 69 69
------------------- ------------- ------- ------ ------ -------
Total 4,787 424 69 5,280
------------------- ------------- ------- ------ ------ -------
Business
Strong 0 - 0.74 2,225 175 - 2,400
Good 0.75 - 9.99 2,791 1,938 - 4,729
Satisfactory 10.00 - 99.99 2 172 - 174
Default 100 - - 272 272
------------------- ------------- ------- ------ ------ -------
Total 5,018 2,285 272 7,575
------------------- ------------- ------- ------ ------ -------
(1) Stage 3 includes POCI of GBP86m (2019: 103m) for Mortgages
and GBP4m (2019: GBP8m) for Personal.
Risk Management
Credit risk
Reconciliation of movement in gross balances and impairment loss
allowance (audited)
The following tables explain the changes in the loss allowance
and gross carrying value of the portfolios between 30 September
2019 and 30 September 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 year.
Stage 1 Stage 2 Stage 3(1)
------------------------------- --------------- -------------- ------------- -------- -----------
Total
Gross Gross Gross gross Total
loans ecl loans ecl loans ecl loans provisions
September 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Virgin Money UK PLC
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Opening balance at 1 October
2019 67,925 79 4,514 168 807 115 73,246 362
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Transfers from Stage 1
to Stage 2 (14,972) (81) 9,513 436 - - (5,459) 355
Transfers from Stage 2
to Stage 1 5,032 37 (2,813) (190) - - 2,219 (153)
Transfers to Stage 3 (102) (1) (328) (84) 384 129 (46) 44
Transfers from Stage 3 44 - 76 9 (93) (18) 27 (9)
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Changes to model methodology 24 (8) (24) (6) - - - (14)
New assets originated
or purchased 18,380 96 1,349 90 150 15 19,879 201
Repayments and other movements (3,454) 67 2,304 150 40 (49) (1,110) 168
Repaid or derecognised (13,658) (53) (1,747) (108) (267) (63) (15,672) (224)
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Write-offs - - - - (159) (159) (159) (159)
Cash recoveries - - - - - 25 - 25
Individually assessed
impairment charge - - - - - 139 - 139
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Closing balance at 30
September 2020 59,219 136 12,844 465 862 134 72,925 735
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Mortgages
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Opening balance at 1 October
2019 58,120 6 1,805 9 466 25 60,391 40
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Transfers from Stage 1
to Stage 2 (10,390) (10) 4,976 75 - - (5,414) 65
Transfers from Stage 2
to Stage 1 3,525 3 (1,260) (17) - - 2,265 (14)
Transfers to Stage 3 (63) - (69) (6) 86 13 (46) 7
Transfers from Stage 3 38 - 24 3 (34) (6) 28 (3)
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Changes to model methodology - - - - - - - -
New assets originated
or purchased 6,981 1 16 - 3 - 7,000 1
Repayments and other movements (2,018) 15 2,784 32 32 (6) 798 41
Repaid or derecognised (6,223) (1) (110) (1) (34) (4) (6,367) (6)
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Write-offs - - - - (3) (3) (3) (3)
Cash recoveries - - - - - - - -
Individually assessed
impairment charge - - - - - 3 - 3
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Closing balance at 30
September 2020 49,970 14 8,166 95 516 22 58,652 131
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
(1) Stage 3 includes POCI for gross loans and advances of GBP86m
for Mortgages and GBP4m Personal; and ECL of GBPnil for Mortgages
and (GBP2m) for Personal.
Risk Management
Credit risk
Stage 1 Stage 2 Stage 3
------------------------------- -------------- -------------- ------------- ------- -----------
Total
Gross Gross Gross gross Total
loans ECL loans ECL loans ECL loans provisions
September 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Personal
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Opening balance at 1 October
2019 4,787 53 424 87 69 35 5,280 175
Transfers from Stage 1
to Stage 2 (1,326) (47) 1,356 270 - - 30 223
Transfers from Stage 2
to Stage 1 723 29 (768) (151) - - (45) (122)
Transfers to Stage 3 (23) (1) (110) (65) 135 96 2 30
Transfers from Stage 3 2 - 3 2 (6) (5) (1) (3)
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Changes to model methodology 24 (8) (24) (6) - - - (14)
New assets originated
or purchased 1,621 26 5 1 1 - 1,627 27
Repayments and other movements (925) 23 (45) 62 36 (52) (934) 33
Repaid or derecognised (223) (5) (18) (6) (40) (36) (281) (47)
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Write-offs - - - - (128) (128) (128) (128)
Cash recoveries - - - - - 23 - 23
Individually assessed
impairment charge - - - - - 104 - 104
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Closing balance at 30
September 2020 4,660 70 823 194 67 37 5,550 301
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Business
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Opening balance at 1 October
2019 5,018 20 2,285 72 272 55 7,575 147
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Transfers from Stage 1
to Stage 2 (3,256) (24) 3,181 91 - - (75) 67
Transfers from Stage 2
to Stage 1 784 5 (785) (22) - - (1) (17)
Transfers to Stage 3 (16) - (149) (13) 163 20 (2) 7
Transfers from Stage 3 4 - 49 4 (53) (7) - (3)
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Changes to model methodology - - - - - - - -
New assets originated
or purchased 9,778 69 1,328 89 146 15 11,252 173
Repayments and other movements (511) 29 (435) 56 (28) 9 (974) 94
Repaid or derecognised (7,212) (47) (1,619) (101) (193) (23) (9,024) (171)
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Write-offs - - - - (28) (28) (28) (28)
Cash recoveries - - - - - 2 - 2
Individually assessed
impairment charge - - - - - 32 - 32
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Closing balance at 30
September 2020 4,589 52 3,855 176 279 75 8,723 303
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Risk Management
Credit risk
Stage 1 Stage 2 Stage 3(1)
------------------------------- --------------- -------------- ------------- -------- -----------
Total
Gross Gross Gross gross Total
loans ecl loans ecl loans ecl loans provisions
September 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Virgin Money UK PLC
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Opening balance at 1 October
2018 29,456 53 2,897 86 564 85 32,917 224
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Transfers from Stage 1
to Stage 2 (6,552) (60) 6,570 257 - - 18 197
Transfers from Stage 2
to Stage 1 3,619 17 (3,650) (98) - - (31) (81)
Transfers to Stage 3 (153) (2) (496) (82) 650 125 1 41
Transfers from Stage 3 41 - 128 6 (175) (18) (6) (12)
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Changes to model methodology (1,752) (5) (32) (6) - - (1,784) (11)
New assets originated
or purchased 57,236 152 1,004 65 46 7 58,286 224
Repayments and other movements (984) (23) (268) 17 92 (12) (1,160) (18)
Repaid or derecognised (12,986) (53) (1,639) (77) (233) (15) (14,858) (145)
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Write-offs - - - - (137) (199) (137) (199)
Cash recoveries - - - - - 28 - 28
Individually assessed
impairment charge - - - - - 114 - 114
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Closing balance at 30
September 2019 67,925 79 4,514 168 807 115 73,246 362
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Mortgages
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Opening balance at 1 October
2018 23,572 3 689 3 279 23 24,540 29
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Transfers from Stage 1
to Stage 2 (3,851) (4) 3,835 22 - - (16) 18
Transfers from Stage 2
to Stage 1 2,393 1 (2,401) (9) - - (8) (8)
Transfers to Stage 3 (92) (1) (185) (4) 276 11 (1) 6
Transfers from Stage 3 29 - 72 1 (105) (4) (4) (3)
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Changes to model methodology - - - - - - - -
New assets originated
or purchased 44,730 8 3 - 138 - 44,871 8
Repayments and other movements (2,412) - (48) (3) (31) (1) (2,491) (4)
Repaid or derecognised (6,249) (1) (160) (1) (83) (2) (6,492) (4)
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Write-offs - - - - (8) (3) (8) (3)
Cash recoveries - - - - - - - -
Individually assessed
impairment charge - - - - - 1 - 1
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
Closing balance at 30
September 2019 58,120 6 1,805 9 466 25 60,391 40
------------------------------- -------- ----- ------- ----- ------ ----- -------- -----------
(1) Stage 3 includes POCI for gross loans and advances of
GBP103m for Mortgages and GBP8m Personal; and ECL of (GBP1m) for
Mortgages and (GBP2m) for Personal.
Risk Management
Credit risk
Stage 1 Stage 2 Stage 3
------------------------------- -------------- -------------- ------------- ------- -----------
Total
Gross Gross Gross gross Total
loans ecl loans ecl loans ecl loans provisions
September 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Personal
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Opening balance at 1 October
2018 1,143 15 38 12 22 18 1,203 45
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Transfers from Stage 1
to Stage 2 (931) (48) 970 194 - - 39 146
Transfers from Stage 2
to Stage 1 403 12 (422) (70) - - (19) (58)
Transfers to Stage 3 (28) (1) (95) (56) 125 91 2 34
Transfers from Stage 3 3 - 2 1 (7) (6) (2) (5)
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Changes to model methodology 32 (1) (32) (6) - - - (7)
New assets originated
or purchased 4,429 85 2 - 1 1 4,432 86
Repayments and other movements (20) (5) (24) 17 36 (4) (8) 8
Repaid or derecognised (244) (4) (15) (5) (8) (6) (267) (15)
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Write-offs - - - - (100) (165) (100) (165)
Cash recoveries - - - - - 27 - 27
Individually assessed
impairment charge - - - - - 79 - 79
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Closing balance at 30
September 2019 4,787 53 424 87 69 35 5,280 175
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Business
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Opening balance at 1 October
2018 4,741 35 2,170 71 263 44 7,174 150
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Transfers from Stage 1
to Stage 2 (1,770) (8) 1,765 41 - - (5) 33
Transfers from Stage 2
to Stage 1 823 4 (827) (19) - - (4) (15)
Transfers to Stage 3 (33) - (216) (22) 249 23 - 1
Transfers from Stage 3 9 - 54 4 (63) (8) - (4)
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Changes to model methodology (1,784) (4) - - - - (1,784) (4)
New assets originated
or purchased 8,077 59 999 65 44 6 9,120 130
Repayments and other movements 1,448 (18) (196) 3 (50) (7) 1,202 (22)
Repaid or derecognised (6,493) (48) (1,464) (71) (142) (7) (8,099) (126)
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Write-offs - - - - (29) (31) (29) (31)
Cash recoveries - - - - - 1 - 1
Individually assessed
impairment charge - - - - - 34 - 34
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Closing balance at 30
September 2019 5,018 20 2,285 72 272 55 7,575 147
------------------------------- ------- ----- ------- ----- ------ ----- ------- -----------
Transfer from Stage 1 to Stage 2 (non-credit impaired)
A lifetime ECL calculation is required where an asset has been
assessed as experiencing a significant increase in credit risk
(SICR), as determined by the Group's staging criteria. The
non-credit impaired movements are classed as Stage 2.
Transfer from Stage 2 to Stage 1
A 12-month ECL calculation is required where an asset, that had
previously been classed as Stage 2, reverts back to the conditions
observed at the initial credit assessment.
Transfer to Stage 3
A lifetime ECL calculation is required where an asset has been
assessed as experiencing a SICR, as determined by the Group's
staging criteria. The credit impaired movements are classed as
Stage 3.
Transfer from Stage 3
Where an asset, that had previously been classed at Stage 3, has
either (i), reverted back to the conditions observed at the initial
credit assessment where a 12-month ECL should be calculated or (ii)
no longer meets the criteria for Stage 3 but does meet the criteria
for Stage 2, it is transferred to that category.
Changes in model methodology
ECL value changes resulting from a change to an underlying model
methodology.
New 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.
Risk Management
Credit risk
Repaid or derecognised (excluding write-offs)
ECL impact from customer repayment or derecognition of all or
part of an asset, other than that resulting from a write-off.
Write-offs
ECL impact due to the reduction of all, or part, of an asset
balance due to a write-off approved by the Group. ECL release may
appear higher than the asset balance on some occasions as a result
of the initial ECL lifetime being released, in addition to the
individually assessed provision applied for the asset balance
write-off.
Cash recoveries
ECL impact of payments received on assets that had previously
been written off.
Individually assessed impairment charge
The income statement charge where an individually assessed
provision has been recognised or a direct write-off has been
applied to an asset balance and reported separately from the Stage
3 provision.
Scenarios, weightings and macroeconomic assumptions
The Group's ECL allowance as at 30 September 2020 was GBP735m
(30 September 2019: GBP362m).
Macroeconomic assumptions
A range of future macroeconomic conditions is used in the
scenarios over the five-year forecast period, reflecting the best
estimate of future conditions under each scenario. The Group has
identified the following key macroeconomic conditions as the most
significant inputs for IFRS 9 modelling purposes: UK GDP growth,
inflation, house prices, base rates, and unemployment rates. These
are assessed and reviewed on a quarterly basis to ensure
appropriateness and relevance to the ECL calculation. The output of
the models is then supplemented by PMAs when it is considered that
not all the risks identified in a product segment have been
accurately reflected within the models.
The shock to the economy as a result of COVID-19 has been faster
and more severe than any in history. This has put increased
emphasis on the IFRS 9 models and the impact of the forward-looking
multiple macroeconomic scenarios on ECLs. As a result, the Group
has re-assessed the possible IFRS 9 scenarios to select appropriate
scenarios and weightings. The scenario weightings are considered
and debated by an internal review panel and then recommended and
approved for use in the IFRS 9 models by ALCO. The three scenarios
selected, together with the weightings applied, have been updated
to reflect the current economic environment:
Scenario 2020 (%) 2019 (%)
--------- -------- --------
Upside 5 20
Base 50 60
Downside 45 20
--------- -------- --------
The 'Upside' scenario has been reduced to a 5% weighting as it
is considered to be overly optimistic in the current economic
environment and the medium-term outlook. The decrease in the level
of weighting applied to the 'Base' scenario is reflective of the
severity of the impact of COVID-19 on the UK economy and the
subsequent view that a larger share of the weightings should be
focused on the downside scenario.
Upside (5%)
This reflects the unprecedented collapse of GDP (20%
year-on-year, based on Q2 of the calendar year). The resultant
effect is a predicted annual reduction of 10.8% in GDP in 2020.
Public sector borrowing is expected to exceed 14% of GDP in the
fiscal year 2020/21, lifting public debt to c. 110% of GDP in the
near term before falling back to stabilise at c. 97% (the
pre-crisis long run forecast was c. 80%).
Base (50%)
Growth in GDP is limited to an average of just 0.5% per annum
for the next five years, which translates into around 4% lower than
in the upside scenario by the end of the forecast period.
Unemployment peaks at 8.8% and recovers slowly while property
prices, and in particular commercial property prices, suffer sharp
falls and only recover to pre-crisis levels towards the end of the
scenario.
Downside (45%)
Demand shock from lockdown is compounded by financial crisis,
with the slow pace of lifting lockdown restrictions weighing on
sentiment, as investment decisions are delayed. The size of the
deficit leads to the re-introduction of austerity measures, with
output declining by c. 24% peak to trough and unemployment surging
to 12%.
Within each portfolio, the following are the macroeconomic
inputs which are more sensitive and therefore more likely to drive
the move from Stage 1 to Stage 2 under a stress scenario:
Mortgages: Unemployment, House Price Index (HPI) and Base
Rate.
Personal: Unemployment and Inflation.
Business: GDP, Unemployment and Base Rate.
Risk Management
Credit risk
Five-year simple averages and graphical illustrations for the
most sensitive inputs of unemployment, GDP and HPI are:
Unemployment GDP HPI
% % %
--------------------- ------------ ----- -----
at 30 September 2020
Upside 4.4 1.3 1.7
Base 6.5 0.5 (1.6)
Downside 7.4 (0.4) (6.2)
--------------------- ------------ ----- -----
at 30 September 2019
Upside 3.4 2.7 5.8
Base 3.8 1.8 2.9
Downside 5.8 0.2 (4.6)
--------------------- ------------ ----- -----
The full range of the key macroeconomic assumptions is included
in the table on page 45.
The use of estimates, judgements and sensitivity analysis
The following are the main areas where estimates and judgements
are applied to the ECL calculation:
The use of estimates
Asset lifetimes
The calculation of the ECL allowance is dependent on the
expected life of the Group's portfolios. The Group assumes the
remaining contract term as the maximum period to consider credit
losses wherever possible. For the Group's credit card and overdraft
portfolios, behavioural factors such as observed retention rates
and other portfolio level assumptions are taken into consideration
in determining the estimated asset life.
Economic scenarios
The calculation of the Group's impairment provision is sensitive
to changes in the chosen weightings as highlighted above. The
effect on the closing modelled provision of each portfolio as a
result of applying a 100% weighting to each of the selected
scenarios is shown below:
Probability
Weighted
(1) Upside Base Downside
GBPm GBPm GBPm GBPm
------------------------------- ----------- -------- ------ ----------
30 September 2020
Mortgages 46 7 28 76
Personal of which: 190 162 183 204
------------------------------- ----------- -------- ------ ----------
Cards 165 139 158 179
Personal loans and overdrafts 25 23 25 25
------------------------------- ----------- -------- ------ ----------
Business 260 156 214 324
------------------------------- ----------- -------- ------ ----------
Total 496 325 425 604
------------------------------- ----------- -------- ------ ----------
Probability
Weighted Upside Base Downside
GBPm GBPm GBPm GBPm
------------------------------- ------------- -------- ------ ----------
30 September 2019
Mortgages 16 14 14 25
Personal of which 156 150 153 172
------------------------------- ------------- -------- ------ ----------
Cards 131 125 128 146
Personal loans and overdrafts 25 25 25 26
------------------------------- ------------- -------- ------ ----------
Business 94 75 88 134
------------------------------- ------------- -------- ------ ----------
Total 266 239 255 331
------------------------------- ------------- -------- ------ ----------
(1) In addition to the modelled provision shown in the table,
the Group holds GBP186m relative to PMAs (2019: GBP49m) and GBP53m
of individually assessed provision (2019: GBP47m).
Risk Management
Credit risk
One of the criteria for moving an exposure between stages is the
PD which incorporates macroeconomic factors. As a result, the stage
allocation will be different in each scenario and so the
probability-weighted ECL cannot be recalculated using the scenario
ECL provided and the scenario weightings.
Certain asset classes are less sensitive to specific
macroeconomic factors, showing lower relative levels of
sensitivity. To ensure appropriate levels of ECL, the relative lack
of sensitivity is compensated for through the application of post
model adjustments, further detail of which can be found below.
The use of judgement
SICR
Considerable judgement is required in determining the point at
which a SICR has occurred, as this is the point at which a 12-month
ECL is replaced by a lifetime ECL. The Group has developed a series
of triggers that indicate where a SICR has occurred when assessing
exposures for the risk of default occurring at each reporting date
compared to the risk at origination. There is no single factor that
influences this decision, rather a combination of different
criteria that enables the Group to make an assessment based on the
quantitative and qualitative information available. This includes
the impact of forward-looking macroeconomic factors but excludes
the existence of any collateral implications.
Indicators of a SICR include deterioration of the residual
lifetime PD by set thresholds which are unique to each product
portfolio, non-default forbearance programmes, and watch list
status. The Group adopts the backstop position that a SICR will
have taken place when the financial asset reaches 30 DPD. Customers
who requested COVID-19 related support, including payment holidays,
and who were not the subject of any wider SICR triggers or who were
otherwise assessed as having the ability in the medium term to be
viable and meet our risk appetite criteria, were not considered to
have been granted forbearance or to have a SICR.
The Group does not have a set absolute threshold by which the PD
would have to increase by in establishing that a SICR has occurred,
and has established an approach with the required SICR threshold
trigger varying on a portfolio basis according to the origination
PD.
The table below illustrates this with reference to the Group's
business and credit Card portfolios:
Origination
PD SICR Trigger
------------- -------------------- ----------- ------------
Business Low origination PD 0.04% 0.23%
High origination PD 10.09% 13.20%
---------------------------------- ----------- ------------
Credit cards Low origination PD 1.00% 23.86%
High origination PD 11.00% 28.11%
---------------------------------- ----------- ------------
Changes to the overall SICR thresholds can also impact staging,
driving accounts into higher stages with the resultant impact on
the ECL allowance:
2020 (GBPm) 2019 (GBPm)
------------------------------------------------------- ----------- -----------
A 10% movement in the mortgage portfolio from Stage
1 to Stage 2 +18 + 7
A 10% movement in the credit card portfolio from Stage
1 to Stage 2 +56 + 52
A 10% movement in the business portfolio from Stage
1 to Stage 2 +11 +13
A PD stress which increases PDs upwards by 20% for all
portfolios +151 + 54
------------------------------------------------------- ----------- -----------
Definition of default
The PD of a credit exposure is a key input to the measurement of
the ECL allowance. Default occurs when there is evidence that a
customer is experiencing significant financial difficulty which is
likely to affect the ability to repay amounts due. The Group
utilises the 90 DPD backstop for default purposes.
PMAs
The ECL provision is further impacted by judgements in the form
of PMAs, which are judgements that increase the collectively
assessed modelled output where the Group considers that not all of
the known or potential future risks identified in a particular
product segment have been accurately reflected within the
models.
At 30 September 2020, GBP186m of PMAs (2019: GBP49m) are
included within the balance sheet ECL provision of GBP735m (2019:
GBP362m) and categorised as:
2020 2019
Total Total
GBPm GBPm
---------- ----- -----
Mortgages 75 14
Personal 111 19
Business - 16
---------- ----- -----
Total 186 49
---------- ----- -----
PMAs account for 57% of the mortgage ECL provision of GBP131m
(2019: 35% of GBP40m) and 37% of the personal ECL provision of
GBP301m (2019: 7% of GBP175m). The Group does not hold PMAs in
relation to the Business portfolio. PMAs are assigned between
Stages 1 and 2. PMAs are discussed in more detail in the divisional
commentary on pages 25 - 28.
Risk Management
Credit risk
The key macroeconomic factors used in the scenarios and their
weighted averages are(1) :
VMUK
Scenario weighting Economic measure(2) 2020 2021 2022 2023 2024
--------- ---------- ------------------- ------- ------- ------ ------ ------
Upside 5% Base rate 0.2% 0.1% 0.1% 0.2% 0.4%
--------- ----------
Unemployment 5.5% 5.1% 3.9% 3.7% 3.6%
--------- ----------
GDP (10.8%) 10.2% 3.5% 1.9% 1.8%
Inflation 0.7% 1.2% 1.7% 1.8% 1.7%
HPI (4.2%) (1.8%) 6.7% 4.0% 3.8%
--------- ---------- ------------------- ------- ------- ------ ------ ------
Base 50% Base rate 0.2% 0.1% 0.1% 0.2% 0.3%
--------- ----------
Unemployment 6.1% 7.8% 6.3% 6.3% 6.0%
--------- ----------
GDP (14.0%) 7.9% 4.6% 2.1% 1.8%
Inflation (0.6%) (0.2%) 2.0% 2.3% 1.2%
HPI (7.3%) (8.5%) 1.5% 1.9% 4.1%
--------- ---------- ------------------- ------- ------- ------ ------ ------
Downside 45% Base rate 0.2% (0.5%) (0.5%) (0.3%) (0.3%)
--------- ----------
Unemployment 6.7% 10.0% 7.2% 6.8% 6.5%
--------- ----------
GDP (16.9%) 5.0% 5.7% 2.0% 1.9%
Inflation (0.2%) (1.4%) 1.0% 2.4% 0.8%
HPI (11.2%) (15.6%) (6.7%) (2.2%) 4.8%
--------- ---------- ------------------- ------- ------- ------ ------ ------
Weighted
average Base rate 0.2% (0.2%) (0.2%) (0.1%) 0.0%
--------- ----------
Unemployment 6.3% 8.6% 6.6% 6.4% 6.1%
--------- ----------
GDP (15.1%) 6.7% 5.1% 2.1% 1.9%
Inflation (0.4%) (0.7%) 1.5% 2.3% 1.1%
HPI (8.9%) (11.4%) (1.9%) 0.2% 4.4%
--------- ---------- ------------------- ------- ------- ------ ------ ------
(1) Economic assumptions are on a calendar year basis unless
otherwise stated.
(2) The percentages shown for base rate, unemployment and
inflation are averages. Those for GDP and HPI are year on year.
Other credit risks
The Group is exposed to credit risk on its other banking and
Treasury-related activities, which are subject to mitigation and
monitoring. No material ECL provisions are currently held for these
exposures.
Offsetting of financial assets and liabilities
The Group reduces exposure to credit risk through central
clearing for eligible derivatives and daily posting of cash
collateral on such transactions as detailed in note 3.6 to the
financial statements. The amounts offset on the balance sheet, as
shown below, represent derivatives and variation margin collateral
with central clearing houses which meet the criteria for offsetting
under IAS 32. The table excludes financial instruments not subject
to offset and that are only subject to collateral arrangements
(e.g. loans and advances).
The Group enters into derivatives with various counterparties
which are governed by industry-standard master netting agreements.
The Group holds and provides collateral in respect of derivatives
transactions covered by these agreements. The right to offset
balances under these master netting agreements only arises in the
event of non-payment or default and, as a result, these
arrangements do not qualify for offsetting under IAS 32.
Risk Management
Credit risk
The net amounts presented in the table are not intended to
represent the Group's exposure to credit risk, as the Group will
use a wide range of strategies to mitigate credit risk in addition
to netting and collateral.
Net amounts not
offset
on balance sheet
------------------------------------ -------- -------- ----------- ------------------------ ----------
Gross
amounts Net amounts Subject
offset presented to Cash
on on master collateral
Gross balance balance netting pledged/
amounts sheet sheet(1) agreements received Net amount
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ -------- -------- ----------- ----------- ----------- ----------
2020 (audited)
Assets
Derivative financial instruments(2) 423 (105) 318 (127) (12) 179
Liabilities
Derivative financial instruments(2) 1,063 (813) 250 (127) (83) 40
Securities sold under
repurchase agreement - - - - - -
------------------------------------ -------- -------- ----------- ----------- ----------- ----------
2019 (audited)
Assets
Derivative financial instruments(2) 478 (112) 366 (70) (8) 288
Liabilities
Derivative financial instruments(2) 739 (466) 273 (70) (190) 13
Securities sold under
repurchase agreement 1,554 - 1,554 (1,554) - -
------------------------------------ -------- -------- ----------- ----------- ----------- ----------
(1) Cash collateral amounts are limited to the net balance sheet
exposure in order to exclude any over collateralisation. In
addition to cash collateral, the Group holds securities collateral
in respect of derivative transactions subject to master netting
agreements of GBP522m (2019: GBP57m), which is not recognised on
the balance sheet.
(2) Derivative financial instruments comprise both trading and
hedging derivative assets and liabilities.
Risk Management
Financial risk
Strong foundations supporting resilience and growth
The financial risk framework underpins the Group's robust
balance sheet, ensuring strategy is resilient and responsive to
external pressures, including the impact of COVID-19 and changing
regulatory obligations.
Financial risk covers several categories of risk which impact
the manner in which the Group can support its customers in a safe
and sound manner. They include capital risk, funding risk,
liquidity risk, market risk, and pension risk. During the year,
model risk was removed as a sub-category of financial risk and
promoted to principal risk status. Further information can be found
on page 169 in the Group's Annual Report & Accounts.
Risk appetite
The primary objective for the management of financial risks is
to control the risk profile within approved risk limits, to
maintain the confidence of the Group's customers and other
stakeholders. Financial risks are also managed to protect current
and future earnings from the impact of market volatility. The Group
applies a prudent approach to financial risks in order to safeguard
the ongoing strength and resilience of the balance sheet. These
activities are all undertaken in a manner consistent with the
Group's obligations under ring-fencing legislation and prudential
rules.
Financial risk appetite is approved by the Board, with authority
delegated to ALCO for subsequent implementation and monitoring. The
Board has established a range of capital risk appetite measures
including CET1, leverage and minimum holdings of capital. Measures
for funding and liquidity risks consider the structure of the
balance sheet, the Group's overall funding profile and compliance
with the Overall Liquidity Adequacy Rule (OLAR). Board-approved
risk appetite covers both regulatory and internal liquidity
requirements and the need to maintain access to liquidity resources
sufficient to accommodate outflows of funds in a range of stress
scenarios over a one-month and three-month period.
The Group's participation in wholesale markets, along with its
use of financial instruments, is to fund its banking activities and
manage the liquidity and interest rate risks arising from these
activities. The Group establishes an appetite for these risks based
on an overriding principle that the Group will not engage in
proprietary risk taking.
The Group's pension risk appetite is a component of the
Group-wide RAS framework for the management of balance sheet risks
and is considered in the context of potential capital impacts as a
result of volatility in the Scheme's valuations.
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.
Exposures
Capital risk exposures arise when the Group has insufficient
capital resources to support its business activities or to meet
regulatory capital requirements under normal operating conditions
or stressed scenarios.
Measurement
The Group manages capital in accordance with prudential rules
issued by the PRA and the FCA, which are implemented through the
CRD IV CRR regulatory framework. Pillar 1 capital requirements for
the year ended 30 September 2020 are calculated in respect of
credit risk, operational risk, market risk, counterparty credit
risk and credit valuation adjustments. The capital requirements for
retail mortgages are calculated using an advanced internal ratings
based (AIRB) approach while the business portfolios use a
foundation internal ratings based (FIRB) approach. In March 2020,
the Group received approval to move the specialised lending
portfolio from the standardised approach to an IRB slotting basis.
All other requirements are calculated using the standardised
approach.
The Group obtained IRB accreditation for certain portfolios in
October 2018. The PRA has since released a final policy statement
outlining its approach to implementing definition of default per
EBA guidelines. Further to this, there are recommended changes to
both PD and LGD model components relating directly to the
calculation of risk-weighted capital requirements. In July 2020,
the PRA announced their timeline to evaluate the approach of UK
banks to the change in the definition of default calculation.
Implementation for residential mortgage portfolios is expected to
be in 2021 and by 1 January 2022 for all other exposure classes,
subject to PRA approval.
A rigorous approach is taken to assessing risks that are not
adequately covered by Pillar 1, including interest rate risk and
pension risk. The Group also undertakes analysis of a range of
stress scenarios to test the impact on capital arising from severe
yet plausible scenarios. These approaches to capital are thoroughly
documented in the Group's ICAAP which is subject to review,
challenge and approval by the Board.
The Group IRB framework looks at the customer and business PD
along with loss severity (EAD and LGD). The outputs are used in the
calculation of RWA, EL and IFRS 9 ECL. The IRB parameters and
rating assessments are actively embedded in the following
day-to-day processes:
-- Credit approval - IRB models and parameters are used to
assess the customer risk and IRB outputs are used to inform cut-off
models that drive the lending decisions;
-- Pricing - IRB outputs and estimates are used in the
assessment of new products and portfolio pricing reviews;
-- Risk appetite - IRB parameters are included in the assessment
of models and are analysed to inform the Group's risk capacity and
appetite; and
-- Asset quality - IRB parameters are monitored to understand
the product and segment performance of the Group's portfolios.
Regulatory capital developments
The regulatory landscape for capital is subject to a number of
changes which leads to uncertainty on eventual outcomes.
Reconciling capital requirements and macroprudential buffers
On 6 July 2020, the PRA published Policy Statement 15/20, which
updates the Pillar 2A capital framework for the additional
resilience associated with higher macroprudential buffer
requirements in a standard risk environment. The PRA will make
changes to Pillar 2A, where applicable, on or before 16 December
2020.
Risk Management
Financial risk
Capital Requirements Directive V (CRD V) and Capital
Requirements Regulation II (CRR II)
On 16 July 2020, Her Majesty's Treasury (HMT) issued a
consultation on aspects of CRD V that must be implemented before
the end of the transition period for the UK leaving the EU. Items
being consulted on include macro-prudential tools (O-SII buffer,
Systemic Risk Buffer), holding companies and equal pay framework
and enforcement. On 15 October 2020, HMT published a summary of
responses to the consultation and laid draft legislation in
Parliament.
On 31 July 2020, the PRA issued CP12/20 'CRD V' which set out
proposed changes to the PRA's rules, supervisory statements and
statements of policy to meet the objectives of CRD V. This
consultation was focused on Pillar 2, remuneration, intermediate
parent undertakings, governance, and third-country branch
reporting.
On 20 October 2020, the PRA issued CP17/20 'CRD V: Further
implementation'. This consultation is focused on: the approval and
supervision of holding companies; measures to enhance supervisory
requirements for interest rate risk in the banking book (IRRBB);
revisions to the capital buffers framework; amendments to the
definition of the maximum distributable amount that constrains a
firm's distributions when it uses its capital buffers; and
clarifying the quality of capital required to meet Pillar 2. It
also covers CRR measures in respect of the process through which
variable capital requirements may be applied to firms' real estate
exposures, and the methods that may be used for prudential
consolidation.
Based on the CRD V and CRR II requirements published in the EU
Official Journal and the subsequent HMT/PRA releases, the Group
does not anticipate a material impact on capital ratios.
Basel III revisions
The Basel Committee published its final reforms to the Basel III
framework in December 2017. The amendments include changes to the
standardised approaches to credit and operational risks and the
introduction of a new RWA output floor. The reforms are subject to
a transition period from 2023 to 2028.
IRB approach to UK mortgage risk weights
In September 2020, the PRA issued Consultation Paper 14/20
'Internal Ratings Based UK mortgage risk weights: Managing
deficiencies in model risk capture'. The proposals help address the
PRA's view of prudential risks from "inappropriately low" IRB UK
mortgage risk weights with the aim of:
-- reducing the difference in standardised approach and IRB
mortgage risk weights for current UK mortgages;
-- placing a limit on future divergence; and
-- reducing the variability of mortgage risk weights between
those firms on the IRB approach for given levels of mortgage
LTVs.
Key proposals from this are the introduction of the following
floors:
-- an individual mortgage risk weight of at least 7%; and
-- an exposure-weighted average risk weight of at least 10% for
an IRB UK mortgage portfolio as a whole.
Following consultation, the PRA's final policy is expected to
take effect from 1 January 2022.
COVID-19 regulatory capital developments
There have been a number of regulatory capital developments in
the UK and Europe in response to COVID-19. Key items relevant to
the Group are set out below.
Government backed loan schemes
During the year, the Group participated in the various
government backed loan schemes for businesses, in addition to
offering payment holidays to both business and retail customers.
Impacts to the Group's financial risk profile are discussed in this
section and further details on loan schemes are provided in the
credit risk section.
Revised timelines
In order to provide operational capacity for banks to respond to
the immediate financial stability priorities resulting from the
impact of COVID-19, both the PRA and Basel communicated revised
timelines across key regulatory initiatives. The implementation of
the Basel III revisions has been delayed by one year to 1 January
2023, and includes revisions to: the standardised approach to
credit risk; IRB approach; operational risk framework, market risk
framework; Pillar 3 disclosures and the introduction of output
floors.
In addition, the PRA advised that the proposals in Consultation
Paper 21/19 'Credit risk: PD and LGD estimation' will be delayed by
one year to 1 January 2022 and the hybrid IRB models will also be
delayed until the same date.
On 26 March 2020, the PRA wrote to CEOs of UK banks setting out
guidance in respect of:
-- consistent and robust IFRS 9 accounting and the regulatory definition of default;
-- the treatment of borrowers who breach covenants due to COVID-19; and
-- the regulatory capital treatment of IFRS 9.
The PRA has subsequently provided a number of updates to banks
in this regard as the COVID-19 situation evolves.
CRR 'Quick Fix' package
On 24 June 2020, the European Parliament adopted regulation to
facilitate lending to households and businesses in the EU in light
of COVID-19. This package, known as the 'CRR Quick Fix', came into
force on 27 June 2020 and made a number of beneficial amendments to
the CRR that apply to the Group, including changes to IFRS 9
transitional arrangements and SME supporting factors.
On 14 October 2020, the EBA published its final draft Regulatory
Technical Standards (RTS) specifying the prudential treatment of
software assets. The RTS replaces the current upfront full
deduction with a simple approach based on a prudential amortisation
of software assets calibrated over a maximum period of three years.
The RTS will become effective on the day following its publication
in the Official Journal of the European Union.
Risk Management
Financial risk
Mitigation
The Group's capital risk policy standard provides the framework
for the management of capital within the Group. The objectives of
the policy standard are to efficiently manage the capital base to
optimise shareholder returns while maintaining robust capital
adequacy, meeting regulatory requirements, managing the rating
agencies' assessment of the Group, and ensuring that excessive
leverage is not taken.
The Group is able to accumulate additional capital through
retention of profit over time, which may be increased by: income
growth and cost cutting; raising new equity via, for example, a
rights issue; reducing or cancelling distributions on capital
instruments; and raising AT1 and Tier 2 capital. The availability
and cost of additional capital is dependent upon market conditions
and perceptions at the time. The Group is also able to manage the
demands for capital through management actions including adjusting
lending strategy.
Capital optimisation remains a key strategic priority of the
Group. Work is progressing to ensure that the approach to models
and IRB portfolios supports the overall strategy and delivers
robust outcomes for the management of risks.
Monitoring
The capital plan is approved by the Board annually, and ALCO
monitors the actual and forecast position monthly. This ensures
that performance trends are reviewed and that there is transparency
of the impact on capital ratios, risk appetite and the future
outlook.
Capital position
The Group's capital position as at 30 September 2020 is
summarised below:
2020 2019
Regulatory capital (unaudited) (1) GBPm GBPm
--------------------------------------------------- ------- -------
Statutory total equity 4,932 5,021
Cet1 capital: regulatory adjustments (2)
AT1 capital instruments (915) (915)
Defined benefit pension fund assets (470) (257)
Prudent valuation adjustment (6) (5)
Intangible assets (477) (501)
Goodwill (11) (11)
Deferred tax asset relying on future profitability (151) (146)
Cash flow hedge reserve 80 26
Excess expected losses - (88)
AT1 coupon accrual (21) (20)
IFRS 9 transitional adjustments 310 100
--------------------------------------------------- ------- -------
Total regulatory adjustments to CET1 (1,661) (1,817)
--------------------------------------------------- ------- -------
Total CET1 capital 3,271 3,204
--------------------------------------------------- ------- -------
AT1 capital
AT1 capital instruments 915 915
--------------------------------------------------- ------- -------
Total AT1 capital 915 915
--------------------------------------------------- ------- -------
Total Tier 1 capital 4,186 4,119
--------------------------------------------------- ------- -------
Tier 2 capital
Subordinated debt 749 721
--------------------------------------------------- ------- -------
Total Tier 2 capital 749 721
--------------------------------------------------- ------- -------
Total regulatory capital 4,935 4,840
--------------------------------------------------- ------- -------
(1) This table shows the capital position on a CRD IV 'fully
loaded' basis and transitional IFRS 9 basis.
(2) A number of regulatory adjustments to CET1 capital are
required under CRD IV regulatory capital rules.
Risk Management
Financial risk
CRD IV CRD IV
2020 2019
Regulatory capital flow of funds (unaudited) (1) 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) (91) (210)
Acquisition of Virgin Money Holdings (UK) PLC - 1,567
Prudent valuation adjustment (1) (2)
Intangible assets 24 (89)
Goodwill - (11)
Deferred tax asset relying on future profitability (5) (47)
Defined benefit pension fund assets (213) (119)
Cash flow hedge reserve 54 (13)
Excess expected losses 88 (88)
IFRS 9 transitional relief 210 100
-------------------------------------------------------- ------ ------
Total CET1 capital at 30 September 3,271 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 at 30 September 915 915
-------------------------------------------------------- ------ ------
Total Tier 1 capital at 30 September 4,186 4,119
-------------------------------------------------------- ------ ------
Tier 2 capital
Tier 2 capital at 1 October 721 626
Credit risk adjustments(3) - (152)
Capital instruments issued: subordinated debt 472 247
Capital instruments purchased: subordinated debt (444) -
-------------------------------------------------------- ------ ------
Tier 2 capital at 30 September 749 721
-------------------------------------------------------- ------ ------
Total capital at 30 September 4,935 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.
Risk Management
Financial risk
The Group's CET1 capital increased by GBP67m in the year,
primarily driven by regulatory adjustments for expected losses
(ELs) and transitional relief of GBP298m, offset by the loss for
the year of GBP141m and AT1 distributions of GBP79m.
During the year, there were also increases in Tier 2 capital.
The Group issued an additional GBP475m of Tier 2 capital in
September 2020 in the form of Fixed Rate Reset Callable Tier 2
Notes due 2030. In addition, during the year the Group purchased
GBP445m of Fixed Reset Callable Subordinated Tier 2 Notes due 2026.
The balances do not agree directly to the regulatory capital flow
of funds statement above due to differences between the accounting
and regulatory carrying values.
2020 2019
Minimum Pillar 1 capital requirements (unaudited) GBPm GBPm
-------------------------------------------------- ----- -----
Credit risk 1,720 1,685
Operational risk 205 209
Counterparty credit risk 14 15
Credit valuation adjustment 14 15
-------------------------------------------------- ----- -----
Total Pillar 1 regulatory capital requirements 1,953 1,924
-------------------------------------------------- ----- -----
RWA movements (unaudited)
12 months to 30 September 2020 12 months to 30 September 2019(1)
-------------------- --------------------------------------- -------------------------------------------
IRB STD Other Capital IRB STD Other Capital
RWA RWA RWA Total required RWA RWA RWA Total required
RWA flow 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 - 18,104 1,998 20,102 1,608
Asset size (48) 187 - 139 11 183 531 10 724 58
Asset quality 464 (65) - 399 33 484 (61) - 423 34
Model updates(2) 149 - - 149 12 (396) - - (396) (32)
Methodology
and policy (287) (48) - (335) (27) 250 - - 250 20
Acquisitions
and disposals - - - - - 4,330 2,870 962 8,162 654
IRB accreditation 457 (473) - (16) (1) 10,247 (15,592) - (5,345) (428)
Other(3) 7 88 (78) 17 1 6 101 19 126 10
-------------------- ------ ----- ----- ------ --------- ------ -------- ----- ------- ---------
RWA at 30 September 15,846 5,642 2,911 24,399 1,953 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.
(3) 'Other' includes operational risk, CVA and counterparty
credit risk.
Methodology and policy movements have been driven primarily by
SME Supporting Factor changes, which were implemented by the CRR
Quick Fix package and took effect from 27 June 2020, resulting in a
GBP695m reduction in RWA. The other material change is 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 due to increased
risk sensitivity and improved downturn estimation.
Of the remaining reduction of GBP151m, GBP94m relates to the
recognition of eligible collateral in relation to the asset finance
and invoice finance portfolios, following approval by the PRA. In
addition, there was a GBP68m reduction due to a change in the
credit conversion factor applied to personal current accounts and
business credit cards.
IRB accreditation movements were driven by PRA approval received
in March 2020 to move the specialised lending portfolio from the
standardised approach to IRB slotting. This was first reported in
June 2020.
Risk Management
Financial risk
Pillar 1 RWA and capital requirements by business line
(unaudited)
At 30 September 2020 At 30 September 2019
----------------------------------- --------------------------- ---------------------------
Capital Capital
Capital requirements for required RWA Exposure required RWA Exposure
calculating RWA GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- --------- ------ -------- --------- ------ --------
Corporates 509 6,362 9,468 501 6,258 8,587
Retail 759 9,484 62,683 708 8,846 64,067
----------------------------------- --------- ------ -------- --------- ------ --------
Total IRB approach 1,268 15,846 72,151 1,209 15,104 72,654
----------------------------------- --------- ------ -------- --------- ------ --------
Central governments or
central banks - - 12,264 1 9 11,663
Regional governments or
local authorities 1 13 219 1 13 175
Public sector entities - 5 409 - 5 335
Multilateral development
banks - - 1,268 - - 1,034
Financial institutions 15 186 898 16 195 948
Corporates 17 210 233 28 347 376
Retail 327 4,090 5,453 319 3,993 5,324
Secured by mortgages on
immovable property 12 144 433 40 498 875
Exposures in default 5 62 58 5 59 55
Collective investments
undertakings - - - - 1 1
Equity exposures 1 14 13 1 11 9
Items associated with particularly
high risk - - - 1 11 7
Covered bonds 12 144 1,442 11 141 1,415
Other items 62 774 746 53 670 754
----------------------------------- --------- ------ -------- --------- ------ --------
Total standardised approach 452 5,642 23,436 476 5,953 22,971
----------------------------------- --------- ------ -------- --------- ------ --------
Total credit risk 1,720 21,488 95,587 1,685 21,057 95,625
----------------------------------- --------- ------ -------- --------- ------ --------
Operational risk 205 2,557 - 209 2,606
Counterparty credit risk 14 179 - 15 191
Credit valuation adjustment 14 175 - 15 192
----------------------------------- --------- ------ -------- --------- ------ --------
Total Pillar 1 regulatory
capital requirements 1,953 24,399 - 1,924 24,046
----------------------------------- --------- ------ -------- --------- ------ --------
Risk Management
Financial risk
The exposure amounts disclosed in the Pillar 1 RWA and capital
requirements by business line table are post-credit conversion
factors and pre-credit mitigation.
Additional breakdown analysis of the IRB portfolios can be seen
within the 'EU CR6 - IRB Approach - Credit risk by exposure class
and PD range' table in the Group's Pillar 3 disclosures.
2020 2019
Capital position and CET1 (unaudited) GBPm GBPm
-------------------------------------- ------ ------
RWA (1)
Retail mortgages 9,484 8,846
Business lending 6,716 7,124
Other retail lending 4,151 4,042
Other lending 343 481
Other(2) 794 564
-------------------------------------- ------ ------
Total credit risk 21,488 21,057
-------------------------------------- ------ ------
Operational risk 2,557 2,606
Counterparty credit risk 179 191
Credit valuation adjustment 175 192
-------------------------------------- ------ ------
Total RWA 24,399 24,046
-------------------------------------- ------ ------
(1) RWA are calculated under the AIRB approach for the mortgage
portfolio and the FIRB approach for the business portfolio. In
March 2020, the Group received approval to move the specialised
lending portfolio from a standardised approach to IRB slotting,
with this change first being reported in June 2020. All other
portfolios are calculated under the standardised approach, via
either sequential IRB implementation or Permanent Partial Use.
(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.
IFRS 9 transitional arrangements (unaudited)
This table shows a comparison of capital resources, requirements
and ratios with and without the application of transitional
arrangements for IFRS 9.
30 September 2020
(GBPm)
--------------------------------------- ----------------------
IFRS 9
IFRS 9 Fully
Transitional loaded
Available capital (amounts) (1) basis basis
--------------------------------------- ------------- -------
CET1 capital 3,271 2,961
Tier 1 capital 4,186 3,876
Total capital 4,935 4,720
RWA (amounts)
Total RWA 24,399 24,246
--------------------------------------- ------------- -------
Capital ratios
CET1 (as a percentage of RWA) 13.4% 12.2%
Tier 1 (as a percentage of RWA) 17.2% 16.0%
Total capital (as a percentage of RWA) 20.2% 19.5%
--------------------------------------- ------------- -------
Leverage ratio
Leverage ratio total exposure measure 86,490 86,181
Leverage ratio 4.8% 4.5%
--------------------------------------- ------------- -------
(1) The table shows the capital position on a CRD IV 'fully
loaded' basis.
The adoption of IFRS 9 by the Group on 1 October 2018 resulted
in an increase in credit impairment losses, due to the move from an
incurred loss to an ECL methodology. The CRR includes transitional
arrangements, which allow for the regulatory capital impact of
these higher losses to be phased in over a five year period from
adoption. The table above presents the Group's key capital metrics,
as reported (i.e. including transitional relief), and on a fully
loaded basis (with no transitional relief).
The CRR Quick Fix amendments package, which applies from 27 June
2020, introduced changes to provide additional relief from the
economic impacts of COVID-19. Under this package, relevant
provisions raised from 1 January 2020 through to 2021 have a CET1
add-back percentage of 100%, reducing to 75% in 2022, 50% in 2023
and 25% in 2024.
Risk Management
Financial risk
Capital requirements
The Group measures the amount of capital it is required to hold
by applying CRD IV as implemented in the UK by the PRA 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.
As at 30 September
2020
---------------------------------- --------------------
Total
Minimum requirements (unaudited) CET1 capital
---------------------------------- ------ ------------
Pillar 1(1) 4.5% 8.0%
Pillar 2A(2) 2.5% 4.4%
---------------------------------- ------ ------------
Total capital requirement 7.0% 12.4%
---------------------------------- ------ ------------
Capital conservation buffer 2.5% 2.5%
UK countercyclical capital buffer 0.0% 0.0%
---------------------------------- ------ ------------
Total (excluding PRA buffer) (3) 9.5% 14.9%
---------------------------------- ------ ------------
(1) The minimum amount of total capital under Pillar 1 of the
regulatory framework is determined as 8% of RWA, of which at least
4.5% of RWA are required to be covered by CET1 capital.
(2) On 7 May 2020, the PRA announced that Pillar 2A capital
requirements for banks would be converted from an RWA percentage to
a fixed amount. This change was made on the basis that the PRA does
not believe that RWA are a good approximation for the evolution of
the risks captured in Pillar 2A in a stress.
(3) The Group may be subject to a PRA buffer as set by the PRA
but is not permitted to disclose the level of any buffer. A PRA
buffer can consist of two components:
- a risk management and governance buffer that is set as a
scalar of the Pillar 1 and Pillar 2A requirements; and
- a buffer relating to the results of the BoE stress tests.
The Group continues to maintain a significant buffer of 3.9%
(equivalent to GBP950m) over its CRD IV minimum CET1 requirement of
9.5%.
The Group's total capital Pillar 2A requirement has reduced from
5.3% at September 2019 to 4.4% at September 2020 following
revisions made by the PRA during the year.
The regulatory capital buffer framework is intended to ensure
firms maintain a sufficient amount of capital above their
regulatory minimum in order to withstand periods of stress. The UK
has implemented the provisions on capital buffers outlined in the
CRD to create combined capital buffers including a Capital
Conservation Buffer (CCB), a Countercyclical Capital Buffer (CCyB),
a Global Systemically Important Institution (G-SII) Buffer, and a
Systemic Risk Buffer (SRB) for ring-fenced banks. The Group's
capital planning process considers the impact of all relevant
capital buffers.
The UK CCyB is dependent upon the BoE's view of credit
conditions in the economy and may be set between 0% and 2.5%. On 11
March 2020, as part of a package of measures to support the economy
from the impact of COVID-19, the Financial Policy Committee (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.
Currently, the Group does not meet the criteria for designation
as a systemically important institution, or the threshold for
systemic risk. Therefore, the Group is not subject to either a
G-SII buffer of SRB.
MREL
An analysis of the Group's current MREL position is provided
below:
As at
------------------------------------------------------ --------------
30 Sep 30 Sep
2020 2019
------------------------------------------------------ ------ ------
Total capital resources(1) 4,935 4,840
Eligible senior unsecured securities issued by Virgin
Money UK PLC(2) 2,002 1,550
------------------------------------------------------ ------ ------
Total MREL resources 6,937 6,390
------------------------------------------------------ ------ ------
Risk-weighted assets 24,399 24,046
------------------------------------------------------ ------ ------
MREL Ratio 28.4% 26.6%
------------------------------------------------------ ------ ------
(1) This table shows the capital position on a CRD IV 'fully
loaded' basis and transitional IFRS 9 basis.
(2) Excludes instruments with less than one year to
maturity.
In June 2018, the BoE published its updated approach to setting
a MREL. MREL is subject to phased implementation and will be fully
implemented from 1 January 2022, at which time the Group's
indicative MREL is expected to be two times the sum of its Pillar 1
and Pillar 2A capital requirements, subject to final regulatory
guidance. During the transitional period from 1 January 2020 until
31 December 2021, the Group is subject to an interim MREL of 18% of
RWAs.
During 2020, the Group issued GBP0.9bn of debt that contributes
to its MREL (GBP450m senior unsecured term funding and GBP475m
subordinated debt). Combined with previous issuances made over the
last few years, the Group's MREL ratio of 28.4% comfortably exceeds
its interim MREL and is in line with its expected end-state
MREL.
This means future MREL issuance is focused on building a prudent
management buffer over the expected end-state MREL.
Risk Management
Financial risk
Dividend
The Board has recommended not to pay a final dividend for the
financial year ended 30 September 2020.
Leverage
2020 2019
Leverage ratio (unaudited) GBPm GBPm
------------------------------------------------- ------- ------
Total Tier 1 capital for the leverage ratio
Total CET1 capital 3,271 3,204
AT1 capital 915 915
------------------------------------------------- ------- ------
Total Tier 1 4,186 4,119
------------------------------------------------- ------- ------
Exposures for the leverage ratio
Total assets 90,259 90,999
Adjustment for off-balance sheet items 2,892 2,728
Adjustment for derivative financial instruments 81 (35)
Adjustment for securities financing transactions 2,072 1,934
Adjustment for qualifying central bank claims (8,088) -
Other adjustments (726) (882)
------------------------------------------------- ------- ------
Leverage ratio exposure 86,490 94,744
------------------------------------------------- ------- ------
CRD IV leverage ratio (1) 4.8% 4.3%
------------------------------------------------- ------- ------
UK leverage ratio (2) 4.9% 4.9%
------------------------------------------------- ------- ------
Average UK leverage ratio exposure 85,713 n/a
------------------------------------------------- ------- ------
Average UK leverage ratio (3) 4.6% n/a
------------------------------------------------- ------- ------
(1) IFRS 9 transitional capital arrangements have been applied
to the leverage ratio calculation.
(2) The Group's leverage ratio on a modified basis, excluding
qualifying central bank claims and loans under the UK BBLS from the
exposure measure.
(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.
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 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
in the Group's Annual Report & Accounts for the first time.
The leverage ratio is monitored against a Board-approved RAS,
with responsibility for managing the ratio delegated to 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.
On 4 May 2020, the PRA published a modification by consent for
banks subject to the UK Leverage Ratio Part of the PRA Rulebook to
exclude loans under the BBLS from the leverage ratio total exposure
measure. Bounce back loans have therefore been excluded from the UK
leverage exposure value used in the leverage ratio calculation.
The Group's CRD IV leverage ratio of 4.8% (30 September 2019:
4.3%) exceeds the Basel Committee's proposed minimum of 3% 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 to reduce the
Group's CCyB rate to 0%, the leverage ratio buffer also reduced to
0%.
On 14 November 2018, the PRA published a policy statement - 'UK
leverage ratio: Applying the framework to systemic ring-fenced
bodies and reflecting the systemic risk buffer,' confirming that
from 1 January 2019 the UK leverage ratio framework will apply on a
sub-consolidated basis to ring-fenced bodies in scope.
Risk Management
Financial risk
Funding and liquidity risk
Funding risk occurs where the Group is unable to raise or
maintain funds of sufficient quantity and quality to support the
delivery of the business plan or sustain lending commitments.
Prudent funding risk management reduces the likelihood of liquidity
risks occurring, increases the stability of funding sources,
minimises concentration risks and controls future balance sheet
growth.
Liquidity risk occurs when the Group is unable to meet its
current and future financial obligations as they fall due or at
acceptable cost, or when the Group reduces liquidity resources
below internal or regulatory stress requirements.
Exposures
The Group is predominantly funded by personal and business
customers. Customer funding is augmented by the Group's ongoing
wholesale funding programmes, medium-term secured funding issuance
(e.g. the Group's securitisation programme), regulated covered
bonds and unsecured medium-term notes. The Group also has access to
the BoE TFS.
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 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 ability to fund new and existing committed lending obligations
including mortgage pipeline and credit card facilities.
Measurement
Funding and liquidity risks are subject to a range of measures
contained within the Group's RAS and a series of limits agreed by
ALCO. These measures provide a short-and long-term view of risks
under both normal and stressed conditions. The measures focus on:
cash outflows and inflows under stress; concentration risks;
refinancing risks; asset encumbrance; and readiness of mitigating
actions.
The Group's funding plan establishes an acceptable level of
funding risk which is approved by the Board and is consistent with
risk appetite and the Group's strategic objectives. The development
of the Group's funding plan is informed by the requirements of the
Group's financial risk policy standards. A series of metrics is
used across the Group to measure risk exposures, including funding
ratios, limits to concentration risk and maximum levels of
encumbrance.
Liquidity risk exposures are subject to assessment under both
regulatory and internal requirements. The volume and quality of the
Group's liquid asset portfolio is defined through a series of
stress tests across a range of time horizons and stress conditions.
The High-Quality Liquid Asset (HQLA) requirement is quantified as
the outflow of funds under a series of stress scenarios less the
impact of inflows from assets. Stress cash outflow assumptions have
been established for individual liquidity risk drivers across
idiosyncratic and market-wide stresses. Liquidity within the Group
is managed in accordance with the ILAAP, which is approved by the
Board.
The Treasury function is responsible for the development and
execution of strategy subject to oversight from the Risk function.
In relation to funding and liquidity risk, the primary management
committee is the ALCO. The Group continues to maintain its strong
funding and liquidity position and seeks to achieve an appropriate
balance between profitability, liquidity risk and capital
optimisation.
Monitoring
Liquidity is actively monitored by the Group, with reporting
conducted through ALCO and the Executive Risk Committee. In a
stress situation or in adverse conditions, the level of monitoring
and reporting is increased commensurate with the nature of the
stress event, as demonstrated in response to COVID-19.
Monitoring and control processes are in place against internal
and regulatory liquidity requirements. The Group monitors a range
of market and internal early warning indicators on a routine basis
for early signs of liquidity risk in the market or specific to the
Group. These indicators cover a mixture of quantitative and
qualitative measures including daily variation of customer
balances, measurement against stress requirements and monitoring of
the macroeconomic environment.
Mitigation
The Group holds a portfolio of HQLA that can be utilised to
raise funding in times of stress. The size of the HQLA portfolio is
calibrated based on a view of potential outflows under both
systemic and idiosyncratic stress events. In addition, the Group
can use the repo market to generate funds and can also participate
in BoE operations through the Sterling Monetary Framework (SMF).
The Group has several sources of funding which are well-diversified
in terms of the type of instrument and product, counterparty, term
structure and market. In addition to customer funding, wholesale
funding is used to support balance sheet growth, lengthen the
contractual tenor of funding and diversify funding sources. These
funding programmes are a source of strength for the Group and
leverage the Group's high-quality mortgage book as collateral for
secured funding.
As a participant in the BoE SMF, the Group has access to funding
via the TFS. Following its launch in April 2020, the Group has also
been able to access additional funding from TFSME, which was
established to provide cost-effective funds to banks to support
additional lending to the real economy and incentivise lending to
SMEs during a period of economic disruption caused by COVID-19.
The funding plan includes an assessment of the Group's capacity
for raising funds from its primary sources, thereby mitigating
funding risk. Refinancing risks are carefully managed and are
subject to controls overseen by ALCO. The Group's funding plan
includes embedded TFS and TFSME repayment profiles designed to
manage refinancing risk.
The Group recovery plan has been established for management of
an escalated liquidity requirement, if the Group experiences either
restricted access to wholesale funding or a significant increase in
the withdrawal of funds. The plan identifies triggers for
escalation, assesses capacity, details the action required,
allocates the key tasks to individuals, provides a timeframe and
defines a management committee to manage the action plan.
The Group operates a Funds Transfer Pricing system. A key
purpose of Funds Transfer Pricing is to ensure that liquidity risk
is a factor in the pricing of loans and deposits.
Risk Management
Financial risk
Sources of funding
The table below provides an overview of the Group's sources of
funding as at 30 September 2020.
2020 2019
(audited) (audited)
GBPm GBPm
-------------------------------------------------- ---------- ----------
Total assets 90,259 90,999
Less: other liabilities(1) (3,390) (3,471)
-------------------------------------------------- ---------- ----------
Funding requirement 86,869 87,528
-------------------------------------------------- ---------- ----------
Funded by:
Customer deposits 67,710 64,000
Debt securities in issue 8,758 9,591
Due to other banks 5,469 8,916
-------------------------------------------------- ---------- ----------
of which:
Secured loans 5,397 7,308
Securities sold under agreements to repurchase - 1,554
Transaction balances with other banks 15 12
Deposits with other banks 57 42
-------------------------------------------------- ---------- ----------
Equity 4,932 5,021
-------------------------------------------------- ---------- ----------
Total funding 86,869 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 customer growth. At 30 September 2020, the
Group had a funding requirement of GBP86,869m (2019: GBP87,528m)
with the majority being used to support loans and advances to
customers. The Group's funding mix did not materially change
throughout the year and continues to be predominantly retail
funded. During the year, the Group has been active in the
securitisation and senior debt markets.
Customer deposits
The majority of the Group's funding requirement was met by
customer deposits of GBP67,710m (2019: GBP64,000m). Customer
deposits comprise interest bearing deposits, term deposits and
non-interest bearing demand deposits from a range of sources
including personal and business customers. The increase of
GBP3,710m during the year demonstrates the impact of COVID-19, as
societal restrictions coupled with a fall in UK consumer confidence
linked to the recessionary environment have driven increases in
customer deposits within current accounts and easy access saving
products.
Equity
Equity of GBP4,932m (2019: GBP5,021m) was also used to meet the
Group's funding requirement. Equity comprises ordinary share
capital, retained earnings, other equity investments and a number
of other reserves. For full details on equity refer to note 4.1
within the consolidated financial statements.
Liquid assets
The quantity and quality of the Group's liquid assets are
calibrated to the Board's view of liquidity risk appetite and
remain at a prudent level above regulatory requirements.
The LCR moved from 152% to 140% during the year and remains
comfortably above regulatory and internal risk appetite. The
management of liquidity resources throughout the year recognises
the reduced risk exposure from transformation activities and
increased availability of contingent funding through the BoE
TFSME.
2020 2019
(audited) (audited)
Liquidity coverage ratio GBPm GBPm
-------------------------- ---------- ----------
Eligible liquidity buffer 10,675 11,243
Net stress outflows 7,609 7,409
Surplus 3,066 3,834
-------------------------- ---------- ----------
Liquidity coverage ratio 140% 152%
-------------------------- ---------- ----------
Risk Management
Financial risk
The liquid asset portfolio provides a buffer against sudden and
potentially sharp outflows of funds. Liquid assets must therefore
be high-quality so they can be realised for cash and cannot be
encumbered for any other purpose (e.g. to provide collateral for
payments systems).
The volume and quality of the Group's liquid asset portfolio is
considered through a series of internal stress tests across a range
of time horizons and stress conditions, including most recently the
Group's view of liquidity risk due to impacts of COVID-19 and the
UK's withdrawal from the EU. The Group ensures a liquidity surplus
is held, during normal market conditions, above the most severe of
these scenarios. Stress cash outflow assumptions have been
established for individual liquidity risk drivers and are approved
annually by the Board as part of the ILAAP.
The key risk driver assumptions applied to the scenarios
are:
Liquidity Risk Driver Internal Stress Assumption
--------------------- ------------------------------------------------------------
Retail funding Severe unexpected withdrawal of retail deposits by
customers arising from redemption or refinancing risk.
No additional deposit inflows are assumed.
--------------------- ------------------------------------------------------------
Wholesale funding Limited opportunity to refinance wholesale contractual
maturities. Full outflow of secured and unsecured funding
during the refinancing period, with no reinvestment
of funding.
--------------------- ------------------------------------------------------------
Off-balance sheet Cash outflows during the period of stress as a result
of off-balance sheet commitments such as mortgage pipeline,
undrawn credit card facilities and collateral commitments.
Lending outflows, over and above contractual obligations,
are honoured as the Group preserves ongoing division
viability.
--------------------- ------------------------------------------------------------
Intra-day Other participants in the payment system withhold or
delay payments or customers increase transactions resulting
in reduced liquidity.
--------------------- ------------------------------------------------------------
Liquid assets The liquidity portfolio value is reduced, reflecting
stressed market conditions.
--------------------- ------------------------------------------------------------
The Group monitors the movements in its credit ratings and the
related requirement to post collateral for payment systems and
clearing houses. These figures are not considered material compared
to the volume of unencumbered liquid assets.
As at 30 September 2020, the Group held eligible liquid assets
well in excess of 100% of net stress outflows, as defined through
internal risk appetite.
Average Average
2020 2019 Change 2020 2019
(audited) (audited) (audited) (audited) (audited)
Liquid asset portfolio (1) GBPm GBPm % GBPm GBPm
--------------------------------- ---------- ---------- ---------- ---------- ----------
Level 1
Cash and balances with central
banks 6,255 7,469 (16%) 6,430 7,266
UK government treasury bills and
gilts 1,232 1,076 14% 1,301 870
Other debt securities 3,262 2,867 14% 3,186 2,604
--------------------------------- ---------- ---------- ---------- ---------- ----------
Total level 1 10,749 11,412 (6%) 10,917 10,740
Level 2 (2) 29 29 - 33 103
--------------------------------- ---------- ---------- ---------- ---------- ----------
Total LCR eligible assets 10,778 11,441 (6%) 10,950 10,843
--------------------------------- ---------- ---------- ---------- ---------- ----------
(1) Excludes encumbered assets.
(2) Includes Level 2A and Level 2B.
Before investing in any security, an assessment is completed for
both the credit quality and the treatment for liquidity purposes.
ALCO oversees the composition of the liquid asset portfolio.
Further information can be found in notes 3.4 (cash and balances
with central banks) and 3.7 (FVOCI) to the consolidated financial
statements.
Cash and balances with central banks of GBP9,107m, as per note
3.4, includes: GBP2,572m of assets that are encumbered to support
the issuance of Scottish bank notes (excluding notes not in
circulation) and to support payments systems; GBP220m of mandatory
central bank deposits; and GBP61m excluded from LCR to cover
operating expenses.
Financial assets at FVOCI of GBP5,080m, as per note 3.7,
include: GBP826m of encumbered UK government treasury bills and
gilts, GBP312m of which is encumbered to support Operational
Continuity in Resolution and GBP513m of which is encumbered to
support structured funding programmes.
The CRR II amendments to the CRR will introduce a binding net
stable funding ratio (NSFR) requirement from 28 June 2021. Based on
current interpretations of European regulatory requirements and
guidance, the ratio as at 30 September 2020 is 131% (2019:
128%).
Risk Management
Financial risk
Encumbered assets by asset category
The Group manages the level of asset encumbrance to ensure
appropriate assets are maintained to support potential future
planned and stressed funding requirements. Encumbrance limits are
set in the Group RAS and calibrated to ensure that after a stress
scenario is applied that increases asset encumbrance, the balance
sheet can recover over an acceptable period of time. Examples of
reasons for asset encumbrance include, among others, supporting the
Group's secured funding programmes to provide stable term funding
to the Group, the posting of assets in respect of drawings under
the TFS, use of assets as collateral for payments systems in order
to support customer transactional activity, and providing security
for the Group's issuance of Scottish bank notes.
Encumbered assets by asset category (audited)
Other assets
-------------- --------- ----------- ------------------------------------------- ------
Assets encumbered with Assets not positioned
non-central bank counterparties at the central bank
------------------------------------ ----------------------------------- ------
Positioned
at
the Other
central Readily assets
bank available capable Cannot
Covered Securi- (including for of being be
bonds tisations Other Total encumbered) encumbrance encumbered encumbered Total Total
September 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- --------- ---------- ----- ------ ----------- ----------- ---------- ---------- ------ ------
Loans and
advances
to customers 2,551 7,253 - 9,804 15,604 26,736 17,406 3,070 62,816 72,620
Cash and
balances
with central
banks - - - - 2,994 6,113 - - 9,107 9,107
Due from other
banks 337 424 93 854 - - 73 - 73 927
Derivative
financial
instruments - - - - - - - 318 318 318
Financial
instruments
at fair value
through other
comprehensive
income - - 826 826 - 4,254 - - 4,254 5,080
Other assets - - 910 910 - - 301 996 1,297 2,207
-------------- --------- ---------- ----- ------ ----------- ----------- ---------- ---------- ------ ------
Total assets 2,888 7,677 1,829 12,394 18,598 37,103 17,780 4,384 77,865 90,259
-------------- --------- ---------- ----- ------ ----------- ----------- ---------- ---------- ------ ------
Other assets
-------------- --------- ----------- ------------------------------------------- ------
Assets encumbered with Assets not positioned
non-central bank counterparties at the central bank
------------------------------------ ----------------------------------- ------
Positioned
at
the Other
central Readily assets
bank available capable Cannot
Covered Securi- (including for of being be
bonds tisations Other Total encumbered) encumbrance encumbered encumbered Total Total
September 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- --------- ---------- ----- ------ ----------- ----------- ---------- ---------- ------ ------
Loans and
advances
to customers 2,896 8,571 - 11,467 19,929 19,933 18,589 3,430 61,881 73,348
Cash and
balances
with central
banks - - - - 3,219 7,077 - - 10,296 10,296
Due from other
banks 156 550 171 877 - - 131 10 141 1,018
Derivatives
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
financial
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 Group's total non-central bank asset encumbrance decreased
by GBP989m to GBP12,394m as at 30 September 2020. This was
primarily due to a reduction in RMBS funding partially offset by an
increase in derivatives margin requirements. Current levels of
encumbrance include the impact of use of Term Funding Schemes which
are subject to a repayment profile to manage refinancing risk, and
the TFSME scheme launched this year.
Risk Management
Financial risk
Assets and liabilities by maturity
The following tables represent a breakdown of the Group's
balance sheet, according to the contractual maturity of the assets
and liabilities. Many of the longer-term monetary assets are
variable rate products, with behavioural maturities shorter than
the contractual terms. Accordingly, this information is not relied
upon by the Group in its management of interest rate risk. The
Group has disclosed certain term facilities within loans and
advances to customers with a revolving element at the maturity of
the facility as this best reflects their contractual maturity.
3 to 1 to
3 months 12 5 Over No specified
Call or less months years 5 years maturity(1) Total
2020 (audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------- -------- ------- ------- -------- ------------ -------
Assets
Financial assets at amortised
cost
Loans and advances to customers 785 2,058 1,820 10,880 52,460 4,427 72,430
Cash and balances with central
banks 7,547 - - - - 1,560 9,107
Due from other banks 814 113 - - - - 927
Financial assets at fair value
through profit or loss
Loans and advances to customers - 7 17 61 105 - 190
Derivative financial instruments 1 9 114 80 114 - 318
Other financial assets - - - - - 13 13
Financial assets at fair value
through other comprehensive
income - 732 251 2,318 1,779 - 5,080
Other assets - 32 327 2 1 1,832 2,194
------------------------------------ ------- -------- ------- ------- -------- ------------ -------
Total assets 9,147 2,951 2,529 13,341 54,459 7,832 90,259
------------------------------------ ------- -------- ------- ------- -------- ------------ -------
Liabilities
Financial liabilities at amortised
cost
Customer deposits 44,676 4,677 11,080 7,277 - - 67,710
Debt securities in issue - 385 1,261 5,407 1,705 - 8,758
Due to other banks 68 - 1,493 3,908 - - 5,469
Financial liabilities at fair
value through profit or loss - - - - - - -
Derivative financial instruments 1 4 33 76 136 - 250
Other liabilities 2,319 81 89 76 79 496 3,140
------------------------------------ ------- -------- ------- ------- -------- ------------ -------
Total liabilities 47,064 5,147 13,956 16,744 1,920 496 85,327
------------------------------------ ------- -------- ------- ------- -------- ------------ -------
Off-balance sheet items
Financial guarantees - 18 15 16 46 - 95
Other credit commitments 16,775 - - - - - 16,775
------------------------------------ ------- -------- ------- ------- -------- ------------ -------
Total off-balance sheet items 16,775 18 15 16 46 - 16,870
------------------------------------ ------- -------- ------- ------- -------- ------------ -------
(1) The 'no specified maturity' balance within loans and
advances to customers relates to credit cards.
Risk Management
Financial risk
3 to 1 to
3 months 12 5 Over No specified
Call or less months years 5 years maturity(1) Total
2019 (audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------ -------- ------- ------ -------- ------------ ------
Assets
Financial assets at amortised
cost
Loans and advances to customers 1,097 1,804 1,738 9,777 54,462 4,217 73,095
Cash and balances with central
banks 8,722 - - - - 1,574 10,296
Due from other banks 225 793 - - - - 1,018
Financial assets at fair value
through profit or loss
Loans and advances to customers - 6 26 96 125 - 253
Derivative financial instruments - 8 34 226 98 - 366
Other financial assets - - - - - 14 14
Financial assets at fair value
through other comprehensive
income - 125 784 1,735 1,684 - 4,328
Other assets - 66 176 - - 1,387 1,629
------------------------------------ ------ -------- ------- ------ -------- ------------ ------
Total assets 10,044 2,802 2,758 11,834 56,369 7,192 90,999
------------------------------------ ------ -------- ------- ------ -------- ------------ ------
Liabilities
Financial liabilities at amortised
cost
Customer deposits 40,512 5,558 10,168 7,762 - - 64,000
Debt securities in issue - 574 1,258 5,168 2,591 - 9,591
Due to other banks 45 1,361 181 7,329 - - 8,916
Financial liabilities at fair
value through profit or loss
Customer deposits - 2 2 - - - 4
Derivative financial instruments - 7 14 64 188 - 273
Other liabilities 2,277 78 99 - - 740 3,194
------------------------------------ ------ -------- ------- ------ -------- ------------ ------
Total liabilities 42,834 7,580 11,722 20,323 2,779 740 85,978
------------------------------------ ------ -------- ------- ------ -------- ------------ ------
Off-balance sheet items
Financial guarantees - 23 24 18 48 - 113
Other credit commitments 15,158 - - - - - 15,158
------------------------------------ ------ -------- ------- ------ -------- ------------ ------
Total off-balance sheet items 15,158 23 24 18 48 - 15,271
------------------------------------ ------ -------- ------- ------ -------- ------------ ------
(1) The 'no specified maturity' balance within loans and
advances to customers relates to credit cards.
Risk Management
Financial risk
Cash flows payable under financial liabilities by contractual
maturity
3 to 1 to
3 months 12 5 Over No specified
Call or less months years 5 years maturity Total
2020 (audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ------- -------- ------- ------- -------- ------------ -------
Liabilities
Financial liabilities at amortised
cost
Customer deposits 44,676 4,720 11,211 7,423 - - 68,030
Debt securities in issue - 423 1,380 5,919 1,693 - 9,415
Due to other banks 68 1 1,507 3,907 - - 5,483
Financial liabilities at fair
value through profit or loss
Trading derivative financial
instruments - 32 39 27 24 - 122
Hedging derivative liabilities
Contractual amounts payable - 5 25 159 48 - 237
Contractual amounts receivable - - - (79) - - (79)
Other liabilities 2,319 81 89 76 79 496 3,140
----------------------------------- ------- -------- ------- ------- -------- ------------ -------
Total liabilities 47,063 5,262 14,251 17,432 1,844 496 86,348
----------------------------------- ------- -------- ------- ------- -------- ------------ -------
3 to 1 to
3 months 12 5 Over No specified
Call or less months years 5 years maturity Total
2019 (audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ------- -------- ------- ------- -------- ------------ -------
Liabilities
Financial liabilities at amortised
cost
Customer deposits 40,512 5,590 10,321 8,014 - - 64,437
Debt securities in issue - 602 1,402 5,704 2,611 - 10,319
Due to other banks 45 1,375 240 7,380 - - 9,040
Financial liabilities at fair
value through profit or loss
Customer deposits - 2 2 - - - 4
Trading derivative financial
instruments - 15 14 36 28 - 93
Hedging derivative liabilities
Contractual amounts payable - 7 36 197 619 - 859
Contractual amounts receivable - - (1) (81) (532) - (614)
All other liabilities 2,277 78 99 - - 740 3,194
----------------------------------- ------- -------- ------- ------- -------- ------------ -------
Total liabilities 42,834 7,669 12,113 21,250 2,726 740 87,332
----------------------------------- ------- -------- ------- ------- -------- ------------ -------
The balances in the cash flow tables above will not agree
directly to the balances in the consolidated balance sheet as the
table incorporates all cash flows, on an undiscounted basis,
related to both principal and future coupon payments.
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 to 1 to
3 months 12 5 Over
or less months years 5 years Total Total
GBPm GBPm GBPm GBPm 2020 2019
----------------------------------- -------- ------- ------ -------- ----- -----
Covered bonds - 10 623 1,295 1,928 1,912
Securitisation 372 1,214 2,419 - 4,005 5,051
Medium term notes 6 7 1,645 410 2,068 1,897
Subordinated debt 7 30 720 - 757 731
----------------------------------- -------- ------- ------ -------- ----- -----
Total debt securities in issue 385 1,261 5,407 1,705 8,758 9,591
----------------------------------- -------- ------- ------ -------- ----- -----
Of which issued by Virgin Money UK
PLC 13 37 2,365 410 2,825 2,257
----------------------------------- -------- ------- ------ -------- ----- -----
Risk Management
Financial risk
External credit ratings
The Group's long-term credit ratings are summarised below:
Outlook
as at As at
--------------------------- --------- ----------------
30 Sep 30 Sep 30 Sep
Material risk for the Group 2020(1) 2020 2019
--------------------------- --------- ------- -------
Virgin Money UK PLC
Moody's Stable Baa3 Baa3
Fitch Negative BBB+ BBB+
Standard & Poor's Negative BBB- BBB-
Clydesdale Bank PLC
Moody's(2) Stable Baa1 Baa1
Fitch Negative A- A-
Standard & Poor's Negative BBB+ BBB+
--------------------------- --------- ------- -------
(1) For detailed background on the latest credit opinion by
Standard & Poor and Fitch, please refer to the respective
rating agency websites.
(2) Long-term deposit rating.
On 21 October 2019, Fitch and Moody's withdrew the long- and
short-term ratings of Virgin Money Holdings (UK) PLC and Virgin
Money PLC following completion of the FSMA Part VII transfer.
On 12 November 2019, Moody's changed the outlook on the
long-term ratings of Virgin Money UK PLC and Clydesdale Bank PLC to
'stable' from 'positive'. 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. Moody's adjusted the ratings outlook for 15 banks and
building societies, including the Group.
On 1 April 2020, Fitch placed the long-term ratings of Virgin
Money UK PLC and Clydesdale Bank PLC on 'rating watch negative',
reflecting the downside risks resulting from the economic and
financial market implications resulting from COVID-19. On 10 July
2020, Fitch affirmed the ratings of Virgin Money UK PLC and
Clydesdale Bank PLC, removed the 'rating watch negative' and
changed the outlook to 'negative'. The negative outlook reflects
Fitch's view that risks remain clearly tilted to the downside in
the medium term but that the Group's ratings are not immediately at
risk from the impact of the economic downturn, due mainly to the
bank's sufficient capital buffers and sound asset quality metrics
at the entry point of the crisis, and relatively large and stable
deposit funding.
On 23 April 2020, Standard & Poor's changed the outlook on
the long-term ratings of Virgin Money UK PLC and Clydesdale Bank
PLC to 'negative' (from 'stable' and 'positive', respectively), as
part of a broader action on the European banking sector. The
outlook revisions reflects Standard & Poor's view that the
economic stress triggered by COVID-19 is likely to put pressure on
the Group's asset quality and earnings and may delay MREL
issuance.
As at 24 November 2020, there have been no other changes to the
Group's long-term credit ratings or outlooks since the report
date.
Market risk
Market risk is the risk of loss associated with adverse changes
in the value of assets and liabilities held by the Group as a
result of movements in market factors such as foreign exchange
risk, interest rates (duration risk), customer behaviour
(optionality risk), and the movement in rate spreads across types
of assets or liabilities (basis risk and credit spread risk). The
Group's balance sheet is predominantly UK based and is denominated
in GBP, therefore foreign exchange risk is not a material risk for
the Group.
Exposures
The Group's principal exposure comes from structural interest
rate risk. It comprises the sensitivity of the Group's current and
future NII and economic value to movements in market interest
rates. The major contributors to interest rate risk are:
-- the mismatch, or duration, between repricing dates of
interest bearing assets and liabilities;
-- basis risk or assets and liabilities repricing to different
reference rates, for example, customer asset and liability products
repricing against BoE base rate and Sterling Overnight Index
Average (SONIA); and
-- customer optionality, e.g. the right to repay borrowing in
advance of contractual maturity dates.
The focus of the Group's activity is to provide high-quality
banking services to its customers. These services include the
provision of foreign exchange products and derivative products to
enable customers to manage risks within their businesses. As a
result of these activities, the Group may be exposed to forms of
market risk that would arise from movements in the price on these
products, however, these risks are not a material component of the
Group's risk profile. Controls include the hedging of these
products as and when they arise.
Outlook
The BoE continues to assess the appropriateness of a negative
official Bank Rate, alongside other monetary policy tools that are
available to support the economy and may consider using negative
rates, if it is deemed to be more effective in terms of policy
objectives over other tools. To be an effective policy tool, the
BoE recognises the need for the financial sector to be
operationally ready to implement such a policy step in a way that
doesn't adversely affect the safety and soundness of firms and is
engaging with firms on this matter, including the Group. This
engagement is not indicative that a zero or negative policy rate
will be employed, nor is the engagement asking firms to begin
taking steps to ensure operational readiness. The BoE has requested
information on the impact of a range of outcomes each of which
would have different operational considerations and potentially
different outcomes in terms of risk, margins and earnings for
firms.
Risk Management
Financial risk
Measurement
IRRBB is measured, monitored, and managed from both an internal
management and regulatory perspective. The RMF incorporates both
market valuation and earnings-based approaches. In accordance with
the Group IRRBB policy standard, risk measurement techniques
include: basis point sensitivity, NII sensitivity, value at risk
(VaR), economic value of equity, interest rate risk stress testing,
and scenario analysis.
The key features of the internal interest rate risk management
model are:
-- basis point sensitivity analysis is performed daily and
compares the potential impact of a one basis point (0.01%) change
on the present value of all future cash flows;
-- NII sensitivity assesses changes to earnings over a 12-month
time horizon as a result of interest rate movements and changes to
customer behaviour;
-- VaR is measured on a statistical basis using a 99% confidence
level based on daily rate movements over a two year history set
with a one day holding period;
-- economic value of equity is measured in line with EBA
guidance with all eight of the proposed EBA rate shocks assessed on
a quarterly basis, including customer optionality stresses.
Reporting is performed both including and excluding equity;
-- static balance sheet (i.e. any new business is assumed to be
matched, hedged or subject to immediate repricing);
-- investment term for capital is modelled with a benchmark term agreed by ALCO;
-- investment term for core non-interest bearing assets and
liabilities is modelled on a behavioural basis with a benchmark
term agreed by ALCO;
-- assumptions covering the behavioural life of products and
customer behaviour for optionality are reviewed and approved by
ALCO; and
-- credit spread risk in the banking book (CSRBB) is assessed
through VaR applied to the Group's liquid asset buffer portfolio.
CSRBB is measured at a 99% confidence level based on daily spread
movements over a 10-year history set with a three month holding
period.
Foreign exchange risk is assessed based on the absolute exposure
to each currency.
Mitigation
Market risks are overseen by ALCO with delegation for day-to-day
management given to Treasury. Treasury uses a number of techniques
and products to manage market risks including interest rate swaps,
cash flow netting and foreign exchange. Basis risk may be managed
through a combination of wholesale market basis risk management
products, pricing strategies and product innovation.
Fair value hedges - the Group hedges part of its existing
interest rate risk, resulting from potential movements in the fair
value of fixed rate assets and liabilities. The fair value of these
swaps is disclosed within note 3.6 to the Group's consolidated
financial statements. There were no transactions for which fair
value hedge accounting had to be discontinued in the year.
Cash flow hedges - the Group hedges a portion of the variability
in future cash flows attributable to interest rate and foreign
currency risk. The interest and foreign currency risks arise from
variable interest rate assets and liabilities which are hedged
using cross currency and interest rate swaps, and material non-GBP
denominated assets which are hedged using foreign exchange forward
contracts. There were no transactions for which cash flow hedge
accounting had to be discontinued in the year as a result of the
highly probable cash flows no longer being expected to occur. The
fair value of derivatives is disclosed within note 3.6 to the
Group's consolidated financial statements.
Monitoring
Model parameters and assumptions are reviewed and updated on at
least an annual basis. Material changes require the approval of
ALCO. Oversight of market risk is conducted by the Group's
Financial Risk team which is independent of the Treasury function.
The Board and Executive Risk Committee, through ALCO's oversight,
monitor risk to ensure it remains within approved policy limits and
Board requirements.
Value at Risk (audited)
Duration risk Credit spread(2)
------------------------------ --------------- ------------------
2020 2019(1) 2020 2019
12 months to 30 September GBPm GBPm GBPm GBPm
------------------------------ ------ ------- -------- --------
As at 30 September 2 2 49 19
Average value during the year 2 2 36 23
Minimum value during the year 1 - 23 19
Maximum value during the year 2 2 49 26
------------------------------ ------ ------- -------- --------
(1) 2019 duration risk VaR restated from a three-month to a
one-day holding period to align to 2020 internal risk
methodology.
(2) The history set for credit spread VAR was increased from two
years to 10 years from 1 March 2020 under internal methodology
driving the year on year increase. The average figures for 2020
include 5 months over a two year history and seven months over a 10
year history.
Risk Management
Financial risk
Market risk linkage to the balance sheet (audited)
The following table shows the Group's principal market risks,
linked to the balance sheet assets and liabilities.
Interest
2020 2019 rate Credit Foreign
GBPm GBPm duration Optionality Basis spread exchange
------------------------------------ ------ ------ --------- ----------- ----- ------- ---------
Assets
Financial assets at amortised
cost
Loans and advances to customers 72,430 73,095 -- -- -- --
Cash and balances with central
banks 9,107 10,296 -- --
Due from other banks 927 1,018 -- -- --
Financial assets at fair value
through profit or loss
Loans and advances to customers 190 253 -- -- -- --
Derivative financial instruments 318 366 -- -- --
Other financial assets 13 14 -- --
Financial instruments at fair
value through other comprehensive
income 5,080 4,328 -- -- -- --
Other assets 2,194 1,629 -- --
------------------------------------ ------ ------ --------- ----------- ----- ------- ---------
Total assets 90,259 90,999
------------------------------------ ------ ------ --------- ----------- ----- ------- ---------
Liabilities
Financial liabilities at amortised
cost
Customer deposits 67,710 64,000 -- -- -- --
Debt securities in issue 8,758 9,591 -- -- --
Due to other banks 5,469 8,916 -- -- --
Financial liabilities at fair
value through profit or loss
Customer deposits - 4 -- -- -- --
Derivative financial instruments 250 273 -- -- --
Other liabilities 3,140 3,194 -- --
------------------------------------ ------ ------ --------- ----------- ----- ------- ---------
Total liabilities 85,327 85,978
------------------------------------ ------ ------ --------- ----------- ----- ------- ---------
Risk Management
Financial risk
Repricing periods of assets and liabilities by asset/liability
category
The following table shows the repricing periods of the Group's
assets and liabilities as assessed by the Group. This repricing
takes account of behavioural assumptions where material and the
Group's policy to hedge capital in accordance with a benchmark term
agreed by ALCO. During Q3 2020 the Group shortened the tenor
applied to equity and to deposits that are subject to behavioural
assumptions.
3 to 1 to Non-
3 months 12 5 Over interest
Overnight or less months years 5 years bearing Total
2020 (unaudited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ --------- -------- ------- -------- -------- --------- ------
Assets
Financial assets at amortised
cost
Loans and advances to customers 3,130 14,310 15,101 38,802 1,087 - 72,430
Cash and balances with central
banks 7,697 - - - - 1,410 9,107
Due from other banks 167 760 - - - - 927
Financial assets at fair value
through profit or loss
Loans and advances to customers - 119 10 29 32 - 190
Other financial assets - - - - - 318 318
Financial assets at fair value
through other comprehensive
income 1,017 1,506 150 1,131 1,276 - 5,080
Other assets - - - - - 2,207 2,207
------------------------------------ --------- -------- ------- -------- -------- --------- ------
Total assets 12,011 16,695 15,261 39,962 2,395 3,935 90,259
------------------------------------ --------- -------- ------- -------- -------- --------- ------
Liabilities
Financial liabilities at amortised
cost
Customer deposits 27,503 22,837 10,201 7,167 2 - 67,710
Debt securities in issue 2,245 2,126 30 2,237 2,120 - 8,758
Due to other banks 5,469 - - - - - 5,469
Financial liabilities at fair
value through profit or loss
Derivative financial instruments - - - - - 250 250
Other liabilities - 950 - - - 2,190 3,140
Equity 4,932 - - - - - 4,932
------------------------------------ --------- -------- ------- -------- -------- --------- ------
Total liabilities and equity 40,149 25,913 10,231 9,404 2,122 2,440 90,259
------------------------------------ --------- -------- ------- -------- -------- --------- ------
Notional value of derivatives
managing interest rate sensitivity 32,965 6,185 (8,416) (30,392) (342) - -
Total interest rate gap 4,827 (3,033) (3,386) 166 (69) 1,495 -
------------------------------------ --------- -------- ------- -------- -------- --------- ------
Cumulative interest rate gap 4,827 1,794 (1,592) (1,426) (1,495) - -
------------------------------------ --------- -------- ------- -------- -------- --------- ------
Risk Management
Financial risk
3 to 1 to Non-
3 months 12 5 Over interest
Overnight or less months years 5 years bearing Total
2019 (unaudited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ --------- -------- ------- -------- -------- --------- ------
Assets
Financial assets at amortised
cost
Loans and advances to customers 7,475 10,245 13,884 40,122 1,241 128 73,095
Cash and balances with central
banks 8,254 572 12 62 - 1,396 10,296
Due from other banks 333 685 - - - - 1,018
Financial assets at fair value
through profit or loss
Loans and advances to customers - 21 87 145 - - 253
Derivative financial assets - - - - - 366 366
Financial assets at fair value
through other comprehensive
income 684 1,099 410 836 1,299 - 4,328
Other assets - 107 80 426 - 1,030 1,643
------------------------------------ --------- -------- ------- -------- -------- --------- ------
Total assets 16,746 12,729 14,473 41,591 2,540 2,920 90,999
------------------------------------ --------- -------- ------- -------- -------- --------- ------
Liabilities
Financial liabilities at amortised
cost
Customer deposits 10,353 17,720 12,524 23,401 2 - 64,000
Debt securities in issue 301 5,599 300 1,228 2,163 - 9,591
Due to other banks 2,844 5,922 150 - - - 8,916
Financial liabilities at fair
value through profit or loss
Customer deposits 4 - - - - - 4
Derivative financial instruments - - - - - 273 273
Other liabilities - 48 143 760 - 2,243 3,194
Equity 230 240 719 3,832 - - 5,021
------------------------------------ --------- -------- ------- -------- -------- --------- ------
Total liabilities and equity 13,732 29,529 13,836 29,221 2,165 2,516 90,999
------------------------------------ --------- -------- ------- -------- -------- --------- ------
Notional value of derivatives
managing interest rate sensitivity (2,253) 16,185 (800) (13,149) 17 - -
Total interest rate gap 761 (615) (163) (779) 392 404 -
------------------------------------ --------- -------- ------- -------- -------- --------- ------
Cumulative interest rate gap 761 146 (17) (796) (404) - -
------------------------------------ --------- -------- ------- -------- -------- --------- ------
LIBOR replacement
The Group has a LIBOR transition programme to manage the impact
of the BoE's plan to discontinue the use of LIBOR as a reference
rate after 2021. The work to decommission LIBOR is focused on
ceasing the issuance of new LIBOR lending in advance of the end of
March 2021 industry deadline, developing and delivering alternative
reference rate products, and implementing a back-book migration
strategy based on consensual customer agreement and transition
before the end of 2021. A similar approach is being taken with new
and existing derivatives. All market-facing derivative flows are
now executed against SONIA and the strategy to proactively manage
the back-book of LIBOR derivatives is underway.
The Group has maintained engagement with the BoE's Working Group
on Sterling Risk Free Reference Rates and other industry forums.
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.
Risk Management
Financial risk
Pension risk
The Group operates a defined benefit pension scheme, the
Yorkshire and Clydesdale Bank Pension Scheme (the Scheme).
Clydesdale Bank PLC (the Bank) is the Scheme's principal employer
and there are no other participating employers. The Scheme was
closed to future accrual on 1 August 2017 for most members. A small
number of members remain on a defined benefit accruals basis
subject to certain conditions.
Defined benefit pension schemes provide a promise to pay members
a pre-determined level of income at retirement which is independent
of the contributions, investments and returns (the scheme assets)
used to fund these benefit promises (the scheme liabilities). The
operation of a pension scheme gives rise to several risks, for
example, movements in equity valuations, changes in bond yields,
life expectancy of scheme members, movements in interest and
inflation rates and changes in legislation. The Group also supports
a defined contribution scheme, however the nature of this type of
scheme places the investment and liability risk on the member
rather than the Group.
Pension risk is the risk that, at any point in time, the value
of the scheme assets is not enough to meet the current or expected
future value of the scheme liabilities. This risk will continue to
exist until the scheme is formally wound up, either if all the
liabilities are transferred to a third party (for example an
insurer) or once all individual member benefits have been
honoured.
Risk appetite
The Group's pension risk appetite is a component of the
Group--wide RAS framework for the management of balance sheet risks
and is considered in the context of potential capital impacts as a
result of volatility in the Scheme's valuations.
Assets
The Trustee governs investments according to a Statement of
Investment Principles. This is reviewed and agreed by the Trustee
Board on a regular basis, with the Bank consulted on any proposed
changes. The Statement of Investment Principles is drafted in
accordance with the requirements of Section 35 of the Pensions Act
1995 (as amended by the Pensions Act 2004 and regulations made
under it). This sets out the Scheme objectives and the journey plan
to meet these objectives.
This results in an appropriate mix of return seeking assets as
well as liability matching assets to better match future pension
obligations. The split of Scheme assets is shown within note 3.10
to the Group's consolidated financial statements. The fair value of
the assets was GBP4.7bn as at 30 September 2020 (2019:
GBP4.7bn).
Liabilities
The retirement benefit obligations are a series of future cash
outflows with relatively long duration and are responsive to
movements on many of the inputs including interest rates. On an IAS
19 basis these cash flows are primarily sensitive to changes in the
expected long-term price inflation rates (RPI/CPI), the life
expectancy of members and the discount rate (linked to yields on AA
corporate bonds):
-- an increase in long-term expected inflation corresponds to an increase in liabilities;
-- an increase in life expectancy corresponds to an increase in liabilities; and
-- a decrease in the discount rate corresponds to an increase in liabilities.
Exposure
The Group's defined benefit pension scheme affects its
regulatory capital in two ways:
-- CET1 capital - while an IAS 19 surplus will increase the
Group's balance sheet assets and reserves, any such amount is not
recognised for the purposes of determining CET1 capital. However,
an IAS 19 deficit, which increases balance sheet liabilities and
reduces reserves, is recognised for regulatory capital purposes,
and so will decrease CET1 capital.
-- Pillar 2A capital - the Group is also required to determine
the level of capital required to be held under Pillar 2A for
pension obligation risk as part of the annual ICAAP process. This
requirement forms part of the Group's regulatory Total Capital
Requirement.
Within the Scheme itself, risk arises because the assets (e.g.
equities, bonds/gilts, property) are exposed to market valuation
movements, within and between asset classes, while the liabilities
are more sensitive to interest rate and inflation rate changes, and
changes in other actuarial assumptions which may not be borne out
in experience, for example life expectancy.
Mitigation
The Trustee and Group have a common view of the Scheme's
long-term strategic aims, encapsulated by an agreed de-risking
journey plan. Within the journey plan, several core principles have
been established, including a long-term self-sufficiency funding
target (i.e. the point in time when the Scheme would no longer need
to call on the Bank for additional funding) with assumptions as to
how this target is expected to be managed, monitored and met.
Potential actions to address deviations in the actual funding level
relative to the journey plan have also been considered.
Several other activities have been implemented by the Group and
Trustee with the specific aim of reducing risk in the Scheme,
including equity options which reduce the downside risk of a fall
in equity values, increasing the levels of inflation, interest rate
hedging and several member benefit reforms, culminating in closure
to future accrual for most members.
In addition, the Group has signed a contingent security
arrangement to give the Trustee a degree of protection against the
risk of the Group defaulting on its obligations under the Recovery
Plan and to provide an additional amount to partially mitigate
adverse changes impacting the Scheme's assets or liabilities.
Further information is shown within note 3.10 to the Group's
consolidated financial statements.
The Bank and the Trustee continue to explore other
cost-effective options to further reduce risk within the
Scheme.
Monitoring
Information on the Scheme's current valuations, asset holdings
and discount and inflation rate assumptions are presented monthly
to ALCO. The impact of the Scheme on the Group is also subject to
risk oversight from the Risk function. In addition, semi-annual
pension risk updates are provided to the Executive and Board Risk
Committees.
Performance of the Scheme's asset portfolio against the various
risk metrics is independently monitored by the Scheme investment
adviser, Willis Towers Watson, and reported to the Investment Sub
Committee (ISC), which includes Group representation, and Trustee
Board on a quarterly basis.
Directors' responsibility statement in respect of the Annual
Report & Accounts
The responsibility statement below has been prepared in
connection with the Company's full Annual Report & Accounts for
the year ending 30 September 2020. Certain parts thereof are not
included within this announcement.
The Directors confirm that to the best of their knowledge:
-- the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company and the Group and the undertakings included in the
consolidation taken as a whole; and
-- the Strategic report includes a fair review of the
development and performance of the business and the position of the
Company and the Group, together with a description of the principal
risks and uncertainties that they face.
The Directors consider the Annual Report & Accounts, taken
as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company's and
Group's position and performance, business model and strategy.
David Duffy
Chief Executive Officer
24 November 2020
Group financial statements
Consolidated income statement
2020 2019(1)
For the year ended 30 September Note GBPm GBPm
---------------------------------------------- ---- -------- -------
Interest income 2,129 2,420
Other similar interest 8 13
Interest expense and similar charges (854) (919)
---------------------------------------------- ---- -------- -------
Net interest income 2.2 1,283 1,514
Gains less losses on financial instruments at
fair value (11) (17)
Other operating income 171 252
---------------------------------------------- ---- -------- -------
Non-interest income 2.3 160 235
---------------------------------------------- ---- -------- -------
Total operating income 1,443 1,749
Operating and administrative expenses before
impairment losses 2.4 (1,104) (1,729)
---------------------------------------------- ---- -------- -------
Operating profit before impairment losses 339 20
Impairment losses on credit exposures 3.2 (507) (252)
---------------------------------------------- ---- -------- -------
Loss on ordinary activities before tax (168) (232)
Tax credit 2.5 27 53
---------------------------------------------- ---- -------- -------
Loss for the year (141) (179)
---------------------------------------------- ---- -------- -------
Attributable to:
Ordinary shareholders (220) (253)
Other equity holders 79 41
Non-controlling interests - 33
---------------------------------------------- ---- -------- -------
Loss for the year (141) (179)
---------------------------------------------- ---- -------- -------
Basic loss per share (pence) 2.6 (15.3) (17.9)
---------------------------------------------- ---- -------- -------
Diluted loss per share (pence) 2.6 (15.3) (17.9)
---------------------------------------------- ---- -------- -------
(1) The comparative has been restated in line with the current
year presentation. Refer to note 1.10.
All material items dealt with in arriving at the loss before tax
for the above years relate to continuing activities.
The notes on pages 76 to 126 form an integral part of these
financial statements.
Group financial statements
Consolidated statement of comprehensive income
2020 2019(1)
For the year ended 30 September Note GBPm GBPm
--------------------------------------------------- ---- ----- -------
Loss for the year (141) (179)
Items that may be reclassified to the income
statement
Change in cash flow hedge reserve
(Losses)/gains during the year (133) 73
Transfers to the income statement 60 (57)
Taxation thereon - deferred tax credit/(charge) 20 (9)
Taxation thereon - current tax (charge)/credit (1) 6
--------------------------------------------------- ---- ----- -------
(54) 13
--------------------------------------------------- ---- ----- -------
Change in fair value through other comprehensive
income reserve
Gains during the year 15 13
Transfers to the income statement (16) (4)
Taxation thereon - deferred tax credit/(charge) 1 (2)
--------------------------------------------------- ---- ----- -------
- 7
--------------------------------------------------- ---- ----- -------
Total items that may be reclassified to the income
statement (54) 20
--------------------------------------------------- ---- ----- -------
Items that will not be reclassified to the income
statement
Change in asset revaluation reserve - -
Taxation thereon - deferred tax charge - (1)
Change in defined benefit pension plan 3.10 292 110
Taxation thereon - deferred tax charge (117) (56)
Taxation thereon - current tax credit 9 7
--------------------------------------------------- ---- ----- -------
184 61
Total items that will not be reclassified to
the income statement 184 60
--------------------------------------------------- ---- ----- -------
Other comprehensive income, net of tax 130 80
--------------------------------------------------- ---- ----- -------
Total comprehensive losses for the year, net
of tax (11) (99)
--------------------------------------------------- ---- ----- -------
Attributable to:
Ordinary shareholders (90) (173)
Other equity holders 79 41
Non-controlling interests - 33
--------------------------------------------------- ---- ----- -------
Total comprehensive losses for the year, net
of tax (11) (99)
--------------------------------------------------- ---- ----- -------
(1) The comparative has been restated in line with the current
year presentation. Refer to note 1.10.
The notes on pages 76 to 126 form an integral part of these
financial statements.
Group financial statements
Consolidated balance sheet
2020 2019
As at 30 September Note GBPm GBPm
--------------------------------------------------- ---- ------- ------
Assets
Financial assets at amortised cost
Loans and advances to customers 3.1 72,430 73,095
Cash and balances with central banks 3.4 9,107 10,296
Due from other banks 927 1,018
Financial assets at fair value through profit
or loss
Loans and advances to customers 3.5 190 253
Derivative financial instruments 3.6 318 366
Other financial assets 3.5 13 14
Financial assets at fair value through other
comprehensive income 3.7 5,080 4,328
Property, plant and equipment 288 145
Intangible assets and goodwill 3.8 491 516
Current tax assets 27 13
Deferred tax assets 3.9 326 322
Defined benefit pension assets 3.10 723 396
Other assets 339 237
--------------------------------------------------- ---- ------- ------
Total assets 90,259 90,999
--------------------------------------------------- ---- ------- ------
Liabilities
Financial liabilities at amortised cost
Customer deposits 3.11 67,710 64,000
Debt securities in issue 3.12 8,758 9,591
Due to other banks 3.13 5,469 8,916
Financial liabilities at fair value through profit
or loss
Customer deposits - 4
Derivative financial instruments 3.6 250 273
Deferred tax liabilities 3.9 274 201
Provisions for liabilities and charges 3.14 172 459
Other liabilities 3.15 2,694 2,534
--------------------------------------------------- ---- ------- ------
Total liabilities 85,327 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 (43) 10
Retained earnings 2,624 2,661
--------------------------------------------------- ---- ------- ------
Total equity 4,932 5,021
--------------------------------------------------- ---- ------- ------
Total liabilities and equity 90,259 90,999
--------------------------------------------------- ---- ------- ------
The notes on pages 76 to 126 form an integral part of these
financial statements.
These financial statements were approved by the Board of
Directors on 24 November 2020 and were signed on its behalf by:
David Bennett David Duffy
Chairman Chief Executive Officer
Virgin Money UK PLC, Registered number: 09595911
Group financial statements
Consolidated statement of changes in equity
Other reserves
----------------------- ------- ------- ------- ------- ----------------------------------------------------- -------- -------- ------
Share
capital Other Equity Cash Non
and Capital equity Own Deferred based flow control-
share reorg' Merger instru- shares shares comp' Asset FVOCI hedge ling
premium reserve reserve ments held reserve reserve reval' reserve reserve Retained interest Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm reserve GBPm GBPm earnings GBPm equity
Note 4.1.1 4.1.3 4.1.4 4.1.2 4.1.5 4.1.5 4.1.5 GBPm 4.1.5 4.1.5 GBPm 4.1.6 GBPm
----------------------- ------- ------- ------- ------- ------ -------- ------- ------- ------- -------- -------- -------- ------
As at 1 October
2018 89 (839) 633 450 - - 10 2 4 (39) 2,855 - 3,165
Loss for the year(1) - - - - - - - - - - (179) - (179)
Other comprehensive
(losses)/income,
net of tax - - - - - - - (1) 7 13 61 - 80
----------------------- ------- ------- ------- ------- ------ -------- ------- ------- ------- -------- -------- -------- ------
Total comprehensive
(losses)/income
for the year - - - - - - - (1) 7 13 (118) - (99)
Acquisition of
Virgin Money Holdings
(UK) PLC 54 - 1,495 - (5) 23 - - - - - 422 1,989
Dividends paid
to ordinary
shareholders - - - - - - - - - - (45) - (45)
AT1 distribution
paid(1) - - - - - - - - - - (41) - (41)
Distributions
to non-controlling
interests(1) - - - - - - - - - - (33) - (33)
Transfer from
equity based
compensation
reserve - - - - - - (8) - - - 8 - -
Equity based
compensation
expensed - - - - - - 4 - - - - - 4
Settlement of
Virgin Money Holdings
(UK) PLC share
awards 3 - - - 4 (4) - - - - 1 - 4
AT1 issuance - - - 465 - - - - - - - - 465
Capital note redemption - - - - - - - - - - 34 (422) (388)
----------------------- ------- ------- ------- ------- ------ -------- ------- ------- ------- -------- -------- -------- ------
As at 30 September
2019 146 (839) 2,128 915 (1) 19 6 1 11 (26) 2,661 - 5,021
Adjustment on
adoption of IFRS
16 (net of tax)
- note 5.4 - - - - - - - - - - 1 - 1
----------------------- ------- ------- ------- ------- ------ -------- ------- ------- ------- -------- -------- -------- ------
As at 1 October
2019 146 (839) 2,128 915 (1) 19 6 1 11 (26) 2,662 - 5,022
Loss for the year - - - - - - - - - - (141) - (141)
Other comprehensive
(losses)/income
net of tax - - - - - - - - - (54) 184 - 130
----------------------- ------- ------- ------- ------- ------ -------- ------- ------- ------- -------- -------- -------- ------
Total
comprehensive(losses)/
income for the
year - - - - - - - - - (54) 43 - (11)
AT1 distribution
paid - - - - - - - - - - (79) - (79)
Ordinary shares
issued 1 - - - - - - - - - - - 1
Transfer from
equity based
compensation
reserve - - - - - - (6) - - - 6 - -
Equity based
compensation
expensed - - - - - - 10 - - - - - 10
Release of asset
revaluation reserve - - - - - - - (1) - - - - (1)
Settlement of
Virgin Money Holdings
(UK) PLC share
awards - - - - 1 (3) - - - - 1 - (1)
FSMA Part VII
transfer - - - - - - - - - - (9) - (9)
----------------------- ------- ------- ------- ------- ------ -------- ------- ------- ------- -------- -------- -------- ------
As at 30 September
2020 147 (839) 2,128 915 - 16 10 - 11 (80) 2,624 - 4,932
----------------------- ------- ------- ------- ------- ------ -------- ------- ------- ------- -------- -------- -------- ------
(1) The comparative has been restated in line with the current
year presentation. Refer to note 1.10.
The notes on pages 76 to 126 form an integral part of these
financial statements.
Group financial statements
Consolidated statement of cash flows
2020 2019(2)
For the year ended 30 September Note GBPm GBPm
--------------------------------------------------------- ----- ------- -------
Operating activities
Loss on ordinary activities before tax (168) (232)
Adjustments for:
Non-cash or non-operating items included in loss
before tax 5.2 (606) (1,035)
Changes in operating assets 5.2 (75) (2,543)
Changes in operating liabilities 5.2 1,877 2,630
Payments for short-term and low value leases (2) -
Interest received 2,152 2,320
Interest paid (684) (745)
Tax paid (12) (8)
--------------------------------------------------------- ----- ------- -------
Net cash provided by operating activities 2,482 387
--------------------------------------------------------- ----- ------- -------
Cash flows from investing activities
Interest received 35 27
Cash acquired on acquisition of Virgin Money
Holdings (UK) PLC - 4,663
Proceeds from maturity of financial assets at
fair value through other comprehensive income 1,568 659
Proceeds from sale of financial assets at fair
value through other comprehensive income 587 352
Purchase of financial assets at fair value through
other comprehensive income (2,838) (1,647)
Proceeds from sale of 50% (less one share) consideration
in Virgin Money Unit Trust Managers Limited - 45
Purchase of shares issued by Virgin Money Unit
Trust Managers Limited (2) -
Proceeds from sale of property, plant and equipment 5 3
Purchase of property, plant and equipment (14) (20)
Purchase and development of intangible assets (78) (130)
--------------------------------------------------------- ----- ------- -------
Net cash (used in)/provided by investing activities (737) 3,952
--------------------------------------------------------- ----- ------- -------
Cash flows from financing activities
Interest paid (195) (81)
Repayment of principal portions of lease liabilities(1) 3.17 (30) -
Proceeds from issuance of other equity instruments - 247
Repayment of AT1 classified as non-controlling
interest - (160)
Redemption and principal repayment on RMBS and
covered bonds 3.12 (1,492) (2,003)
Redemption and principal repayment on medium-term
notes/subordinated debt 3.12 (745) -
Issuance of RMBS and covered bonds 3.12 491 2,227
Issuance of medium-term notes/subordinated debt 3.12 922 642
Amounts drawn down under the TFSME 1,300 -
Amounts repaid under the TFS (3,234) (1,295)
Ordinary dividends paid - (45)
AT1 distributions 4.1.2 (79) (41)
Distributions to non-controlling interests - (33)
--------------------------------------------------------- ----- ------- -------
Net cash used in financing activities (3,062) (542)
--------------------------------------------------------- ----- ------- -------
Net (decrease)/increase in cash and cash equivalents (1,317) 3,797
Cash and cash equivalents at the beginning of
the year 11,131 7,334
--------------------------------------------------------- ----- ------- -------
Cash and cash equivalents at the end of the year 5.2 9,814 11,131
--------------------------------------------------------- ----- ------- -------
(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 and depreciation
on right-of-use assets is included within depreciation.
(2) Cash and cash equivalents has been restated in the
comparative year in line with the current year presentation, as
detailed in note 1.11.
Group financial statements
Consolidated statement of cash flows
Movements in liabilities arising from financing activities
Term Debt
funding securities Lease
schemes in issue liabilities(1) Total
GBPm GBPm GBPm GBPm
----------------------------------------------- -------- ----------- --------------- -------
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 - 1,413 - 1,413
Drawdowns 1,300 - - 1,300
Redemptions - (2,237) - (2,237)
Repayment (3,234) - (30) (3,264)
Non-cash flows:
Fair value adjustments and associated
unwind on acquired TFS and debt
securities in issue 36 27 - 63
Additions to right-of-use asset in exchange
for increased lease liabilities - - 2 2
Remeasurement - - (6) (6)
Movement in accrued interest (13) (7) 4 (16)
Unrealised foreign exchange movements - (23) - (23)
Unamortised costs - (6) - (6)
----------------------------------------------- -------- ----------- --------------- -------
At 30 September 2020 5,397 8,758 175 14,330
----------------------------------------------- -------- ----------- --------------- -------
(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.
The notes on pages 76 to 126 form an integral part of these
financial statements.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation
Overview
This section sets out the Group's accounting policies that relate to
the consolidated financial statements as a whole. Where an accounting
policy is specific to one note, the policy is described in the note
to which it relates. This section also shows new accounting standards,
amendments and interpretations which are relevant to the Group, and
whether they are effective in 2020 or later years. We explain how these
changes are expected to impact the financial position and performance
of the Group.
The Group has adopted the UK Finance Code for Financial Reporting Disclosure
and has prepared the 2020 Annual Report & Accounts in compliance with
the Code.
1.1 General information
The Company is a public company limited by shares, incorporated
in the United Kingdom under the Companies Act and registered in
England and Wales.
The consolidated financial statements comprise those of the
Company and its controlled entities, together the 'Group'.
1.2 Basis of accounting
The consolidated financial statements have been prepared in
accordance with IFRS as adopted by the EU and in accordance with
the provisions of the Companies Act 2006.
The financial information has been prepared under the historical
cost convention, as modified by the revaluation of certain
financial assets and liabilities at fair value through profit or
loss and other comprehensive income. Fair value is defined as the
price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at
the measurement date.
1.3 Presentation of risk, offsetting and maturity
disclosures
Certain disclosures required under IFRS 7 'Financial
instruments: disclosures' and IAS 1 'Presentation of financial
statements' have been included within the audited sections of the
Risk report. Where information is marked as audited, it is
incorporated into these financial statements by this cross
reference and it is covered by the Independent auditor's
report.
1.4 Going concern
The Group's business activities, together with the factors
likely to affect its future development, performance and position,
are set out in the Strategic report contained in the Group's Annual
Report & Accounts. In addition, the Risk report includes the
Group's risk management objectives and the Group's objectives,
policies and processes for managing its capital.
In assessing the Group's going concern position as at 30
September 2020, the Directors have considered a number of factors,
including the current balance sheet position, the Group's strategic
and financial plan, taking account of possible changes in trading
performance and funding retention, and stress testing and scenario
analysis. The assessment concluded that, for the foreseeable
future, the Group has sufficient capital and liquidity for the next
12 months. The Group's capital ratios and its total capital
resources are comfortably in excess of PRA requirements and
internal stress testing indicates the Group can withstand severe
economic and competitive stresses. The Group's MREL ratio at 30
September 2020 comfortably exceeds its interim MREL requirements
and is in line with its expected end-state MREL requirements. This
means future MREL issuance is focused on building a prudent
management buffer over the expected end-state MREL minimum
requirement.
As a result of the assessment, the Directors have a reasonable
expectation that the Company and the Group have adequate resources
to continue in operational existence for the foreseeable future and
therefore believe that the Group is well placed to manage its
business risks successfully. Accordingly, they continue to adopt
the going concern basis in preparing the consolidated financial
statements.
1.5 Basis of consolidation
Controlled entities are all entities (including structured
entities) to which the Company is exposed, or has rights, to
variable returns from its involvement with the entity and has the
ability to affect those returns through its power over the entity.
An assessment of control is performed on an ongoing basis.
Controlled entities are consolidated from the date on which
control is established by the Group until the date that control
ceases. The acquisition method of accounting is used to account for
business combinations other than those under common control. A
non--controlling interest is recognised by the Group in respect of
any portion of the total assets less total liabilities of an
acquired entity or entities that is not owned by the Group.
Balances and transactions between entities within the Group and any
unrealised gains and losses arising from those transactions are
eliminated in full upon consolidation.
The Group's interests in JV entities are accounted for using the
equity method and then assessed for impairment in the relevant
holding companies' financial statements.
The consolidated financial statements have been prepared using
uniform accounting policies.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation
1.6 Foreign currency
Functional and presentation currency
Items included in the financial statements of each of the
Group's entities are measured using the currency of the primary
economic environment in which the entity operates, the 'functional
currency'. The consolidated financial statements are presented in
pounds sterling (GBP), which is also the Group's presentation
currency, rounded to the nearest million pounds sterling (GBPm)
unless otherwise stated.
Transactions and balances
The Group records an asset, liability, expense or revenue
arising from a transaction using the closing exchange rate between
the functional and foreign currency on the transaction date. At
each subsequent reporting date, the Group translates foreign
currency monetary items at the closing rate. Foreign exchange
differences arising on translation or settlement of monetary items
are recognised in the income statement during the year in which the
gains or losses arise.
Foreign currency non-monetary items measured at historical cost
are translated at the date of the transaction, with those measured
at fair value translated at the date when the fair value is
determined. Foreign exchange differences are recognised directly in
equity for non-monetary items where any component of associated
gains or losses is recognised directly in equity. Foreign exchange
differences arising from non-monetary items, whereby the associated
gains or losses are recognised in the income statement, are also
recognised in the income statement.
1.7 Financial assets and liabilities
Recognition and derecognition
A financial asset or a financial liability is recognised on the
balance sheet when the Group becomes party to the contractual
provisions of the instrument. Purchases and sales of financial
assets classified within FVTPL or FVOCI are recognised on trade
date.
The Group derecognises a financial asset when the contractual
cash flows from the asset expire or it transfers the right to
receive contractual cash flows on the financial asset in a
transaction in which substantially all the risks and rewards of
ownership are transferred. Financial liabilities are derecognised
when the Group has discharged its obligation to the contract, or
the contract is cancelled or expires.
Classification and measurement
The Group measures a financial asset or liability on initial
recognition at its fair value, plus or minus transaction costs that
are directly attributable to the acquisition or issue of the
financial asset or the financial liability (with the exception of
financial assets or liabilities at FVTPL, where transaction costs
are recognised directly in the income statement as they are
incurred).
Financial assets
Subsequent accounting for a financial asset is determined by the
classification of the asset depending on the underlying business
model and contractual cash flow characteristics. This results in
classification within one of the following categories: i) amortised
cost; ii) FVTPL; or iii) FVOCI.
A financial asset is measured at amortised cost when: (1) the
asset is held within a business model whose objective is achieved
by collecting contractual cash flows; and (2) the contractual terms
give rise to cash flows on specified dates which are solely
payments of principal and interest on the principal amount
outstanding. The amortised cost classification applies to the
Group's loans and advances to customers (note 3.1), cash and
balances from central banks (note 3.4) and balances due from other
banks. Financial assets classified at amortised cost are subject to
ECL requirements as detailed in note 3.2.
The accounting policies for financial assets at FVTPL and FVOCI
are detailed in notes 3.5 and 3.7 respectively.
Financial liabilities
All financial liabilities are measured at amortised cost, except
for financial liabilities at FVTPL. Such liabilities include
derivatives (other than derivatives that are financial guarantee
contracts or are designated and effective hedging instruments) and
liabilities designated at FVTPL on initial recognition.
Offsetting
This can only occur, and the net amount be presented on the
balance sheet, when the Group currently has a legally enforceable
right to offset the recognised amounts and intends either to settle
on a net basis, or to realise the asset and settle the liability
simultaneously.
1.8 Property, plant and equipment
The Group's property, plant and equipment is carried at cost,
less accumulated depreciation and impairment losses. Cost includes
expenditure that is directly attributable to acquisition of the
asset. Impairment is assessed whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable.
All items of property, plant and equipment are depreciated or
amortised using the straight line method, at rates appropriate to
their estimated useful life to the Group. The annual rates of
depreciation or amortisation are:
Buildings 50 years
Leases (leasehold improvements) the lower of the expected lease
term or the asset's remaining useful life
Fixtures and equipment 3-10 years
Residual values and useful lives of assets are reviewed at each
reporting date. Depreciation is recognised within operating
expenses in the income statement.
The Group previously held freehold and long-term leasehold land
and buildings at fair value as highlighted in note 1.11.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation
1.9 Critical accounting estimates and judgements
The preparation of financial statements requires the use of
certain critical accounting estimates and judgements that affect
the reported amounts of assets, liabilities, revenues and expenses
and the disclosed amount of contingent liabilities. Actual results
may differ from those on which management's estimates are based.
Estimates and assumptions are continually evaluated and are based
on historical experience and other factors, including expectations
of future events that are believed to be reasonable. Estimates
which are based on future economic conditions, and sensitive to
changes in those conditions, have been impacted by COVID-19. This
estimation impact has primarily been in the measurement of ECL, EIR
and assessing the recoverability of deferred tax balances. Actual
results may differ materially from these estimates.
The Group considers the most significant use of accounting
estimates and judgements relate to the following areas:
-- impairment provisions on credit exposures (note 3.2);
-- EIR (note 2.2);
-- deferred tax (note 3.9);
-- PPI redress provision and other conduct related matters (note 3.14); and
-- retirement benefit obligations (note 3.10).
1.10 New accounting standards and interpretations
The Group has adopted a number of International Accounting
Standards Board (IASB) pronouncements in the current financial
year.
IFRS 16 'Leases'
IFRS 16 'Leases' is effective for financial periods beginning on
or after 1 January 2019 and replaces IAS 17 'Leases', IFRIC 4
'Determining whether an Arrangement contains a Lease,' SIC-15
'Operating Leases -- Incentives' and SIC-27 'Evaluating the
Substance of Transactions Involving the Legal Form of a Lease.'
IFRS 16 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, IFRS 16 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 on which the leased asset is available for
use. Assets and liabilities arising from a lease are initially
measured on a present value basis. The accounting policy for leases
(note 3.17) has been revised.
As permitted by the new standard, the Group has implemented IFRS
16 using the 'modified retrospective' approach and recognised the
cumulative impact of transition as an adjustment through retained
earnings. Therefore, the comparative information has not been
restated and is presented, as previously reported, under IAS 17 and
related interpretations. 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 30 September 2020 the
right-of-use assets and lease liabilities were GBP162m and GBP175m
respectively. The right-of-use assets are presented in property,
plant and equipment and the liabilities are presented in other
liabilities. Further detail on the transitional impact of IFRS 16
can be found in note 5.4.
Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and
IFRS 7)
Amendments to IFRS 9, IAS 39 and IFRS 7 were issued in September
2019. The amendments are effective for financial years beginning on
or after 1 January 2020 (with early adoption permitted) and were
endorsed for use in the EU in January 2020. The amendments provide
temporary reliefs which enable hedge accounting to continue during
the period of uncertainty before the hedged items or hedging
instruments affected by the current interest rate benchmarks are
amended as a result of the ongoing interest rate benchmark
reforms.
The Group exercised the accounting policy choice to continue
hedge accounting under IAS 39 on adoption of IFRS 9 in October
2018. The Group has also early adopted the amendments and related
disclosure requirements relating to IAS 39 and IFRS 7 with effect
from 1 October 2019. Adopting these amendments allows the Group to
continue hedge accounting during the period of uncertainty arising
from interest rate benchmark reforms. Further detail is provided in
note 3.6.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation
1.10 New accounting standards and interpretations continued
Other accounting standards and interpretations
Except where otherwise stated, the following IASB pronouncements
did not have a material impact on the Group's consolidated
financial statements:
-- IFRIC interpretation 23: 'Uncertainty over Income Tax
Treatments' issued in 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 32 '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 year of GBP15m (12 months
to 30 September 2019: GBP15m) for the Group and a reduction in tax
expense and an increase in profit for the year of GBP15m (12 months
to 30 September 2019: GBP8m) for the Company;
-- 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 JV to which the equity method is not applied but that,
in substance, form part of the net investment in the associate or
JV (long-term interests).
New accounting standards and interpretations not yet adopted
Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS 9,
IAS 39, IFRS 7, IFRS 4 and IFRS 16)
Following completion of the second part of the IASB's two-phased
project, amendments were issued in August 2020 and are effective
for financial years beginning on or after 1 January 2021. The
amendments have not yet been endorsed for use by the EU and
therefore have not been adopted by the Group.
The amendments address issues that might affect financial
reporting as a result of the reform of an interest rate benchmark,
including the effects of changes to contractual cash flows or
hedging relationships arising from the replacement of an interest
rate benchmark with an alternative benchmark rate. The amendments
provide practical relief from certain requirements in IFRS 9, IAS
39, IFRS 7, IFRS 4 and IFRS 16 relating to:
-- changes in the basis for determining contractual cash flows
of financial assets, financial liabilities and lease liabilities;
and
-- hedge accounting.
On application of the amendments, the Group does not expect any
impact on amounts reported for 2020 or prior years.
The IASB has issued a number of other minor amendments to IFRSs
that are not mandatory for 30 September 2020 reporting years and
have not been early adopted by the Group. These amendments are not
expected to have a material impact for the Group.
1.11 Other changes in the year
Freehold and long-term leasehold land and buildings - change in
accounting policy
The Group changed its accounting policy with respect to freehold
and long-term leasehold land and buildings. The Group now applies
the cost model, where these assets are carried at cost less
accumulated depreciation and any accumulated impairment. Prior to
this change in policy, freehold and long-term leasehold land and
buildings were recorded at their fair values. The Group concluded
that the cost model provides a more reliable and more meaningful
presentation following the adoption of IFRS 16 which introduced a
significant property related right-of-use asset, held at cost, on
the balance sheet in the year, and also removed the previous
distinction between finance and operating leases. The application
of the cost model is also standard market practice across the UK
banking sector. For these reasons the Group determined it should
harmonise the measurement basis for all property related assets to
be at cost. This change in accounting policy has not had a material
impact on the Group's balance sheet as there has been no difference
of significance between the fair value and cost value on freehold
and long-term leasehold land and buildings for a number of years.
The GBP1m asset revaluation reserve that existed at 30 September
2019 has been released. Due to the immaterial effect of this
change, comparatives have not been
restated.
Cash and cash equivalents - change in definition
During the year, the Group has reassessed 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 in the Glossary.
Comparative years have been restated to reflect this change in
definition, with the balance for the 12 months to 30 September 2019
increasing by GBP1,012m from GBP10,119m to GBP11,131m.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.1 Segment information
The Group's operating segments are operating units engaged in
providing different products or services and whose operating
results and overall performance are regularly reviewed by the
Group's Chief Operating Decision Maker, the Executive Leadership
Team.
With effect from 1 October 2019, the business has been aligned
operationally into three divisions: Mortgages, Personal and
Business. 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.
Summary income statement
2020 2019
GBPm GBPm
-------------------------------------- -------- -------
Net interest income 1,283 1,514
Non-interest income 160 235
-------------------------------------- -------- -------
Total operating income 1,443 1,749
Operating and administrative expenses (1,104) (1,729)
Impairment losses on credit exposures (507) (252)
-------------------------------------- -------- -------
Segment loss before tax (168) (232)
-------------------------------------- -------- -------
Average interest earning assets 86,826 86,362
-------------------------------------- -------- -------
The Group has no operations outside the UK and therefore no
secondary geographical area information is presented. The Group is
not reliant on a single customer. Liabilities are managed on a
centralised basis.
2.2 Net interest income
Accounting policy
Interest income is recognised in the income statement using the effective
interest method which discounts the estimated future cash payments
or receipts over the expected life of the financial instrument to the
gross carrying amount of the non-credit impaired financial asset. Interest
expense is recognised in the income statement using the same effective
interest method on the amortised cost of the financial liability.
When calculating the EIR, cash flows are estimated considering all
contractual terms of the financial instrument (e.g. prepayment, call
and similar options) excluding future credit losses. The calculation
includes all amounts paid or received that are an integral part of
the EIR such as transaction costs and all other premiums or discounts.
Where it is not possible to reliably estimate the cash flows or the
expected life of a financial instrument (or group of financial instruments),
the contractual cash flows over the full contractual term of the financial
instrument (or group of financial instruments) are used.
Loan origination and commitment fees are recognised within the EIR
calculation. Fees in relation to the non-utilisation of a commitment
are recognised as revenue upon expiry of the agreed commitment period.
Loan related administration and service fees are recognised as revenue
over the period of service.
Interest income on financial assets in impairment Stages 1 and 2 is
recognised on the unwind of the discount from the initial recognition
of the ECL using the original EIR. Once a financial asset or group
of similar financial assets has been categorised as credit-impaired
(Stage 3), interest income is recognised on the net carrying value
(after the ECL allowance) using the asset's original EIR. The interest
income for POCI financial assets is calculated using the credit-adjusted
EIR applied to the amortised cost of the financial asset from initial
recognition. The Group recognises and presents the reversal of ECLs
following the curing of a credit impaired financial asset as a reversal
of impairment losses.
Interest income and interest expense on hedged assets and liabilities
and financial assets and liabilities designated as FVTPL are also recognised
as part of NII.
Interest income and expense on derivatives economically hedging interest
bearing financial assets or liabilities (but not designated as hedging
instruments) and other financial assets and liabilities held at FVTPL
(either mandatory or by election) are presented within 'Other similar
interest'.
Included in interest income is finance lease income which is recognised
at a constant periodic rate of return on the net investment.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.2 Net interest income continued
Critical accounting estimates and judgements
EIR
The EIR is determined at initial recognition based upon the Group's
best estimate of the future cash flows of the financial instrument.
In the event these estimates are revised at a later date, a present
value adjustment to the carrying value of the EIR asset may be recognised
in profit or loss. Such adjustments can introduce income statement
volatility and consequently the EIR method introduces a source of estimation
uncertainty. The Group considers that material risk of adjustments
exists in relation to the application of EIR to the Group's mortgage
and credit card portfolios.
Mortgages
The main accounting judgement when assessing the cash flows within
the Group's secured lending EIR model is the product life (including
assumptions based on observed historic customer behaviour when in a
standard variable rate (SVR) period) and the early repayment charge
income receivable. The Group currently assumes that 84% of customers
will have fully repaid or remortgaged within two months of reverting
to SVR. If this were to increase to 89%, the loans and advances to
customers balance would reduce by GBP9m with the adjustment recognised
in NII.
Credit cards
The Group measures credit card EIR by modelling expected cash flows
based on assumptions of future customer behaviour, which is supported
by observed experience. Key behavioural assumptions include an estimation
of utilisation of available credit, future retail and cash transactions,
repayment activity and the retention of the customer balance after
the end of a promotional period.
The EIR of new business written in the current year is 5.60% (2019:
5.26%).
The Group specifically considered the impact of COVID-19 on the expected
cash flows, and adjustments were made to assumptions of future customer
behaviour, in particular utilisation of available credit, future retail
transactions and repayment activity. In the weeks that followed the
initial UK lockdown retail spend fell by almost 60% before beginning
to recover as lockdown restrictions began to ease. Retail and cash
transactions remain below the level of pre-COVID-19 volumes, at around
75% of pre-COVID-19 volumes. The Group currently assumes that retail
and cash transaction activity will recover during 2021, however if
current customer behaviour was to continue and retail transaction activity
remained at 75% of pre-COVID-19 volumes for the next 12 months to 30
September 2021, with an associated adjustment to expected repayment
activity of 0.6% to account for the lower retail and cash transactions,
the Group estimates this would result in a negative present value adjustment
of approximately GBP20m as at 30 September 2020.
The Group holds an appropriate level of model risk reserve across both
asset classes to mitigate the risk of estimation uncertainty.
The Group will continue to monitor the impact of COVID-19 and update
key assumptions and judgements as required.
2020 2019
GBPm GBPm
----------------------------------------------------------- ------ -----
Interest income
Loans and advances to customers 2,062 2,320
Loans and advances to other banks 35 72
Financial assets at fair value through other comprehensive
income 32 27
Other interest income - 1
----------------------------------------------------------- ------ -----
Total interest income 2,129 2,420
----------------------------------------------------------- ------ -----
Other similar interest
Financial assets at fair value through profit or loss 15 21
Derivatives economically hedging interest bearing assets (7) (8)
----------------------------------------------------------- ------ -----
Total other similar interest 8 13
----------------------------------------------------------- ------ -----
Less: interest expense and similar charges
Customer deposits (588) (580)
Debt securities in issue (193) (185)
Due to other banks (68) (144)
Other interest expense (5) (10)
----------------------------------------------------------- ------ -----
Total interest expense and similar charges (854) (919)
----------------------------------------------------------- ------ -----
Net interest income 1,283 1,514
----------------------------------------------------------- ------ -----
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.3 Non-interest income
Accounting policy
Gains less losses on financial instruments at fair value
This includes fair value gains and losses from three distinct activities:
* derivatives classified as held for trading - the full
change in fair value of trading derivatives is
recognised inclusive of interest income and expense
arising on those derivatives except when economically
hedging other assets and liabilities at fair value as
outlined in note 2.2;
* other financial assets and liabilities designated at
FVTPL - these relate principally to the Group's fixed
interest rate loan portfolio and related term
deposits (note 3.5), which were designated at
inception as fair value through profit or loss. The
fair value of these loans is derived from the future
loan cash flows using appropriate discount rates and
includes adjustments for credit risk and credit
losses. The valuation technique used is reflective of
current market practice; and
* hedged assets, liabilities and derivatives designated
in hedge relationships - fair value movements are
recognised on both the hedged item and hedging
derivative in a fair value hedge relationship, the
net of which represents hedge ineffectiveness, and
hedge ineffectiveness on cash flow hedge
relationships (note 3.6).
Fees and commissions
Fees and commissions receivable which are not an integral part of the
EIR are recognised as income as the Group fulfils its performance obligations.
The Group's principal performance obligations arising from contracts
with customers are in respect of current accounts, debit cards and
credit cards. The Group provides the service and consequently generates
the fees monthly; the fees are recognised in income on this basis.
Costs incurred to generate fee and commission income are charged to
fees and commissions expense as they are incurred.
Income from insurance, protection and investments
This includes management fees in the previous year generated from the
sale of and management of funds, Stocks and Shares ISAs and pensions
to retail investors.
2020 2019
GBPm GBPm
------------------------------------------------------------- ----- -----
Gains less losses on financial instruments at fair value
Held for trading derivatives 15 16
Financial assets and liabilities at fair value(1) 2 3
Ineffectiveness arising from fair value hedges (note
3.6) (17) (22)
Amounts recycled to profit and loss from cash flow hedges(2)
(note 3.6) (5) -
Ineffectiveness arising from cash flow hedges (note
3.6) (6) (14)
------------------------------------------------------------- ----- -----
(11) (17)
------------------------------------------------------------- ----- -----
Other operating income
Net fee and commission income 142 195
Margin on foreign exchange derivative brokerage 17 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 loss after tax(3) (7) (1)
Other income 3 1
------------------------------------------------------------- ----- -----
171 252
------------------------------------------------------------- ----- -----
Total non-interest income 160 235
------------------------------------------------------------- ----- -----
(1) A credit risk gain on loans and advances at fair value of
GBP1m and a fair value loss of GBP5m have been recognised in the
current year (2019: GBP2m gain and GBP2m fair value loss).
(2) In respect of terminated hedges.
(3) The share of joint venture loss after tax is included within
continuing activities.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.3 Non-interest income continued
Non-interest income includes the following fee and commission
income disaggregated by income type:
2020 2019
GBPm GBPm
-------------------------------------- ----- -----
Current account and debit card fees 94 117
Credit cards 41 42
Insurance, protection and investments 16 37
Other fees(1) 31 31
-------------------------------------- ----- -----
Total fee and commission income 182 227
Total fee and commission expense (40) (32)
-------------------------------------- ----- -----
Net fee and commission income 142 195
-------------------------------------- ----- -----
(1) Other fees include mortgages, invoice and asset finance and
ATM fees.
2.4 Operating and administrative expenses before impairment
losses
Accounting policy
Personnel expenses primarily consist of wages and salaries, accrued
bonus and social security costs arising from services rendered by employees
during the financial year.
The Group recognises bonus costs where it has a present obligation
that can be reliably measured. Bonus costs are recognised over the
relevant service period required to entitle the employee to the reward.
The Group's accounting policies on pension expenses and equity based
compensation are included in notes 3.10 and 4.2 respectively.
2020 2019
GBPm GBPm
-------------------------------------------- ------ -----
Personnel expenses 396 421
Depreciation and amortisation expense(1) 149 108
Other operating and administrative expenses 559 1,200
-------------------------------------------- ------ -----
Total operating and administrative expenses 1,104 1,729
-------------------------------------------- ------ -----
(1) Following the adoption of IFRS 16 from 1 October 2019, the
depreciation charge arising on the right-of-use assets is reported
within depreciation and amortisation expense. Prior to adoption of
IFRS 16, the equivalent operating lease charges were reported
within other operating and administrative expenses.
Personnel expenses comprise the following items:
2020 2019
GBPm GBPm
---------------------------------------------------------- ----- -----
Salaries, wages and non-cash benefits and social security
costs 252 256
Defined contribution pension expense 49 47
Defined benefit pension expense (note 3.10) - 9
Equity based compensation (note 4.2) 10 4
Other personnel expenses 85 105
---------------------------------------------------------- ----- -----
Personnel expenses 396 421
---------------------------------------------------------- ----- -----
The average number of FTE employees of the Group during the year
was made up as follows:
2020 2019
Number Number
--------------- ------- -------
Managers 2,911 2,989
Clerical staff 5,345 5,714
--------------- ------- -------
8,256 8,703
--------------- ------- -------
The average monthly number of employees was 9,275 (2019:
9,787).
All staff are contracted employees of the Group and its
subsidiary undertakings. The average figures above do not include
contractors.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.4 Operating and administrative expenses before impairment
losses continued
Auditor's remuneration included within other operating and
administrative expenses:
2020 2019
GBP'000 GBP'000
---------------------------------------------------- -------- --------
Fees payable to the Company's auditor for the audit
of the Company's financial statements 20 21
Fees payable to the Company's auditor for the audit
of the Company's subsidiaries(1) 3,218 2,967
---------------------------------------------------- -------- --------
Total audit fees 3,238 2,988
Audit related assurance services 322 436
Other assurance services 329 289
---------------------------------------------------- -------- --------
Total non-audit fees 651 725
Fees payable to the Company's auditor in respect of
associated pension schemes 91 88
---------------------------------------------------- -------- --------
Total fees payable to the Company's auditor 3,980 3,801
---------------------------------------------------- -------- --------
(1) Includes the audit of the Group's structured entities.
Non-audit services of GBP0.7m (2019: GBP0.7m) performed by the
auditor during the year included the review of the Interim
Financial Report, comfort letters for the global medium-term note
programme and AT1 issuance, and client money reviews. In addition
to the above, out of pocket expenses of GBP0.1m (2019: GBP0.2m)
were borne by the Group, principally related to reimbursement of
travel expenses incurred by staff when performing the above
services.
2.5 Taxation
Accounting policy
Income tax on the profit or loss for the year comprises current and
deferred tax. Income tax is recognised in the income statement except
to the extent that it is related to items recognised directly in equity,
in which case the tax is also recognised in equity (excluding AT1 distributions
where the tax impact is recognised in the income statement). Current
tax is the expected tax payable or receivable on the taxable profit
or loss for the year, using tax rates enacted or substantively enacted
at the balance sheet date, and any adjustment to tax payable in respect
of previous years. Deferred tax assets and liabilities are recognised
on temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the financial statements.
Deferred tax is determined using tax rates and laws that have been
enacted or substantively enacted by the balance sheet date and are
expected to apply when the related deferred tax asset is realised or
the deferred tax liability is settled.
2020 2019
GBPm GBPm
------------------------------------- ----- -----
Current tax
Current year 10 5
Adjustment in respect of prior years (6) (5)
------------------------------------- ----- -----
4 -
------------------------------------- ----- -----
Deferred tax (note 3.9)
Current year (38) (56)
Adjustment in respect of prior years 7 3
------------------------------------- ----- -----
(31) (53)
------------------------------------- ----- -----
Tax credit for the year (27) (53)
------------------------------------- ----- -----
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.5 Taxation continued
The tax assessed for the year differs from that arising from
applying the standard rate of corporation tax in the UK of 19%. A
reconciliation from the credit implied by the standard rate to the
actual tax credit is as follows:
2020 2019
GBPm GBPm
----------------------------------------------------- ----- -----
Loss on ordinary activities before tax (168) (232)
----------------------------------------------------- ----- -----
Tax credit based on the standard rate of corporation
tax in the UK of 19% (2019: 19%) (32) (44)
----------------------------------------------------- ----- -----
Effects of:
Disallowable expenses 5 50
Conduct indemnity adjustment (39) 10
Deferred tax assets derecognised/(recognised) 90 (49)
Non-taxable gain on partial disposal of Virgin Money
Unit Trust Managers Limited (note 2.3) - (7)
Bank levy - 1
Impact of rate changes (37) 3
AT1 distribution (15) (15)
Adjustments in respect of prior years 1 (2)
----------------------------------------------------- ----- -----
Tax credit for the year (27) (53)
----------------------------------------------------- ----- -----
The conduct indemnity adjustment represents a reduction in the
amount payable to the Group's former parent, NAB, under the term of
the Deed of Indemnity entered into at demerger in 2016. The
reduction reflects the forecast decrease in utilisation of tax
losses that are the subject of the indemnity, with a consequent
reduction in the amount to be returned to NAB. The current
anticipated cumulative liability, measured in accordance with the
Group's established methodology, is GBP64m (2019: GBP104m), shown
within 'Due to other banks' on the Company balance sheet. The
liability will crystallise when certain tax losses are used within
the Virgin Money UK PLC group to reduce the Group's corporation tax
liability.
Deferred tax assets derecognised represent historic losses that
have been derecognised in accordance with the Group's established
deferred tax recognition methodology, reflecting their expected
utilisation against future taxable profits. More information on
deferred tax is given in note 3.9.
The rate change credit arises on the revaluation of the Group's
net deferred tax assets. The valuation at 30 September 2019
reflected the enacted reduction to a 17% rate, but this reduction
was cancelled in the Budget of 11 March 2020 with reversion to
19%.
As outlined in note 1.10, 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 has
been presented in the income statement, rather than in equity. This
change is presentational only; it has no effect on total
shareholder assets. Prior year comparatives have been restated.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.6 Earnings per share (EPS)
Accounting policy
Basic EPS
Basic EPS is calculated by taking the profit attributable to ordinary
shareholders of the parent company and then dividing this by the weighted-average
number of ordinary shares outstanding during the year after deducting
the weighted-average of the Group's holdings of its own shares.
Diluted EPS
This requires the weighted-average number of ordinary shares in issue
to be adjusted to assume conversion of all dilutive potential ordinary
shares. These arise from awards made under equity based compensation
schemes. Share awards with performance conditions attaching to them
are not considered to be dilutive unless these conditions have been
met at the reporting date.
The Group presents basic and diluted loss per share data in
relation to the ordinary shares of Virgin Money UK PLC.
2020 2019
GBPm GBPm
----------------------------------------------------- ----- -----
Loss attributable to ordinary equity holders for the
purposes of basic and diluted EPS (220) (253)
----------------------------------------------------- ----- -----
2020 2019
---------------------------------------------------- ------ ------
Weighted-average number of ordinary shares in issue
(millions)
- Basic 1,440 1,414
- Diluted 1,440 1,414
Basic loss per share (pence) (15.3) (17.9)
Diluted loss per share (pence) (15.3) (17.9)
---------------------------------------------------- ------ ------
Basic loss per share has been calculated after deducting 0.3m
(2019: 1m) ordinary shares representing the weighted-average of the
Group's holdings of its own shares. The calculation of the diluted
earnings per share in the current and prior year excluded
conditional awards of 1m ordinary shares made under equity based
compensation schemes. These have been considered anti-dilutive due
to the Group making a loss in the current and prior year.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.1 Loans and advances to customers
Accounting policy
Loans and advances to customers arise when the Group provides money
directly to a customer and includes mortgages, term lending, overdrafts,
credit card lending, lease finance and invoice financing. They are
recognised initially at fair value and are subsequently measured at
amortised cost, using the effective interest method, adjusted for ECLs
(note 3.2). They are derecognised when the rights to receive cash flows
have expired or the Group has transferred substantially all the risks
and rewards of ownership.
Leases entered into by the Group as lessor, where the Group transfers
substantially all the risks and rewards of ownership to the lessee,
are classified as finance leases. The leased asset is not held on the
Group balance sheet; instead, a finance lease is recognised representing
the minimum lease payments receivable under the terms of the lease,
discounted at the rate of interest implicit in the lease. Interest
income is recognised in interest receivable, allocated to accounting
years to reflect a constant periodic rate of return.
2020 2019
GBPm GBPm
----------------------------------------------------- ------- ------
Gross loans and advances to customers 72,925 73,246
Impairment provisions on credit exposures (note 3.2) (735) (362)
Fair value hedge adjustment 240 211
----------------------------------------------------- ------- ------
72,430 73,095
----------------------------------------------------- ------- ------
The Group has a portfolio of fair valued business loans of
GBP190m (2019: GBP253m) which are classified separately as
financial assets at FVTPL on the balance sheet (note 3.5). Combined
with the above, this is equivalent to total loans and advances of
GBP72,620m (2019: GBP73,348m).
The fair value hedge adjustment represents an offset to the fair
value movement on derivatives designated in hedge relationships to
manage the interest rate risk inherent in the Group's fixed rate
mortgage portfolio.
The Group has transferred a proportion of mortgages to the
securitisation and covered bond programmes (note 3.3).
Lease finance
The Group leases a variety of assets to third parties under
finance lease arrangements, including vehicles and general plant
and machinery. The cost of assets acquired by the Group during the
year for the purpose of letting under finance leases and hire
purchase contracts amounted to GBP61m (2019: GBP38m) and GBP346m
(2019: GBP408m) respectively.
Finance lease receivables are presented in the statement of
financial position within 'Loans and advances to customers'. The
maturity analysis of lease receivables, including the undiscounted
lease payments to be received are as follows:
Gross investment in finance lease and hire purchase
receivables
2020 2019
GBPm GBPm
-------------------------------------------------------------- ----- -----
Less than 1 year 265 276
1-2 years 186 180
2-3 years 125 112
3-4 years 65 63
4-5 years 32 31
More than 5 years 33 23
-------------------------------------------------------------- ----- -----
706 685
Unearned finance income (36) (36)
-------------------------------------------------------------- ----- -----
Net investment in finance lease and hire purchase receivables 670 649
-------------------------------------------------------------- ----- -----
Finance income recognised on the net investment in the lease was
GBP22m (2019: GBP22m) and is included in 'Interest income' in the
income statement (note 2.2).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.2 Impairment provisions on credit exposures
Accounting policy
At each reporting date, the Group assesses financial assets measured
at amortised cost, as well as loan commitments and financial guarantees
not measured at FVTPL, for impairment. The impairment loss allowance
is calculated using an ECL methodology and reflects: (i) an unbiased
and probability weighted amount; (ii) the time value of money which
discounts the impairment loss; and (iii) reasonable and supportable
information that is available without undue cost or effort at the reporting
date about past events, current conditions and forecasts of future
economic conditions.
ECL methodology is based upon the combination of PD, LGD and EAD estimates
that consider a range of factors that impact on credit risk and consequently
the level of impairment loss provisioning. The Group uses reasonable
and supportable forecasts of future economic conditions in estimating
the ECL allowance. The methodology and assumptions used in the ECL
calculation are reviewed regularly and updated as necessary.
The ECL assessment is performed on either a collective or individual
basis:
Collectively assessed: these assets are assessed and provided for
on a group or a pooled basis due to the existence of shared risk characteristics
for as long as they retain those similar characteristics. Financial
assets are considered to have shared risk characteristics when, at
a given point in time, they will tend to display a similar PD and credit
risk profile.
Individually assessed: these assets are assessed and provided for
at the financial instrument level, with the assessment (which is governed
by the Group's Credit Policy) taking into consideration a range of
likely potential outcomes relating to each customer and their associated
financial assets.
Regardless of the calculation basis, the Group generates an allowance
at the individual financial instrument level.
SICR assessment and staging
The ECL is calculated as either a 12-month (Stage 1) or lifetime ECL
depending on whether the financial asset has suffered a SICR since
origination (Stage 2) or has otherwise become credit impaired (Stage
3) as at the reporting date. The Group uses a PD threshold curve (distinct
for each portfolio) to assess for a SICR and also utilises the 30 days
past due and 90 days past due backstops for recognising Stage 2 and
Stage 3 provisions respectively.
In addition to the above stages, POCI financial assets are those which
are assessed as being credit impaired upon initial recognition. Once
a financial asset is classified as POCI, it remains there until derecognition
irrespective of its credit quality. POCI financial assets are disclosed
separately from those financial assets in Stage 3. The Group regards
the date of acquisition as the origination date for purchased portfolios.
Financial assets can move between stages when the relevant staging
criteria are no longer satisfied. If the level of impairment loss reduces
in a subsequent year, the previously recognised impairment loss allowance
is reversed and recognised in the income statement.
The Group has not made use of the low credit risk option under IFRS
9 for loans and advances at amortised cost.
Write-offs and recoveries
When there is no reasonable expectation of recovery for a loan, it
is written off against the related provision. Such loans are written
off after all the necessary procedures have been completed and the
amount of the loss has been determined. Subsequent recoveries of amounts
previously written off decrease the amount of the impairment charge
in the income statement.
The Group's impairment policy for debt instruments at FVOCI is included
in note 3.7. The impact of the ECL methodology on the Group's cash
and balances with central banks and due from other banks balances is
immaterial.
Critical accounting estimates and judgements
The use of an ECL methodology under IFRS 9 requires the Group to apply
estimates and exercise judgement when calculating an impairment allowance
for credit exposures.
Further detail on the scenarios, macroeconomic assumptions and weightings
used in the ECL calculation together with sensitivity analysis is detailed
in the Risk report on pages 42 to 45.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.2 Impairment provisions on credit exposures continued
2020 2019
Movement in impairment provisions on credit exposures GBPm GBPm
------------------------------------------------------ ------ -----
Opening balance 362 224
Charge for the year 507 252
Amounts written off (159) (142)
Recoveries of amounts written off in previous years 25 28
------------------------------------------------------ ------ -----
Closing balance 735 362
------------------------------------------------------ ------ -----
Individually assessed 53 47
Collectively modelled 682 315
------------------------------------------------------ ------ -----
735 362
------------------------------------------------------ ------ -----
The Group impairment provision is classified by stage allocation
as follows:
2020 2019
GBPm GBPm
----------- ----- -----
Stage 1 136 79
Stage 2 465 168
Stage 3(1) 134 115
----------- ----- -----
735 362
----------- ----- -----
(1) Stage 3 includes GBP2m (2019: GBP3m) of POCI gross loans and advances.
3.3 Securitisation and covered bond programmes
Accounting policy
The Group sponsors the formation of structured entities, primarily
for the purpose of facilitation of asset securitisation and covered
bond transactions, the full details of which can be found in note 6.2
to the Company financial statements. The Group has no shareholding
in these entities, but is exposed, or has rights, to variable returns
and has the ability to affect those returns. The entities are consolidated
in the Group's financial statements in accordance with note 1.5.
Securitisation
The Group has securitised a portion of its retail mortgage loan portfolio
under both master trust (Lanark and Lannraig) and standalone (Gosforth)
securitisation programmes. The securitised mortgage loans have been
assigned at principal value to bankruptcy remote structured entities.
The securitised debt holders have no recourse to the Group other than
the principal and interest (including fees) generated from the securitised
mortgage loan portfolio.
The externally held securitised notes in issue are included within
debt securities in issue (note 3.12). There are a number of notes held
internally by the Group which are used as collateral for repurchases
and similar transactions or for credit enhancement purposes.
Covered bond
A subset of the Group's retail mortgage loan portfolio has been ring-fenced
and assigned to bankruptcy remote limited liability partnerships, Clydesdale
Covered Bond No 2 LLP and Eagle Place LLP, to provide a guarantee for
the obligations payable on the covered bonds issued by the Group.
The covered bond partnerships are consolidated with the mortgage loans
retained on the consolidated balance sheet and the covered bonds issued
included within debt securities in issue (note 3.12). The covered bond
holders have dual recourse: firstly, to the bond issuer on an unsecured
basis; and secondly, to the appropriate LLP under the Covered Bond
Guarantee secured against the mortgage loans.
Under both the securitisation and covered bond programmes, the mortgage
loans do not qualify for balance sheet derecognition because the Group
remains exposed to the majority of the risks and rewards of the mortgage
loan portfolio, principally the associated credit risk. The Group continues
to service the mortgage loans in return for an administration fee and
is also entitled to any residual income after all payment obligations
due under the terms of the programmes and senior programme expenses
have been met. In the mortgage originator a deemed loan liability is
recognised for the proceeds of the funding transaction.
Significant restrictions
Where the Group uses its financial assets to raise finance through
securitisations and the sale of securities subject to repurchase agreements,
the assets become encumbered and are not available for transfer around
the Group.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.3 Securitisation and covered bond programmes continued
The assets and liabilities in relation to securitisation and
covered bonds in issue at 30 September are as follows:
2020 2019
------------------------------------- ----------------------- -----------------------
Loans Loans
and and
advances Notes advances Notes
securitised in issue securitised in issue
GBPm GBPm GBPm GBPm
------------------------------------- ------------ --------- ------------ ---------
Securitisation programmes
Lanark Master Issuer 5,686 4,757 5,009 4,597
Lannraig Master Issuer 860 765 1,032 838
Gosforth 2014-1 - - 372 385
Gosforth 2015-1 - - 707 630
Gosforth 2016-1 1,141 947 1,142 1,048
Gosforth 2016-2 - - 701 579
Gosforth 2017-1 910 709 934 852
Gosforth 2018-1 1,227 1,060 1,353 1,267
------------------------------------- ------------ --------- ------------ ---------
9,824 8,238 11,250 10,196
Less held by the Group (4,236) (5,154)
------------------------------------- ------------ --------- ------------ ---------
4,002 5,042
------------------------------------- ------------ --------- ------------ ---------
Covered bond programmes
Clydesdale Bank PLC 905 781 1,253 776
Clydesdale Bank PLC (formerly Virgin
Money PLC) 3,446 1,137 2,622 1,126
------------------------------------- ------------ --------- ------------ ---------
4,351 1,918 3,875 1,902
------------------------------------- ------------ --------- ------------ ---------
The fair values of financial assets and associated liabilities
relating to the securitisation programmes where the counterparty to
the liabilities has recourse only to the financial assets were
GBP9,807m and GBP3,988m respectively (2019: GBP11,329m and
GBP5,085m).
There were no events during the year that resulted in any Group
transferred financial assets being derecognised.
The Group has contractual and non-contractual arrangements which
may require it to provide financial support as follows:
Securitisation programmes
The Group provides credit support to the structured entities via
reserve funds, which are partly funded through subordinated debt
arrangements and by holding junior notes. Exposures are shown in
the table below:
2020 2019
GBPm GBPm
------------------------- ----- -----
Beneficial interest held 1,795 1,467
Subordinated loans 46 100
Junior notes held 1,299 1,722
------------------------- ----- -----
3,140 3,289
------------------------- ----- -----
Looking forward through future reporting years there are a
number of date-based options on the notes issued by the structured
entities which could be actioned by them as issuer. These could
require the Group, as sponsor, to provide additional liquidity
support.
Covered bond programmes
The nominal level of over-collateralisation was GBP520m (2019:
GBP699m) in the Clydesdale Bank PLC programme and GBP2,314m (2019:
GBP1,490m) in the Clydesdale Bank PLC (formerly Virgin Money PLC)
programme. From time to time the obligations of the Group to
provide over--collateralisation may increase due to the formal
requirements of the programme.
Under all programmes, the Group has an obligation to repurchase
mortgage exposures if certain mortgage loans no longer meet the
programme criteria.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.4 Cash and balances with central banks
Accounting policy
Cash and balances with central banks are measured at amortised cost,
using the effective interest method, adjusted for ECLs, and are derecognised
when the rights to receive cash flows have expired or the Group has
transferred substantially all the risks and rewards of ownership. These
balances are generally of a short-term nature and repayable on demand
or within a short timescale, generally three months.
2020 2019
GBPm GBPm
----------------------------------------------------------- ------ ------
Cash assets 1,560 1,574
Balances with central banks (including EU payment systems) 7,547 8,722
----------------------------------------------------------- ------ ------
9,107 10,296
Less mandatory deposits with central banks(1) (220) (183)
----------------------------------------------------------- ------ ------
Included in cash and cash equivalents (note 5.2) 8,887 10,113
----------------------------------------------------------- ------ ------
(1) Mandatory deposits are not available for use in the Group's
day-to-day business and are non-interest bearing.
3.5 Financial assets and liabilities at fair value through
profit or loss
Accounting policy
A financial asset is measured at FVTPL if it (i) does not fall into
one of the business models for amortised cost (note 1.7) or FVOCI (note
3.7); (ii) is specifically designated as FVTPL on initial recognition
in order to eliminate or significantly reduce a measurement mismatch;
or (iii) is classified as held for trading.
Financial liabilities are measured at FVTPL where they are trading
liabilities or where they are designated at FVTPL (e.g. an accounting
mismatch) or where the performance is evaluated on a fair value basis
in accordance with risk management and investment strategies.
A financial instrument is classified as held for trading if it is acquired
principally for the purpose of selling in the near term, forms part
of a portfolio of financial instruments that are managed together and
for which there is evidence of short-term profit taking, or it is a
derivative not in a qualifying hedge relationship.
Associated gains and losses are recognised in the income statement
as they arise (note 2.3).
2020 2019
GBPm GBPm
------------------------------------------------------ ----- -----
Financial assets at fair value through profit or loss
Loans and advances 190 253
Other financial assets 13 14
------------------------------------------------------ ----- -----
203 267
------------------------------------------------------ ----- -----
Loans and advances
Included in financial assets at FVTPL is a historical portfolio
of loans (sales ceased in 2012). Interest rate risk associated with
these loans is managed using interest rate derivative contracts and
the loans are recorded at fair value to avoid an accounting
mismatch. The maximum credit exposure of the loans is GBP190m
(2019: GBP253m) including accrued interest receivable of GBP1m
(2019: GBP1m). The cumulative loss in the fair value of the loans
attributable to changes in credit risk amounts to GBP3m (2019:
GBP4m) and the change for the current year is a decrease of GBP1m
(2019: decrease of GBP4m), of which GBP1m (2019: GBP2m) has been
recognised in the income statement.
Other financial assets
Included in other financial assets are GBP12m (2019: GBP8m) of
unlisted securities and GBP1m (2019: GBP6m) of debt
instruments.
Refer to note 3.16 for further information on the valuation
methodology applied to financial assets held at FVTPL and their
classification within the fair value hierarchy. Details of the
credit quality of financial assets is provided in the Risk
report.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments
Accounting policy
The Group uses derivative financial instruments to manage exposure
to interest rate and foreign currency risk. Interest rate risk arises
when there is a mismatch between fixed interest rate and floating interest
rates, and different repricing characteristics between assets and liabilities.
Currency risk arises when assets and liabilities are not denominated
in the functional currency of the entity. Derivatives are recognised
on the balance sheet at fair value on trade date and are measured at
fair value throughout the life of the contract. Derivatives are carried
as assets when the fair value is positive and as liabilities when the
fair value is negative. The notional amount of a derivative contract
is not recorded on the balance sheet but is disclosed as part of this
note.
Netting
Derivative assets and liabilities are offset against collateral received
and paid respectively, and the net amount reported in 'due to and from
other banks' in the balance sheet only when there is a legally enforceable
right to offset the recognised amounts, and there is an intention to
settle on a net basis. Amounts offset on the balance sheet represent
the Group's centrally cleared derivative financial instruments and
collateral paid to/from central clearing houses, which meet the criteria
for offsetting under IAS 32.
Hedge accounting
The Group elects to apply hedge accounting for the majority of its
risk management activity that uses derivatives. This results in greater
alignment in the timing of recognition of gains and losses on hedged
items and hedging instruments and therefore reduces income statement
volatility. The Group does not have a trading book, however derivatives
that do not meet the hedging criteria, or for which hedge accounting
is not applied, are classified as held for trading.
The Group has elected, as a policy choice permitted under IFRS 9, to
continue to apply hedge accounting in accordance with IAS 39. The method
of recognising the fair value gain or loss on a derivative depends
on whether it is designated as a hedging instrument and the nature
of the item being hedged. Certain derivatives are designated as either
hedges of highly probable future cash flows attributable to a recognised
asset or liability, or a highly probable forecast transaction (a cash
flow hedge); or hedges of the fair value of recognised assets or liabilities
or firm commitments (a fair value hedge).
As highlighted in note 1.10, the Group has early adopted the 'Amendments
to IAS 39 and IFRS 7 Interest Rate Benchmark Reform' issued in September
2019. In accordance with the transition provisions, the amendments
have been adopted retrospectively in respect of hedging relationships
that existed at the start of the reporting year or were designated
thereafter, and to the amount accumulated in the cash flow hedge reserve
at that date.
The amendments provide temporary relief from applying specific hedge
accounting requirements to hedging relationships directly affected
by IBOR (Interbank Offered Rates) reform. The reliefs have the effect
that IBOR reform should not generally cause hedge accounting to terminate.
However, any hedge ineffectiveness continues to be recorded in the
income statement. Furthermore, the amendments set out triggers for
when the reliefs will end, which include the uncertainty arising from
interest rate benchmark reform no longer being present.
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 be 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; and
* 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.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
Accounting policy continued
Cash flow hedge
The effective portion of changes in the fair value of derivatives that
are designated and qualify as cash flow hedges is recognised in equity.
Specifically, the separate component of equity (note 4.1) is adjusted
to the lesser of the cumulative gain or loss on the hedging instrument
and the cumulative change in fair value of the expected future cash
flows on the hedged item from the inception of the hedge. Any remaining
gain or loss on the hedging instrument is recognised in the income
statement. The carrying value of the hedged item is not adjusted. Amounts
accumulated in equity are transferred to the income statement in the
year in which the hedged item affects profit or loss.
When a hedging instrument expires or is sold, or when a hedge no longer
meets the criteria for hedge accounting, any cumulative gain or loss
remains in equity and is recognised when the forecast transaction is
ultimately recognised in the income statement. When a forecast transaction
is no longer expected to occur, the cumulative gain or loss that was
reported in equity is immediately transferred to the income statement.
Fair value hedge
The carrying value of the hedged item on initial designation is adjusted
for the fair value attributable to the hedged risk. Subsequently, changes
in the fair value of derivatives that are designated and qualify as
fair value hedges are recorded in the income statement, together with
any changes in the fair value of the hedged asset or liability that
are attributable to the hedged risk. This movement in the fair value
of the hedged item is made as an adjustment to the carrying value of
the hedged asset or liability.
Where the hedged item is derecognised from the balance sheet, the adjustment
to the carrying amount of the asset or liability is immediately transferred
to the income statement. When a hedging instrument expires or is sold,
or when a hedge no longer meets the criteria for hedge accounting,
the adjustment to the carrying amount of a hedged item is amortised
to the income statement over the remaining life of the asset or liability.
Derivatives held for trading
Changes in value of held for trading derivatives are immediately recognised
in the income statement (note 2.3).
The tables below analyse derivatives between those designated as
hedging instruments and those classified as held for trading:
2020 2019
GBPm GBPm
Fair value of derivative financial assets
Designated as hedging instruments 198 315
Designated as held for trading 120 51
----------------------------------------------- ----- -----
318 366
----------------------------------------------- ----- -----
Fair value of derivative financial liabilities
Designated as hedging instruments 158 191
Designated as held for trading 92 82
----------------------------------------------- ----- -----
250 273
----------------------------------------------- ----- -----
In respect of derivatives with other banks, cash collateral
totalling GBP53m (2019: GBP55m) has been pledged and GBP93m has
been received (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,
totalled GBP202m (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.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
Total derivative contracts
2020 2019
----------------------------- -------------------------------------- --------------------------------------
Notional Notional
contract Fair value Fair value contract Fair value Fair value
amount of assets of liabilities amount of assets of liabilities
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- --------- ---------- --------------- --------- ---------- ---------------
Derivatives designated
as hedging instruments
Cash flow hedges
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps (gross) 29,645 74 215 25,023 105 121
Less: net settled interest
rate swaps(1) (19,187) (13) (171) (14,513) (47) (75)
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps (net)(2) 10,458 61 44 10,510 58 46
Cross currency swaps(2) 420 28 - 1,446 162 -
----------------------------- --------- ---------- --------------- --------- ---------- ---------------
10,878 89 44 11,956 220 46
Fair value hedges
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps (gross) 37,803 182 751 25,492 146 526
Less: net settled interest
rate swaps(1) (30,603) (92) (642) (23,872) (60) (389)
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps (net)(2) 7,200 90 109 1,620 86 137
Cross currency swaps(2) 1,448 19 5 808 9 8
----------------------------- --------- ---------- --------------- --------- ---------- ---------------
8,648 109 114 2,428 95 145
----------------------------- --------- ---------- --------------- --------- ---------- ---------------
Total derivatives designated
as hedging instruments 19,526 198 158 14,384 315 191
----------------------------- --------- ---------- --------------- --------- ---------- ---------------
Derivatives designated
as held for trading
Foreign exchange rate
related contracts
Spot and forward foreign
exchange(2) 1,003 15 15 728 16 15
Cross currency swaps(2) 1,263 56 7 1,123 11 9
Options(2) 1 - - 2 - -
----------------------------- --------- ---------- --------------- --------- ---------- ---------------
2,267 71 22 1,853 27 24
----------------------------- --------- ---------- --------------- --------- ---------- ---------------
Interest rate related
contracts
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps (gross) 704 28 47 1,159 24 53
Less: net settled interest
rate swaps(1) - - - (363) (5) (2)
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps (net)(2) 704 28 47 796 19 51
Swaptions(2) 10 - 2 11 - 2
Options(2) 426 2 3 465 2 3
----------------------------- --------- ---------- --------------- --------- ---------- ---------------
1,140 30 52 1,272 21 56
----------------------------- --------- ---------- --------------- --------- ---------- ---------------
Commodity related contracts 131 19 18 55 2 2
----------------------------- --------- ---------- --------------- --------- ---------- ---------------
Equity related contracts - - - 3 1 -
----------------------------- --------- ---------- --------------- --------- ---------- ---------------
Total derivatives designated
as held for trading 3,538 120 92 3,183 51 82
----------------------------- --------- ---------- --------------- --------- ---------- ---------------
(1) Presented within other assets.
(2) Presented within derivative financial instruments.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
Hedge accounting
The hedging strategy of the Group is divided into micro hedges,
where the hedged item is a distinctly identifiable asset or
liability, and portfolio hedges, where the hedged item is a
homogenous portfolio of assets and liabilities.
In some hedge accounting relationships, the Group designates
risk components of hedged items as follows:
-- benchmark interest rate risk as a component of interest rate
risk, such as the SONIA component;
-- exchange rate risk for foreign currency financial assets and financial liabilities; and
-- components of cash flows of hedged items, for example certain
interest payments for part of the life of an instrument.
Other risks such as credit risk and liquidity risk are managed
by the Group but are not included in the hedge accounting
relationship. Changes in the designated risk component usually
account for the largest portion of the overall change in fair value
or cash flows of the hedged item.
Portfolio cash flow hedges
The Group applies macro cash flow hedge accounting to a portion
of its floating rate financial assets and liabilities. The hedged
cash flows are a group of forecast transactions that result in cash
flow variability from resetting of interest rates, reinvestment of
financial assets, or refinancing and rollovers of financial
liabilities. This cash flow variability can arise on recognised
assets or liabilities or highly probable forecast transactions. The
hedged items are designated as the gross asset or liability
positions allocated to time buckets based on projected repricing
and interest profiles. The Group aims to maintain a position where
the principal amount of the hedged items is greater than or equal
to the notional amount of the corresponding interest rate swaps
used as the hedging instruments. The hedge accounting relationship
is reassessed on a monthly basis with the composition of hedging
instruments and hedged items changing frequently in line with the
underlying risk exposures. If necessary, the hedge relationships
are de-designated and redesignated based on the effectiveness test
results.
Micro cash flow hedges
Floating rate issuances that are denominated in currencies other
than the functional currency of the Group are designated in cash
flow hedges with cross currency swaps.
Portfolio fair value hedges
The Group applies macro fair value hedging to its fixed rate
mortgages. During the year fair value hedging of fixed rate
deposits was discontinued. The Group determines hedged items by
identifying portfolios of homogeneous loans or deposits based on
their contractual maturity and other risk characteristics. Loans or
deposits within the identified portfolios are allocated to
repricing time buckets based on expected, rather than contractual,
repricing dates. The hedging instruments are designated to those
repricing time buckets. Hedge effectiveness is measured on a
monthly basis, by comparing fair value movements of the designated
proportion of the bucketed loans due to the hedged risk against the
fair value movements of the derivatives.
The aggregated fair value changes in the hedged loans and
deposits are recognised on the Group's balance sheet as an asset
and liability respectively. At the end of every month, in order to
minimise the ineffectiveness from early repayments and accommodate
new exposures, the Group voluntarily de-designates the hedge
relationships and redesignates them as new hedges.
Micro fair value hedges
The Group uses this hedging strategy on GBP and foreign currency
denominated fixed rate assets held at FVOCI and GBP and foreign
currency denominated fixed rate debt issuances by the Group.
Hedge ineffectiveness
Hedge ineffectiveness can arise from:
-- mismatches between the contractual terms of the hedged item
and hedging instrument, including basis differences;
-- differences in timing of cash flows of hedged items and hedging instruments;
-- changes in expected timings and amounts of forecast future cash flows; and
-- derivatives used as hedging instruments having a non-zero
fair value at the time of designation.
Additionally, for portfolio fair value hedges of the Group's
fixed rate mortgage portfolio, ineffectiveness also arises from the
difference between forecast and actual repayments (e.g. prepayment
risk and impact of short-term payment holidays granted to customers
in response to COVID-19).
Interest Rate Benchmark Reform
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), which are
subject to IBOR reform.
As at 30 September 2020, the principal of the hedged items
designated into cash flow hedge relationships that is directly
affected by the interest rate benchmark reform is GBP611m. The
principal of the hedged items designated in fair value hedge
relationships that is directly affected by the interest rate
benchmark reform is GBP780m, of which GBP78m relates to EURIBOR.
These fair value hedges principally relate to GBP and foreign
currency denominated fixed rate assets, and GBP fixed rate
debt.
At 30 September 2020, the principal amount of the hedging
instruments in hedge relationships to which these amendments apply
was GBP908m, of which GBP778m relates to fair value hedges and
GBP130m relates to cash flow hedges.
Page 67 of the Risk report describes how the Group is managing
the transition to new benchmark interest rates.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
The Group will continue to apply the amendments to IAS 39 until
the uncertainty arising from IBOR reform, with respect to the
timing and the amount of the underlying cash flows that the Group
is exposed to, 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.
The table below discloses the impact derivatives held in micro
hedging relationships are expected to have on the timing and
uncertainty of future cash flows. All notional principal amounts
and carrying values are presented gross, prior to any netting
permitted for balance sheet presentation as this reflects the
derivative position used for risk management and the impact on
future cash flows.
3 months 3 to 12 1 to 5
or less months years Total
----------------------------- -------- ------- ------ -----
2020
Cash flow hedges
Foreign exchange risk
Cross currency swap
Notional principal (GBPm) 185 235 - 420
Average GBP/EUR rate 1.4149 1.4149 - n/a
Average GBP/USD rate 1.3023 1.2984 - n/a
----------------------------- -------- ------- ------ -----
2019
Cash flow hedges
Foreign exchange risk
Cross currency swap
Notional principal (GBPm) 107 445 894 1,446
Average GBP/EUR rate 1.3459 1.3423 1.3680 n/a
Average GBP/USD rate 1.3263 1.3228 1.3089 n/a
----------------------------- -------- ------- ------ -----
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
Summary of hedging instruments in designated hedge
relationships
In the table below, the Group sets out the accumulated
adjustments arising from the corresponding continuing hedge
relationships, irrespective of whether or not there has been a
change in hedge designation during the year.
2020 2019
------------------ ------------------------------------------------ ------------------------------------------------
Carrying amount Carrying amount
--------- ------------------- ---------------- --------- ------------------- ----------------
Change Change
in fair in fair
value value
of hedging of hedging
instrument instrument
in the in the
year year
Notional used for Notional used for
contract ineffectiveness contract ineffectiveness
amount Assets Liabilities measurement(2) amount Assets Liabilities measurement(2)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ --------- ------ ----------- ---------------- --------- ------ ----------- ----------------
Cash flow hedges
Interest rate risk
Interest rate
swaps(1) 29,645 74 (215) (80) 25,023 105 (121) -
Foreign exchange
risk
Cross currency
swaps 420 28 - (59) 1,446 162 - 59
------------------ --------- ------ ----------- ---------------- --------- ------ ----------- ----------------
Total derivatives
designated as
cash flow hedges 30,065 102 (215) (139) 26,469 267 (121) 59
------------------ --------- ------ ----------- ---------------- --------- ------ ----------- ----------------
Fair value hedges
Interest rate risk
Interest rate
swaps(1) 37,803 182 (751) (40) 25,492 146 (526) (264)
Foreign exchange
and
interest rate risk
Cross currency
swaps 1,448 19 (5) - 808 9 (8) 1
------------------ --------- ------ ----------- ---------------- --------- ------ ----------- ----------------
Total derivatives
designated as
fair value hedges 39,251 201 (756) (40) 26,300 155 (534) (263)
------------------ --------- ------ ----------- ---------------- --------- ------ ----------- ----------------
(1) As shown in the total derivatives contracts table on page
94, for centrally cleared derivatives, where the IAS 32 'Financial
Instruments: Presentation' netting criteria is met, the derivative
balances are offset within other assets. For all other derivatives,
the derivative balances are presented within derivative financial
instruments.
(2) Changes in fair value of cash flow hedging instruments are
recognised in other comprehensive income. Changes in fair value of
fair value hedging instruments are recognised in the income
statement in non-interest income.
Summary of hedged items in designated hedge relationships
In the table below, the Group sets out the accumulated
adjustments arising from the corresponding continuing hedge
relationships, irrespective of whether or not there has been a
change in hedge designation during the year.
2020 2019
------------------------------ ------------------------------------------ ------------------------------------------
Change Cash flow hedge Change Cash flow hedge
in fair reserve in fair reserve
value value (excluding deferred
of hedged of hedged tax)
item item
in the in the
year year
used used
for for
ineffectiveness ineffectiveness
measurement measurement
GBPm GBPm
------------------------------ ---------------- ------------------------ ---------------- ------------------------
Continuing Discontinued Continuing Discontinued
hedges hedges hedges hedges
GBPm GBPm GBPm GBPm
------------------------------ ---------------- ---------- ------------ ---------------- ---------- ------------
Cash flow hedges
Interest rate risk
Gross floating rate assets
and gross
floating rate
liabilities(1) 74 (123) 17 (14) (15) (20)
Foreign exchange risk
Floating rate currency
issuances(2) 59 (1) - (59) - -
------------------------------ ---------------- ---------- ------------ ---------------- ---------- ------------
Total 133 (124) 17 (73) (15) (20)
------------------------------ ---------------- ---------- ------------ ---------------- ---------- ------------
(1) Highly probable future cash flows arising from loans and
advances to customers, due to customers and debt securities in
issue.
(2) Hedged item is recorded in debt securities in issue.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
2020 2019
------------------ -------------------------------------------------- --------------------------------------------------
Carrying Carrying
amount amount
of hedged of hedged
items items
-------------------- ----------- --------------- -------------------- ----------- ---------------
Change Change
in fair in fair
Accumulated value Accumulated value
amount of amount of
of hedged of hedged
fair items fair items
value in the value in the
adjustments year adjustments year
on used on used
the for the for
hedged ineffectiveness hedged ineffectiveness
Assets Liabilities item measurement Assets Liabilities item measurement
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------- ----------- ----------- --------------- ------ ------------ ----------- ---------------
Fair value hedges
Interest rate risk
Fixed rate
mortgages(3) 31,110 - 240 29 16,436 - 211 209
Fixed rate
customer
deposits(4) - - (11) 1 - (4,769) (10) (9)
Fixed rate
FVOCI debt
instruments(5) 3,001 - 74 16 2,940 - 166 133
Fixed rate
issuances(2) - (2,576) 146 (23) - (2,368) 122 (92)
Foreign exchange
and interest
rate risk
Fixed rate
currency FVOCI
debt
instruments(5) 83 - 5 3 82 - 3 4
Fixed rate
currency
issuances(2) - (1,389) 4 (3) - (530) 1 (4)
------------------ ------- ----------- ----------- --------------- ------ ------------ ----------- ---------------
Total 34,194 (3,965) 458 23 19,458 (7,667) 493 241
------------------ ------- ----------- ----------- --------------- ------ ------------ ----------- ---------------
(1) Highly probable future cash flows arising from loans and
advances to customers, due to customers and debt securities in
issue.
(2) Hedged item is recorded in debt securities in issue.
(3) Hedged item and the cumulative fair value changes, are
recorded in loans and advances to customers.
(4) Hedge relationship was discontinued during the year. The
fair value adjustment taken will be amortised over the remaining
life of the hedged items, and is recorded in due to customers.
(5) Hedged item is recorded in financial assets at FVOCI.
2020 2019
--------------- -------------------------------------------------- --------------------------------------------------
Reclassified Reclassified
into into
income statement income statement
as as
--------------- ------------- ------------------ --------------- ------------- ------------------
Effective Effective
Hedge portion Hedge portion
ineffectiveness recognised ineffectiveness recognised
recognised in other Net Non- recognised in other Net Non-
in income comprehensive interest interest in income comprehensive interest interest
statement(1) income income income statement(1) income income income
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- --------------- ------------- -------- -------- --------------- ------------- -------- --------
Cash flow
hedges
Interest rate
risk
Gross
floating
rate assets
and gross
floating
rate
liabilities (6) (74) 4 (5) (14) 14 - -
Foreign
exchange risk
Floating
rate
currency
issuances - (59) - (59) - 59 - 57
--------------- --------------- ------------- -------- -------- --------------- ------------- -------- --------
Total losses on
cash flow
hedges (6) (133) 4 (64) (14) 73 - 57
--------------- --------------- ------------- -------- -------- --------------- ------------- -------- --------
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
Hedge ineffectiveness
recognised in
income
----------------------------------------------
2020 2019
GBPm GBPm
---------------------------------------------- ----------- ----------
Fair value hedges
Interest rate risk
Fixed rate mortgages (22) (24)
Fixed rate customer deposits 3 4
Fixed rate FVOCI debt instruments - (2)
Fixed rate issuances 2 (1)
Foreign exchange and interest rate risk
Fixed rate currency FVOCI debt instruments - -
Fixed rate currency issuances - 1
---------------------------------------------- ----------- ----------
Total losses on fair value hedges(1) (17) (22)
---------------------------------------------- ----------- ----------
(1) Recognised in gains less losses on financial assets at fair
value.
3.7 Financial assets at fair value through other comprehensive
income
Accounting policy
A financial asset is measured at FVOCI when (i) the asset is held within
a business model whose objective is achieved by both collecting contractual
cash flows and selling financial assets; and (ii) the contractual terms
give rise to cash flows on specified dates which are solely payments
of principal and interest on the principal amount outstanding unless
the financial asset is designated at FVTPL on initial recognition.
An option for equity investments that are not held for trading can
be taken to classify them at FVOCI where an irrevocable election is
made at initial recognition. This option is available for each separate
investment. The Group has not exercised this option for any equity
investments.
Interest income and impairment gains and losses on FVOCI assets are
measured in the same manner as for assets measured at amortised cost
and are recognised in the income statement, with all other gains or
losses recognised in other comprehensive income as a separate component
of equity in the year in which they arise. Gains and losses arising
from changes in fair value are included as a separate component of
equity until sale when the cumulative gain or loss is transferred to
the income statement. For all FVOCI assets, the gain or loss is calculated
with reference to the gross carrying amount.
Debt instruments at FVOCI are subject to the same impairment criteria
as amortised cost financial assets (note 3.2), with the ECL element
recognised directly in the income statement. As the financial asset
is fair valued through other comprehensive income, the change in its
value includes the ECL element, with the remaining fair value change
recognised in other comprehensive income. Any reversal of the ECL is
recorded in the income statement up to the value recognised previously.
The Group exercises the low credit risk option for debt instruments
classified as FVOCI, recognising the high credit quality of the instruments,
accordingly a 12-month ECL is calculated on the assets.
2020 2019
GBPm GBPm
----------------------------------------------------------------- ------ -----
Listed securities 5,080 4,328
----------------------------------------------------------------- ------ -----
Total financial assets at fair value through other comprehensive
income 5,080 4,328
----------------------------------------------------------------- ------ -----
Refer to note 3.16 for further information on the valuation
methodology applied to financial assets at FVOCI at 30 September
2020 and their classification within the fair value hierarchy.
Details of the credit quality of financial assets is provided in
the Risk report.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.8 Intangible assets and goodwill
Accounting policy
Capitalised software is stated at cost, less amortisation and any provision
for impairment.
Identifiable and directly associated external and internal costs of
acquiring and developing software are capitalised where the software
is controlled by the Group, and where it is probable that future economic
benefits that exceed its cost will flow from its use over more than
one year. Costs associated with maintaining software are recognised
as an expense as incurred. Capitalised software costs are amortised
on a straight line basis over their expected useful lives, usually
between three and ten years. Impairment losses are recognised in the
income statement as incurred.
Goodwill arises on the acquisition of an entity and represents the
excess of the fair value of the purchase consideration and direct costs
of making the acquisition over the fair value of the Group's share
of the net assets at the date of the acquisition. Goodwill is not subject
to amortisation and is tested for impairment on an annual basis.
Assets that are subject to amortisation are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable, which typically arises when the benefits
associated with the software were substantially reduced from what had
originally been anticipated or the asset has been superseded by a subsequent
investment. In such situations, an impairment loss is recognised for
the amount by which the carrying amount of an asset exceeds its recoverable
amount. The recoverable amount of an asset is the higher of its fair
value less costs of disposal or its value-in-use.
Intangible assets which are fully amortised are reviewed annually to
consider whether the assets remain in use.
Capitalised Core deposit
software Goodwill intangible Total
GBPm GBPm GBPm GBPm
------------------------------------- ----------- -------- ------------ -----
Cost
At 1 October 2018 733 - - 733
Acquisition of Virgin Money Holdings
(UK) PLC 172 11 6 189
Additions 130 - - 130
Write-off (85) - - (85)
------------------------------------- ----------- -------- ------------ -----
At 30 September 2019 950 11 6 967
Additions 78 - - 78
------------------------------------- ----------- -------- ------------ -----
At 30 September 2020 1,028 11 6 1,045
------------------------------------- ----------- -------- ------------ -----
Accumulated amortisation
At 1 October 2018 321 - - 321
Charge for the year 82 - 1 83
Impairment 115 - - 115
Write-off (68) - - (68)
------------------------------------- ----------- -------- ------------ -----
At 30 September 2019 450 - 1 451
Charge for the year 102 - 1 103
------------------------------------- ----------- -------- ------------ -----
At 30 September 2020 552 - 2 554
------------------------------------- ----------- -------- ------------ -----
Net book value
------------------------------------- ----------- -------- ------------ -----
At 30 September 2020 476 11 4 491
------------------------------------- ----------- -------- ------------ -----
At 30 September 2019 500 11 5 516
------------------------------------- ----------- -------- ------------ -----
GBP4m (2019: GBP31m) of the GBP78m (2019: GBP130m) software
additions do not form part of internally generated software
projects.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.9 Deferred tax
Accounting policy
Deferred tax assets and liabilities are recognised on temporary differences
arising between the tax bases of assets and liabilities and their carrying
amounts in the consolidated financial statements. A deferred tax asset
is recognised for unused tax losses and unused tax credits only if
it is probable that future taxable amounts will arise against which
those temporary differences and losses may be utilised.
Critical accounting estimates and judgements
The Group has deferred tax assets of GBP326m (2019: GBP322m), the principal
components of which are tax losses and capital allowances.
The Group has assessed the recoverability of these deferred tax assets
at 30 September 2020 and considers it probable that sufficient future
taxable profits will be available against which the underlying deductible
temporary differences can be utilised over the corporate planning horizon.
This assessment is based on the latest strategic plan which has taken
account of the volatile and uncertain macroeconomic conditions in the
UK due to the COVID-19 pandemic and the uncertainty around Brexit.
Deferred tax assets are recognised to the extent that they are expected
to be utilised over six years from the balance sheet date. If instead
of six years the period was five years or seven years the recognised
deferred tax asset would be GBP309m or GBP345m respectively. All tax
assets arising will be used within the UK.
Movement in net deferred tax asset
2020 2019
GBPm GBPm
---------------------------------------------- ----- -----
At 1 October 121 136
Recognised in the income statement (note 2.5) 31 53
Recognised directly in equity (100) (68)
---------------------------------------------- ----- -----
At 30 September 52 121
---------------------------------------------- ----- -----
The Group has recognised deferred tax in relation to the
following items:
2020 2019
GBPm GBPm
----------------------------------------------------- ----- -----
Deferred tax assets
Tax losses carried forward 151 146
Capital allowances 113 91
Cash flow hedge reserve 23 3
Acquisition accounting adjustments(1) 1 44
Transitional adjustment - IFRS 9 15 16
Transitional adjustment - available for sale reserve - 1
Employee equity based compensation 5 5
Unamortised issue costs 4 4
Pension spreading 9 11
Other 5 1
----------------------------------------------------- ----- -----
326 322
----------------------------------------------------- ----- -----
Deferred tax liabilities
Defined benefit pension scheme surplus (253) (139)
Acquisition accounting adjustments(1) (11) (51)
Gains on financial instruments at fair value through
other comprehensive income (6) (6)
Intangible assets (3) (4)
Other (1) (1)
----------------------------------------------------- ----- -----
(274) (201)
----------------------------------------------------- ----- -----
Net deferred tax asset 52 121
----------------------------------------------------- ----- -----
(1) Following the execution of FSMA part VII, the deferred tax
assets and liabilities in respect of acquisition accounting
adjustments have been offset to provide a single number that will
unwind in the same entity over coming years.
The deferred tax assets and liabilities detailed above arise
primarily in Clydesdale Bank PLC.
The value of tax losses carried forward of GBP151m (2019:
GBP146m) has increased due to the recognition of current year
losses and the rate change arising from the increase in the
corporation tax rate. The de-recognition of historic losses has
largely been offset by a reduction in the conduct indemnity
adjustment (note 2.5). At 30 September 2020, the Group had an
unrecognised deferred tax asset of GBP217m (2019: GBP114m)
representing trading losses with a gross value of GBP1,142m valued
at 19% (2019: GBP668m valued at 17%).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.10 Retirement benefit obligations
Accounting policy
The Group makes contributions to both defined benefit and defined contribution
pension schemes which entitle employees to benefits on retirement or
disability.
Defined contribution pension scheme
The Group recognises its obligation to make contributions to the scheme
as an expense in the income statement as incurred. Prepaid contributions
are recognised as an asset to the extent that a cash refund or a reduction
in future payments is available.
Defined benefit pension scheme
A liability or asset is recognised on the balance sheet in respect
of the defined benefit scheme and is measured as the difference between
the present value of the defined benefit obligation less the fair value
of the defined benefit scheme assets at the reporting date. The present
value of the defined benefit obligation for the scheme is discounted
by high quality corporate bond rates that have maturity dates approximating
to the terms of the defined benefit obligation. Surpluses are only
recognised to the extent that they are recoverable through reduced
contributions in the future or through refunds from the scheme. In
assessing whether a surplus is recoverable, the Group considers its
current right to obtain a refund or a reduction in future contributions
and does not anticipate any future acts by other parties that could
change the amount of the surplus that may ultimately be recovered.
Pension expense attributable to the Group's defined benefit scheme
comprises current service cost, past service cost resulting from a
scheme amendment or curtailment, net interest on the net defined benefit
obligation/asset, gains or losses on settlement and administrative
costs incurred. Where actuarial remeasurements arise, the Group recognises
such amounts directly in equity through the statement of comprehensive
income in the year in which they occur. Actuarial remeasurements arise
from experience adjustments (the effects of differences between previous
actuarial assumptions and what has actually occurred) and changes in
actuarial assumptions.
The following table summarises the present value of the defined
benefit obligation and fair value of plan assets for the Scheme as
at 30 September:
2020 2019
GBPm GBPm
------------------------------------------------------------- ------- -------
Active members' defined benefit obligation (23) (30)
Deferred members' defined benefit obligation (2,064) (2,537)
Pensioner and dependant members' defined benefit obligations (1,871) (1,744)
------------------------------------------------------------- ------- -------
Total defined benefit obligation (3,958) (4,311)
Fair value of Scheme assets 4,681 4,707
------------------------------------------------------------- ------- -------
Net defined benefit pension asset 723 396
------------------------------------------------------------- ------- -------
The Group's pension arrangements
The Group operates both defined benefit and defined contribution
arrangements. The Group's principal trading subsidiary, Clydesdale
Bank PLC, is the sponsoring employer in one funded defined benefit
pension scheme, the Yorkshire and Clydesdale Bank Pension Scheme
('the Scheme'). The current version of the Scheme was established
under trust on 30 September 2009 with the assets held in a trustee
administered fund. The Trustee is responsible for the operation and
governance of the Scheme, including making decisions regarding the
Scheme's funding and investment strategy.
The Scheme is subject to the funding legislation outlined in the
Pensions Act 2004 which came into force on 30 December 2005. This,
together with documents issued by the Pensions Regulator, sets out
the framework for funding defined benefit occupational pension
plans in the UK.
The Group has implemented a number of reforms to the Scheme to
manage the obligation. It closed the Scheme to new members in 2004
and since April 2006 has determined benefits accruing on a career
average revalued earnings basis. On 1 August 2017, the Scheme was
closed to future benefit accrual for the majority of current
employees, with affected employees' future pension benefits being
provided through the Group's existing defined contribution scheme,
'Total Pension'. The income statement charge for this is separately
disclosed in note 2.4.
The Group also provides post-retirement healthcare under a
defined benefit scheme for pensioners and their dependant relatives
for which provision has been made on a basis consistent with the
methodology applied to the defined benefit pension scheme. This is
a closed scheme and the provision will be utilised over the life of
the remaining scheme members. The obligation in respect of this
scheme was GBP2m at 30 September 2020 (2019: GBP3m) and is included
within other liabilities in note 3.15.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.10 Retirement benefit obligations continued
Scheme valuations
There are a number of means of measuring liabilities in the
defined benefit schemes, with the ultimate aim of the Trustee being
that the Scheme is 100% funded on an agreed self-sufficiency basis
(which is where the Scheme is essentially self-funded and does not
need to call on the Group for any additional funding). The two
bases used by the Group to value its obligations are: (i) an IAS 19
accounting basis; and (ii) a Trustee's Technical Provision
basis.
(i) IAS 19 accounting basis
The valuations of the Scheme assets and obligations are
calculated on an accounting basis in accordance with the applicable
accounting standard IAS 19 which provides the basis for the
accounting framework and methodology for entries in the income
statement, balance sheet and capital reporting. The principal
purpose of this valuation is to allow comparison of pension
obligations between companies. The obligation under an accounting
valuation can be higher or lower than those under a Trustee's
Technical Provision valuation.
The rate used to discount the obligation on an IAS 19 basis is a
key driver of any potential volatility and is based on yields on AA
rated high-quality corporate bonds, regardless of how the Trustee
of the Scheme invests the assets. The accounting valuation under
IAS 19 can therefore move adversely because of low rates and
narrowing credit spreads which are not fully matched by the Scheme
assets. Inflation is another key source of volatility and arises as
a result of member benefits having an element of index linking,
which causes the obligation to increase in line with rises in
long-term inflation assumptions. In practice however, over the long
term, the relationship between interest and inflation rates tends
to be negatively correlated resulting in a degree of risk
offset.
(ii) Trustee's Technical Provision basis
This valuation basis reflects how much money the Trustee
considers is required now in order to provide for the promised
benefits as they come up for payment in the future. The Trustee is
responsible for ensuring that the calculation is conducted
prudently on an actuarial basis, taking into account factors
including the Scheme's investment strategy and the relative
financial strength of the sponsoring employer.
A key aspect of this valuation is the investment strategy the
Trustee proposes to follow as part of the policy for meeting the
Scheme's obligations. Because there are no guarantees about
investment returns over long periods, legislation requires the
Trustee to consider carefully how much of their expected future
investment returns it would be prudent for them to account for in
advance.
During the current year the Trustee concluded the latest
triennial valuation for the Scheme, which was conducted in
accordance with Scheme data and market conditions as at 30
September 2019. The valuation resulted in an improvement in the
Scheme's funding position, with a reported surplus of GBP144m
(previously a deficit of GBP290m) and a Technical provisions
funding level of 103% (previously 94%). As the 2019 valuation
outcome was a funding surplus, future payments to the Scheme are
limited solely to those relating to a payment holiday agreed
between the Group and Scheme Trustee in respect of contributions
due under the prior 2016 valuation. These total GBP52m and will be
paid at the rate of GBP2m per month over the period January 2021 to
April 2023.
Scheme assets are not subject to the same valuation differences
as Scheme obligations and are consistently valued at current market
value.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.10 Retirement benefit obligations continued
IAS 19 position
The Scheme movements in the year are as follows:
2020 2019
------------------------------- ---------------------------------------- ----------------------------------------
Present Fair Present Fair
value value Cumulative value value Cumulative
of of plan loss of of plan loss
obligation assets Total in OCI obligation assets Total in OCI
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ----------- -------- ----- ---------- ----------- -------- ----- ----------
Balance sheet surplus
at 1 October (4,311) 4,707 396 (3,746) 3,958 212
(594) (704)
Total expense
Current service cost - - - - - -
Past service cost (1) - (1) (11) - (11)
Interest (expense)/income (75) 82 7 (100) 107 7
Administrative costs - (6) (6) - (5) (5)
------------------------------- ----------- -------- ----- ---------- ----------- -------- ----- ----------
Total (expense)/income
recognised
in the consolidated income
statement (76) 76 - (111) 102 (9)
Remeasurements
Return on Scheme assets
greater than
discount rate - 61 61 61 - 772 772 772
Actuarial:
Gain/(loss) - experience
adjustments 140 - 140 140 (9) - (9) (9)
Gain - demographic assumptions 116 - 116 116 30 - 30 30
Loss - financial assumptions (25) - (25) (25) (683) - (683) (683)
------------------------------- ----------- -------- ----- ---------- ----------- -------- ----- ----------
Remeasurement gains/(losses)
recognised
in other comprehensive
income 231 61 292 292 (662) 772 110 110
Contributions and payments
Employer contributions - 35 35 - 83 83
Benefit payments 105 (105) - 96 (96) -
Transfer payments 93 (93) - 112 (112) -
------------------------------- ----------- -------- ----- ---------- ----------- -------- ----- ----------
198 (163) 35 208 (125) 83
------------------------------- ----------- -------- ----- ---------- ----------- -------- ----- ----------
Balance sheet surplus
at 30 September (3,958) 4,681 723 (4,311) 4,707 396
------------------------------- ----------- -------- ----- ---------- ----------- -------- ----- ----------
(302) (594)
------------------------------- ----------- -------- ----- ---------- ----------- -------- ----- ----------
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.10 Retirement benefit obligations continued
The expected contributions and expected benefit payments for the
year ending 30 September 2021 are GBP39m (2020: GBP56m) and GBP108m
(2020: GBP108m) respectively.
The Group and Trustee have entered into a contingent security
arrangement (the 'Security Arrangement') (note 5.3).
Maturity of Scheme liabilities
The estimated maturity period of Scheme obligations on an IAS 19
accounting basis is provided within the Group Annual Report &
Accounts.
The discounted mean term of the defined benefit obligation at 30
September 2020 is 19 years (2019: 20 years).
Scheme assets
In order to meet the obligations of the Scheme, the Trustee
invests in a diverse portfolio of assets, with the level and
volatility of asset returns being a key factor in the overall
investment strategy. The investment portfolio is subject also to a
range of risks typical of the types of assets held, such as: equity
risk; credit risk on bonds; currency risk; interest rate and
inflation risk; and exposure to the property market. The Trustee's
investment strategy (including physical assets and derivatives)
seeks to reduce the Scheme's exposure to these risks. In managing
interest rate and inflation risks, the investment strategy seeks to
hold portfolios of matching assets (including derivatives) that
enable the Scheme's assets to better match movements in the value
of liabilities due to changes in interest rates and inflation.
As at 30 September 2020, the interest rate and inflation rate
hedge ratios were around 97% and 84% respectively (2019: 85% and
75%) of the obligation when measured on a self-sufficiency basis.
This strategy reflects the Scheme's obligation profile and the
Trustee's and the Group's attitude to risk. The Trustee monitors
the investment objectives and asset allocation policy on a regular
basis.
The Trustee's investment strategy involves two main categories
of investments:
-- matching assets - a range of investments that provide a match
to changes in obligation values; and
-- return seeking assets - a range of investments designed to
provide specific, planned and consistent returns.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.10 Retirement benefit obligations continued
The major categories of plan assets for the Scheme, stated at
fair value, are as follows:
2020 2019
----------------------------
Quoted Unquoted Total Quoted Unquoted Total
GBPm GBPm GBPm % GBPm GBPm GBPm %
---------------------------- ------ -------- ------- ---- ------ -------- ------ ----
Bonds
Fixed government 930 - 930 569 - 569
Index linked government 2,001 - 2,001 1,757 - 1,757
Global sovereign 115 1 116 20 1 21
Corporate and other 879 48 927 531 305 836
---------------------------- ------ -------- ------- ---- ------ -------- ------ ----
3,925 49 3,974 85% 2,877 306 3,183 68%
Equities(1)
Global equities - 368 368 - 503 503
Emerging market equities - 43 43 - 50 50
UK equities - 114 114 - 32 32
---------------------------- ------ -------- ------- ---- ------ -------- ------ ----
- 525 525 11% - 585 585 12%
Other
Secured income alternatives - 165 165 - 358 358
Derivatives(2) - 78 78 - 219 219
Repurchase agreements - (1,025) (1,025) - (534) (534)
Property - 122 122 - 129 129
Alternative credit - 563 563 - 409 409
Infrastructure - 127 127 - 352 352
Cash - 146 146 - 1 1
Equity options 6 - 6 5 - 5
---------------------------- ------ -------- ------- ---- ------ -------- ------ ----
6 176 182 4% 5 934 939 20%
---------------------------- ------ -------- ------- ---- ------ -------- ------ ----
Total Scheme assets 3,931 750 4,681 100% 2,882 1,825 4,707 100%
---------------------------- ------ -------- ------- ---- ------ -------- ------ ----
(1) Equity investments are classified as unquoted reflecting the
nature of the funds in which the Scheme invests directly. The
underlying investments within those funds are, however, mostly
quoted.
(2) Derivative financial instruments are used to modify the
profile of the assets of the Scheme to better match the Scheme
liabilities. Derivative holdings may lead to increased or decreased
exposures to the physical asset categories disclosed above. At 30
September 2020, the Scheme had employer-related investments within
the meaning of Section 40 (2) of the Pensions Act 1995 totalling
GBP2m (2019: GBP2m).
Actuarial assumptions
The following assumptions were used in arriving at the IAS 19
defined benefit obligation:
2020 2019
% p.a. % p.a.
--------------------------------------------------------- ------- -------
Financial assumptions
Discount rate 1.58 1.77
Inflation (RPI) 2.93 3.20
Inflation (CPI) 2.03 2.20
Career average revalued earnings (CARE) revaluations:
Pre 31 March 2012 benefits (RPI) 2.93 3.20
Post 31 March 2012 benefits (CPI capped at 5% per annum) 2.03 2.20
Pension increases (capped at 2.5% per annum) 2.01 2.10
Pension increases (capped at 5% per annum) 2.85 3.07
Rate of increase for pensions in deferment 2.03 2.20
--------------------------------------------------------- ------- -------
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.10 Retirement benefit obligations continued
Demographic assumptions
2020 2019
Years Years
---------------------------------- ------ ------
Post-retirement mortality:
Current pensioners at 60 - male 27.2 28.0
Current pensioners at 60 - female 29.3 29.6
Future pensioners at 60 - male 28.2 29.1
Future pensioners at 60 - female 30.4 30.8
---------------------------------- ------ ------
Critical accounting estimates and judgements
The value of the Group's defined benefit pension scheme requires management
to make several assumptions. The key areas of estimation uncertainty
are:
* discount rate applied: this is set with reference to
market yields at the end of the reporting year on
high quality corporate bonds in the currency and with
a term consistent with the Scheme's obligations. The
average duration of the Scheme's obligations is
approximately 20 years. The market for bonds with a
similar duration is illiquid and, as a result,
significant management judgement is required to
determine an appropriate yield curve on which to base
the discount rate;
* inflation assumptions: this is set with reference to
market expectations of the RPI measure of inflation
for a term consistent with the Scheme's obligations,
based on data published by the BoE. Other measures of
inflation (such as CPI, or inflation measures subject
to an annual cap) are derived from this assumption;
and
* mortality assumptions: the cost of the benefits
payable by the Scheme will also depend upon the life
expectancy of the members. The assumptions for
mortality rates are based on standard mortality
tables (as adjusted to reflect the characteristics of
Scheme members) which allow for future improvements
in life expectancies.
The table below sets out the sensitivity and impact on the balance
sheet surplus position of the Scheme, the defined benefit obligation
and pension cost to changes in the key actuarial assumptions: Balance
sheet Pension
surplus Obligation cost
Assumption change GBPm GBPm GBPm
------------------ ------- -------- ---------- -------
Discount rate + 0.25% (29) (180) (5)
- 0.25% 33 192 4
Inflation + 0.25% (23) 128 2
- 0.25% 26 (124) (2)
Life expectancy +1 year (161) 161 3
-1 year 156 (156) (3)
------------------ ------- -------- ---------- -------
The above sensitivity analyses are based on a change in an assumption
while holding all other assumptions constant. In practice, changes
in some of the assumptions may be correlated.
3.11 Customer deposits
2020 2019
GBPm GBPm
------------------------------------- ------- ------
Interest bearing demand deposits 41,866 38,551
Term deposits 21,107 22,239
Non-interest bearing demand deposits 4,549 3,002
Other wholesale deposits - 1
------------------------------------- ------- ------
67,522 63,793
Accrued interest payable 188 207
------------------------------------- ------- ------
67,710 64,000
------------------------------------- ------- ------
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.12 Debt securities in issue
Accounting policy
Debt securities comprise short and long-term debt issued by the Group
including commercial paper, medium-term notes, covered bonds and RMBS
notes.
Debt securities are initially recognised at fair value, being the issue
proceeds, net of transaction costs incurred. These instruments are
subsequently measured at amortised cost using the effective interest
method resulting in premiums, discounts and associated issue costs
being recognised in the income statement over the life of the instrument.
The breakdown of debt securities in issue is shown below:
Medium-term Subordinated Covered
notes debt Securitisation bonds Total
GBPm GBPm GBPm GBPm GBPm
----------------------------- ----------- ------------ -------------- -------- ------
2020
Amortised cost 1,991 750 3,992 1,842 8,575
Fair value hedge adjustments 64 - 10 76 150
----------------------------- ----------- ------------ -------------- -------- ------
Total debt securities 2,055 750 4,002 1,918 8,725
Accrued interest payable 13 7 3 10 33
----------------------------- ----------- ------------ -------------- -------- ------
2,068 757 4,005 1,928 8,758
----------------------------- ----------- ------------ -------------- -------- ------
2019
Amortised cost 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
----------------------------- ----------- ------------ -------------- -------- ------
Key movements in the year are shown in the table below(1) . Full
details of all notes in issue can be found at
https://www.virginmoneyukplc.com/investor-relations/debt-investors/.
There were no issuances or redemptions of covered bonds during the
year.
Issuances Redemptions
------------------ -------------------- ---------------------
Denomination GBPm Denomination GBPm
------------------ ------------- ----- ------------ -------
Medium-term note EUR 448 GBP (300)
Subordinated debt GBP 474 GBP (445)
USD, EUR,
Securitisation USD, GBP 491 GBP (1,492)
------------------ ------------- ----- ------------ -------
1,413 (2,237)
-------------------------------- ----- ------------ -------
(1) Other movements relate to foreign exchange, amortisation of
issuance costs and the unwinding of acquisition accounting
adjustments.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.12 Debt securities in issue continued
The following tables provide a breakdown of the medium-term
notes and subordinated debt by instrument as at 30 September:
Medium-term notes (excluding accrued interest)
2020 2019
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 529 523
VM UK 3.375% fixed rate reset callable senior notes
due 2025 369 366
VM UK 4% fixed rate reset callable senior notes due
2027 406 397
VM UK 2.875% fixed rate reset callable senior notes
due 2025 453 -
CB PLC 2.25% fixed rate senior notes due 2020 - 301
---------------------------------------------------- ------ -----
2,055 1,885
---------------------------------------------------- ------ -----
Subordinated debt (excluding accrued interest)
2020 2019
GBPm GBPm
------------------------------------------------------ ----- -----
VM UK 5% fixed rate reset callable subordinated notes
due 2026(1) 31 476
VM UK 7.875% fixed rate reset callable subordinated
notes due 2028 247 246
VM UK 5.175% fixed rate reset callable subordinated
notes due 2030 472 -
------------------------------------------------------ ----- -----
750 722
------------------------------------------------------ ----- -----
(1) Following a successful tender process, 93.6% of this note
was repurchased at par on 11 September 2020.
Details of securitisation and covered bond issuances are
included in note 3.3.
3.13 Due to other banks
Accounting policy
Repurchase agreements
Securities sold subject to sale and repurchase agreements ('repo')
are retained in their respective balance sheet categories. The associated
liabilities are included in amounts due to other banks based upon the
counterparties to the transactions.
The difference between the sale and repurchase price of repos is treated
as interest and accrued over the life of the agreements using the effective
interest method.
2020 2019
GBPm GBPm
-------------------------------------------------- ------ -----
Secured loans 5,397 7,308
Securities sold under agreements to repurchase(1) - 1,554
Transaction balances with other banks 15 12
Deposits from other banks 57 42
-------------------------------------------------- ------ -----
5,469 8,916
-------------------------------------------------- ------ -----
(1) The underlying securities sold under agreements to
repurchase have a carrying value of GBPNil (2019: GBP2,324m).
Secured loans comprise amounts drawn under the TFS and TFSME
schemes (including accrued interest).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.14 Provisions for liabilities and charges
Accounting policy
Provisions for liabilities and charges are recognised when a legal
or constructive obligation exists as a result of past events, it is
probable that an outflow of economic benefits will be necessary to
settle the obligation, and the obligation can be reliably estimated.
Provisions for liabilities and charges are not discounted to the present
value of their expected net future cash flows except where the time
value of money is considered material.
Critical accounting estimates and judgements
PPI redress provision and other conduct related matters
With the FCA's timebar deadline on PPI complaints having now passed
and significant progress having been made into the large stock of complaints
and IRs received in the weeks preceding the time bar, the level of
uncertainty in determining the quantum of PPI related liability has
reduced. The provision, however, continues to be subject to inherent
uncertainties as a result of the subjective nature of the assumptions
used in quantifying the overall estimated position at 30 September
2020, consequently the provision calculated may be subject to change
in the future if outcomes differ to those currently assumed. Sensitivity
analysis indicating the impact of reasonably possible changes in key
assumptions on the PPI provision is presented within this note.
There are similar uncertainties and judgements for other conduct risk
related matters, however the level of liability is materially lower.
2020 2019
GBPm GBPm
--------------------------------------------- ----- -----
PPI redress provision
Opening balance 379 275
Charge to the income statement - 415
Utilised (272) (311)
--------------------------------------------- ----- -----
Closing balance 107 379
--------------------------------------------- ----- -----
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
Charge to the income statement 28 18
Utilised (30) (45)
--------------------------------------------- ----- -----
Closing balance 31 25
--------------------------------------------- ----- -----
Property closure and redundancy provision
Opening balance 55 15
Adoption of IFRS 16 (note 5.4) (11) -
--------------------------------------------- ----- -----
Opening balance (restated) 44 15
Virgin Money provision on acquisition - 2
Charge to the income statement 19 64
Utilised (29) (26)
--------------------------------------------- ----- -----
Closing balance 34 55
--------------------------------------------- ----- -----
Total provisions for liabilities and charges 172 459
--------------------------------------------- ----- -----
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.14 Provisions for liabilities and charges continued
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 year. The
total provision raised to date in respect of PPI is GBP3,055m
(2019: GBP3,055m), with GBP107m of this remaining (2019:
GBP379m).
At 30 September 2020 the Group had received 730,000 complaints
with c.30,000 of those 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 within expectations, particularly around the
validity of complaints requiring redress (uphold rate). The PPI
operation is now moving into the final months and the main area of
variability is the uphold rate on the remaining complaints. Until
this process is fully complete there remains a residual risk that
existing provisions for PPI customer redress may not cover all
potential costs.
Customer redress and other provisions
Other provisions include amounts in respect of a number of
non-PPI customer redress matters, legal proceedings, claims arising
in the ordinary course of the Group's business and other matters.
The Group has raised GBP26m of further provisions in relation to
non-PPI customer redress matters in the year. 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.
3.15 Other liabilities
Accounting policy
Deferred grants
Deferred grants are recognised when there is reasonable assurance that
the grant will be received and that any conditions attached to the
grant will be complied with. Where the grant relates to costs, it is
released to the income statement on a systematic basis in line with
the incurring of the related costs. Where the grant relates to the
cost of an asset, it is released and recognised directly against the
cost of the asset when incurred.
2020 2019
GBPm GBPm
----------------------------- ------ -----
Notes in circulation 2,319 2,277
Accruals and deferred income 94 130
Deferred grant 35 -
Other 246 127
----------------------------- ------ -----
2,694 2,534
----------------------------- ------ -----
During the year, the Group applied for and was successful in
receiving GBP35m from the CIF (as part of the RBS alternative
remedies package). This will be utilised under the terms of the
grant application in future financial years.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.16 Fair value of financial instruments
Accounting policy
Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the valuation date.
When available, the Group measures the fair value of a financial instrument
using quoted prices in an active market for that instrument. Where
no such active market exists for the particular asset or liability,
the Group uses a valuation technique to arrive at the fair value, including
the use of transaction prices obtained in recent arm's length transactions
where possible, discounted cash flow analysis, option pricing models
and other valuation techniques commonly used by market participants.
In doing so, fair value is estimated using a valuation technique that
makes maximum possible use of market inputs and that places minimal
possible reliance upon entity-specific inputs.
The best evidence of the fair value of a financial instrument at initial
recognition is the transaction price, which represents the fair value
of the consideration paid or received, unless the fair value of that
instrument is evidenced by comparison with other observable current
market transactions in the same instrument (i.e. without modification
or repackaging) or based on a valuation technique whose variables include
only data from observable markets. When such evidence exists, the Group
recognises profits or losses on the transaction date.
In certain limited circumstances, the Group applies the fair value
measurement option to financial assets including loans and advances
where the inherent market risks (principally interest rate and option
risk) are individually hedged using appropriate interest rate derivatives.
The loan is designated as being carried at FVTPL to offset the movements
in the fair value of the derivative within the income statement and
therefore avoid an accounting mismatch. When a loan is held at fair
value, a statistical-based calculation is used to estimate ELs attributable
to adverse movements in credit risk on the assets held. This adjustment
to the credit quality of the asset is then applied to the carrying
amount of the loan to arrive at fair value and recognised in the income
statement.
Analysis of the fair value disclosures uses a hierarchy that reflects
the significance of inputs used in measuring fair value. The level
in the fair value hierarchy within which a fair value measurement is
categorised is determined on the basis of the lowest level input that
is significant to the fair value measurement in its entirety. The fair
value hierarchy is as follows:
* Level 1 fair value measurements - quoted prices
(unadjusted) in active markets for an identical
financial asset or liability;
* Level 2 fair value measurements - inputs other than
quoted prices within Level 1 that are observable for
the financial asset or liability, either directly (as
prices) or indirectly (derived from prices); and
* Level 3 fair value measurements - inputs for the
financial asset or liability that are not based on
observable market data (unobservable inputs).
For the purpose of reporting movements between levels of the fair value
hierarchy, transfers are recognised at the beginning of the reporting
year in which they occur.
(a) Fair value of financial instruments recognised on the
balance sheet at amortised cost
The tables show a comparison of the carrying amounts of
financial assets and liabilities measured at amortised cost, and
their fair values, where these are not approximately equal.
There are various limitations inherent in this fair value
disclosure, particularly where prices are derived from unobservable
inputs due to some financial instruments not being traded in an
active market. The methodologies and assumptions used in the fair
value estimates are therefore described in the notes to the tables.
The difference between carrying value and fair value is relevant in
a trading environment but is not relevant to assets such as loans
and advances.
30 September 2020 30 September 2019
----------------------------------- -------------------- --------------------
Carrying Fair value Carrying Fair value
value GBPm value GBPm
GBPm GBPm
----------------------------------- -------- ---------- -------- ----------
Financial assets
Loans and advances to customers(1) 72,430 71,788 73,095 73,119
Financial liabilities
Due to other banks(2) 5,469 5,469 8,916 8,874
Customer deposits(2) 67,710 67,809 64,000 64,166
Debt securities in issue(3) 8,758 8,836 9,591 9,667
----------------------------------- -------- ---------- -------- ----------
(1) Loans and advances to customers are categorised as Level 3
in the fair value hierarchy with the exception of GBP1,060m (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 GBP2,846m of listed debt (2019: GBP2,606m) which is
categorised as Level 1.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.16 Fair value of financial instruments continued
The Group's fair values disclosed for financial instruments at
amortised cost are based on the following methodologies and
assumptions:
(a) Loans and advances to customers - The fair values of loans
and advances are determined by firstly segregating them into
portfolios which have similar characteristics. Contractual cash
flows are then adjusted for ECLs and expectations of customer
behaviour based on observed historic data. The cash flows are then
discounted using current market rates for instruments of similar
terms and maturity to arrive at an estimate of their fair
value.
(b) Due to other banks - The fair value is determined from a
discounted cash flow model using current market rates for
instruments of similar terms and maturity.
(c) Customer deposits - The fair value of deposits is determined
using a replacement cost method which assumes alternative funding
is raised in the most advantageous market. The contractual cash
flows have been discounted using a funding curve with credit
spreads reflecting the tenor of each deposit.
(d) Debt securities in issue - The fair value is taken directly
from quoted market prices where available or determined from a
discounted cash flow model using current market rates for
instruments of similar terms and maturity.
(b) Fair value of financial instruments recognised on the
balance sheet at fair value
The following tables provide an analysis of financial
instruments that are measured subsequent to initial recognition at
fair value, using the fair value hierarchy described above.
Fair value measurement Fair value measurement
as at as at
30 September 2020 30 September 2019
----------------------------------- ---------------------------- ----------------------------
Level Level Level Level Level Level
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ------ ----- ----- ------ ------ ------ ----- -----
Financial assets
Financial assets at fair
value through other comprehensive
income 5,080 - - 5,080 4,328 - - 4,328
Loans and advances at
fair value through profit
or loss - 190 - 190 - 253 - 253
Other financial assets
at fair value through
profit or loss - 8 5 13 - - 14 14
Derivative financial assets - 318 - 318 - 366 - 366
----------------------------------- ------ ----- ----- ------ ------ ------ ----- -----
Total financial assets
at fair value 5,080 516 5 5,601 4,328 619 14 4,961
----------------------------------- ------ ----- ----- ------ ------ ------ ----- -----
Financial liabilities
Financial liabilities
at fair value - - - - - 4 - 4
Derivative financial liabilities - 250 - 250 - 273 - 273
----------------------------------- ------ ----- ----- ------ ------ ------ ----- -----
Total financial liabilities
at fair value - 250 - 250 - 277 - 277
----------------------------------- ------ ----- ----- ------ ------ ------ ----- -----
There were no transfers between Level 1 and 2 in the current or
prior year.
The Group's valuations for financial instruments that are
measured subsequent to initial recognition at fair value are based
on the following methodologies and assumptions:
(a) Fair value through other comprehensive income - The fair
values of listed investments are based on quoted closing market
prices.
(b) Financial assets and liabilities at fair value through
profit or loss:
Loans and advances to customers and term deposits (Level 2) -
The fair values are derived from data or valuation techniques based
upon observable market data and non-observable inputs as
appropriate to the nature and type of the underlying
instrument.
Financial assets at fair value through profit or loss (Level 2)
- Comprises GBP8m of Visa Inc. Series A preferred stock which
converted from Series B in September 2020. The fair value is
derived from the closing bid price of Common A shares and the
conversion factor.
Financial assets at fair value through profit or loss (Level 3)
- Primarily represents GBP3m of Visa Inc. Series B preferred stock
received as partial consideration for the sale of the Group's share
in Visa Europe. The preferred stock is convertible into Visa Inc.
common stock or its equivalent at a future date, subject to
potential reduction for certain litigation losses that may be
incurred by Visa Europe. The fair value of the preference shares
has been calculated by taking the year end New York Stock Exchange
share price for Visa Inc. and discounting for illiquidity and
clawback related to contingent litigation. For other unlisted
equity investments, the Group's share of the net asset value or the
transaction price respectively is considered the best
representation of the exit price and is the Group's best estimate
of fair value.
(c) Derivative financial assets and liabilities - The fair
values of derivatives, including foreign exchange contracts,
interest rate swaps, interest rate and currency option contracts,
and currency swaps, are obtained from discounted cash flow models
or option pricing models as appropriate.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.16 Fair value of financial instruments continued
Level 3 movement analysis:
2020 2019
------------------------------------- ----------- -----------
Financial Financial
assets assets
at at
fair value fair value
through through
profit profit
or loss or loss
GBPm GBPm
------------------------------------- ----------- -----------
Balance at the beginning of the year 14 11
Fair value gains recognised(1)
In profit or loss - unrealised 1 1
In profit or loss - realised 5 3
Purchases - 3
Sales (10) -
Settlements (5) (4)
------------------------------------- ----------- -----------
Balance at the end of the year 5 14
------------------------------------- ----------- -----------
(1) Net gains or losses were recorded in non-interest income or
FVOCI reserve as appropriate.
Quantitative information about significant unobservable inputs
in Level 3 valuations
The table below lists key unobservable inputs to Level 3
financial instruments and provides the range of those inputs as at
30 September 2020.
Fair value
GBPm Valuation technique Unobservable inputs Low range High range
------------------- ---------- ------------------- --------------------- --------- ----------
Other financial
assets at FVTPL
Discounted cash Contingent litigation
Equity investments 4 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 GBP3m.
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.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.17 Lessee accounting
Accounting policy
The Group as lessee
The Group leases offices, stores and other premises, and sub-leases
certain premises which are no longer occupied by the Group. The Group
applies a single lessee accounting model to all lease arrangements
it enters into from the date on which the leased asset is available
for use, with the exception of low value leases and short-term leases
(less than 12 months) in respect of which the associated lease payments
are expensed in the income statement on a straight line basis over
the lease term.
Under the single lessee accounting model, the Group recognises a right-of-use
asset and a lease liability at the commencement date of the lease.
The right-of-use asset is initially measured at cost, comprising the
initial amount of the lease liability plus any initial direct costs
incurred and any lease payments made at or before the lease commencement
date, less any lease incentives received. The right-of-use asset is
subsequently depreciated using the straight line method from the commencement
date to the earlier of the end of the useful life of the asset or the
end of the lease term, subject to review for impairment. The lease
liability is initially measured at the present value of the lease payments,
discounted using the interest rate implicit in the lease, or if that
rate cannot readily be determined (as is the case in the majority of
the leasing activities of the Group), the incremental borrowing rate.
The liability is remeasured when there is a change in future lease
payments arising from a change in an index or a rate or a change in
the Group's assessment of whether it will exercise an extension or
termination option. When the lease liability is remeasured, a corresponding
adjustment is made to the right-of-use asset or is recorded in the
income statement if the carrying amount of the right -- of -- use asset
has been reduced to zero.
Termination options are included in 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.
In determining judgements on the lease term, management considers all
facts and circumstances that create an economic incentive to exercise
an extension option, or not exercise a termination option. Periods
covered by termination options are only included in the lease term
if it is reasonably certain that the lease will not be terminated.
The assessment of the lease term is reviewed if a significant event
or a significant change in circumstances occurs that is within the
control of the Group.
The Group as sub-lessor
Sub-leases are classified as finance leases if substantially all the
risks and rewards incidental to ownership of the underlying asset are
transferred, otherwise they are classified as operating leases. Finance
sub-leases are recognised in other assets representing the minimum
lease payments receivable under the terms of the lease, discounted
at the rate of interest implicit in the lease. Interest income is recognised
reflecting a constant periodic rate of return. Operating sub-lease
income is recognised in the income statement on a straight line basis
over the lease term.
a) Amounts recognised in the income statement
The income statement includes the following amounts related to
leases:
2020
GBPm
--------------------------------- -----
Interest expense and similar
charges
Interest expense (3)
Other operating income
Amounts receivable under leases
where the Group is a lessor 1
Operating and administrative
expenses
Depreciation and impairment of
right-of-use assets (30)
Expense relating to short-term
leases (3)
Expense relating to leases of
low-value assets that are not
short-term leases (2)
---------------------------------- -----
Amounts recognised in the income
statement (37)
---------------------------------- -----
Total leasing cash outflow in the year was GBP30m.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.17 Lessee accounting continued
b) Amounts recognised on the balance sheet
Right-of-use assets
2020
GBPm
------------------------------------ -----
As at 30 September 2019 -
Adjustment on transition to IFRS 16 194
------------------------------------ -----
As at 1 October 2019 194
Additions 3
Remeasurements (6)
Depreciation and impairment (30)
------------------------------------ -----
As at 30 September 2020 161
------------------------------------ -----
All right-of-use assets relate to leases of land and
buildings.
On 31 July 2020 the Group announced plans for the closure of 35
properties leased by the Group. The value of the right-of-use asset
associated with these properties at that time was GBP10m. Following
the announcement, the recoverable amount of the right-of-use assets
was assessed. Where it is expected the Group can sub-lease the
property, the value-in-use was determined on expected sub-lease
income. Where the Group does not expect to be able to generate any
cash inflows beyond the closure date the value-in-use was
determined to be GBPNil. The discount rates used in the
value-in-use calculations ranged from 0.8%-1.6%. The total
value-in-use was GBP4m resulting in an impairment charge of GBP6m,
which has been recognised in other operating and administration
expenses. In addition to the impairment charge relating to the
right-of-use assets, a provision has been recognised for other
costs associated with the closures (note 3.14).
On 30 September 2020 the Group also reviewed its existing
surplus estate population for impairment. It was concluded that 27
properties should be impaired following this assessment. The
discount rates used in the value-in-use calculations ranged from
0.7%-1.7%. The total value-in-use was GBP4m resulting in an
impairment charge of GBP0.5m, which has been recognised in other
operating and administrative expenses.
Sub-leases
Future undiscounted minimum payments receivable in respect of
sub-leased assets at 30 September were as follows:
2020
GBPm
-------------------- -----
Operating leases 4
Finance leases 5
-------------------- -----
9
-------------------- -----
Lease liabilities
2020
GBPm
--------------------- -----
Lease liabilities(1) 175
--------------------- -----
(1) Lease liabilities are presented within other liabilities on the balance sheet.
Future undiscounted minimum payments under lease liabilities at
30 September 2020 were as follows:
2020
Amounts falling due GBPm
------------------------- -----
Within 1 year 27
Between 1 and 5 years 84
Over 5 years 88
------------------------- -----
199
------------------------- -----
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.17 Lessee accounting continued
c) Lease commitments not recognised on the balance sheet
In addition to the lease liabilities recognised on the balance
sheet, the Group also has lease commitments relating to leases
which have not yet commenced at the balance sheet date. Future
undiscounted minimum payments on leases which are yet to commence
were as follows:
2020 2019 (1)
Amounts falling due GBPm GBPm
------------------------- ----- --------
Within 1 year - 35
Between 1 and 5 years 18 135
Over 5 years 112 244
------------------------- ----- --------
130 414
------------------------- ----- --------
(1) The 2019 disclosure includes all lease commitments and is
presented on an IAS 17 basis, prior to the adoption of IFRS 16 on 1
October 2019. As such, the prior year is not directly comparable
with the undiscounted lease liability payments in the current year
due to differences between the cash flows included in the
measurement of the lease liability compared to the basis of
calculation for the 2019 commitment disclosure. Refer to note 5.4
for a reconciliation of the prior year commitment to the opening
lease liability balance.
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital
4.1 Equity
Accounting policy
Equity
The financial instruments issued by the Company are treated as equity
(i.e. forming part of shareholders' funds) only to the extent that
they meet the following two conditions:
(a) they impose no contractual obligations upon the Company to deliver
cash or other financial assets or to exchange financial assets or financial
liabilities with another party under conditions that are potentially
unfavourable to the Group; and
(b) where the instrument will or may be settled in the Company's own
equity instruments, it is either a non-derivative that includes no
obligation to deliver a variable number of the Company's own equity
instruments or is a derivative that will be settled by the Company
exchanging a fixed amount of cash or other financial assets for a fixed
number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue
are classified as a financial liability.
Incremental costs directly attributable to the issue of new shares
or options or to the acquisition of a business are shown in equity
as a deduction, net of tax, from the proceeds.
Dividends
Final dividends on ordinary shares are recognised as a liability and
deducted from equity when they are approved by the Company's shareholders.
Interim dividends are deducted from equity when they are no longer
at the discretion of the Company.
Proposed final dividends for the year are disclosed as an event after
the balance sheet date.
4.1.1 Share capital and share premium
2020 2019
GBPm GBPm
-------------------------------- ----- -----
Share capital 144 143
Share premium 3 3
-------------------------------- ----- -----
Share capital and share premium 147 146
-------------------------------- ----- -----
2020 2019
Number Number 2020 2019
of shares of 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 4,088,998 7,549,086 1 -
-------------------------------------------- -------------- ------------- ----- -----
Closing ordinary share capital 1,438,574,687 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 30 September 2020 rank equally with regard to the Company's
residual assets.
During the year, 4,088,998 (2019: 7,549,086) ordinary shares
were issued under employee share schemes with a nominal value of
GBP0.4m (2019: GBP0.7m).
A final dividend in respect of the year ended 30 September 2018
of 3.1p per ordinary share amounting to GBP45m was paid in February
2019. This dividend was deducted from retained profits in the prior
year. No dividend was declared or paid in respect of the year ended
30 September 2019. In light of the current uncertainty as to the
economic impact of the COVID-19 pandemic, the Directors do not
recommend payment of a dividend in respect of the year ended 30
September 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.
A description of the other equity categories included within the
consolidated statement of changes in equity, and significant
movements during the year, is provided below:
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital
4.1 Equity continued
4.1.2 Other equity instruments
Other equity instruments consist of the following Perpetual
Contingent Convertible Notes:
-- Perpetual securities (fixed 8% up to the first reset date)
issued on 8 February 2016 with a nominal value of GBP450m and
optional redemption on 8 December 2022;
-- Perpetual securities (fixed 8.75% up to the first reset date)
issued on 10 November 2016 with a nominal value of GBP230m and
optional redemption on 10 November 2021. This was held by Virgin
Money Holdings (UK) PLC on the date of acquisition and was
originally recognised as a non-controlling interest (note 4.1.6).
Following a change in obligor from Virgin Money Holdings (UK) PLC
to CYBG PLC on 20 August 2019, this has been recognised within
other equity; and
-- 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 (2019:
GBP15m). AT1 distributions of GBP79m were paid in the year (2019:
GBP41m). 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.
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 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 30 September 2020 is GBP0.5m (2019:
GBP1m). The market value of the shares held in the EBT at 30
September 2020 was GBP0.1m (2019: GBP1m).
Deferred shares reserve
The deferred shares reserve comprises shares to be issued in the
future relating to employee share plans in regard to the settlement
of outstanding Virgin Money Holdings (UK) PLC share awards, which
will be settled through the issuance of the Company's shares at a
future date in line with the vesting profile of the underlying
plans.
Equity based compensation reserve
The Group's equity based compensation reserve records the value
of equity settled share based payment benefits provided to the
Group's employees as part of their remuneration that has been
charged through the income statement and adjusted for deferred
tax.
FVOCI reserve
The FVOCI reserve records the unrealised gains and losses
arising from changes in the fair value of financial assets at
FVOCI. The movements in this reserve are detailed in the
consolidated statement of comprehensive income.
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.
2020 2019
GBPm GBPm
------------------------------------------------------- ----- -----
At 1 October (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 (74) 14
Amounts transferred to the income statement 1 -
Taxation 19 (3)
Cash flow hedge - foreign exchange risk
Effective portion of changes in fair value of cross
currency swaps (59) 59
Amounts transferred to the income statement 59 (57)
------------------------------------------------------- ----- -----
At 30 September (80) (26)
------------------------------------------------------- ----- -----
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital
4.1 Equity continued
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 were 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 were 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 year (2019: GBP33m paid, GBP26m net of tax).
4.2 Equity based compensation
Accounting policy
The Group operates a number of equity settled share based compensation
plans in respect of services received from certain of its employees.
The fair value of the services received is recognised as an expense.
The total amount to be expensed is measured by reference to the fair
value of the Company's shares, performance options or performance rights
granted, including, where relevant, any market performance conditions
and any non-vesting conditions. The impacts of any service and non-market
performance vesting conditions are not included in the fair value and
instead are included in estimating the number of awards or options
that are expected to vest.
The total expense is recognised over the vesting period, which is the
period over which all of the specified vesting conditions are to be
satisfied. A corresponding credit is recognised in the equity based
compensation reserve, adjusted for deferred tax. In some circumstances,
employees may provide services in advance of the grant date and therefore
the grant date fair value is estimated for the purposes of recognising
the expense during the period between the start of the service period
and the grant date.
At the end of each reporting year, the Group revises its estimates
of the number of shares, performance options and performance rights
that are expected to vest based on the non-market and service vesting
conditions. The impact of the revision to original estimates, if any,
is recognised in the income statement, with a corresponding adjustment
to the equity based compensation reserve.
The equity settled share based payment charge for the year is
GBP10m (2019: GBP4m).
Virgin Money UK PLC awards
The Group issues awards to employees under the following share
plans:
Plan Eligible employees Nature of award Vesting conditions(1) Grant dates(2)
------ ------------------ ------------------ ---------------------- ----------------
DEP(3) Selected employees Conditional rights Continuing employment 2016, 2017, 2018
to shares or leaving in and 2019
certain limited
circumstances
LTIP Selected senior Conditional rights Continuing employment 2017, 2018 and
employees to shares or leaving in 2019
certain limited
circumstances
and achievement
of delivery of
the Group's strategic
goals and growth
in shareholder
value
SIP All employees Non-conditional Continuing employment 2016, 2017 and
share award 2018
------ ------------------ ------------------ ---------------------- ----------------
(1) All awards are subject to vesting conditions and therefore
may or may not vest.
(2) The year in which grants have been made under the relevant
plan.
(3) Grants made under the DEP are made the year following the
financial year to which they relate.
Further detail on each plan is provided below:
DEP
Under the plan, employees are awarded conditional rights to
Virgin Money UK PLC shares. The shares are subject to forfeiture
conditions including forfeiture as a result of resignation,
termination by the Group or failure to meet compliance
requirements. Awards include:
-- the upfront and deferred elements of bonus awards where
required to comply with the PRA Remuneration Code or the Group's
deferral policy; and
-- buyout of equity from previous employment.
LTIP
Under the plan, employees are awarded conditional rights to
Virgin Money UK PLC shares. The shares are subject to forfeiture
conditions including forfeiture as a result of resignation,
termination by the Group or failure to meet compliance
requirements. The performance conditions of the plan must be met
over a three-year period. The measures reflect a balanced approach
between financial and non-financial performance and are aligned to
the Group's strategic goals. Measures, relative weightings and the
quantum for assessing performance are outlined in the Directors'
remuneration report contained in the Group's Annual Report &
Accounts.
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital
4.2 Equity based compensation continued
SIP
At the date of the awards, eligible employees are awarded Group
shares which are held in the SIP Trust. Awards are not subject to
performance conditions and participants are the beneficial owners
of the shares granted to them, but not the registered owners.
Voting rights over the shares are normally exercised by the
registered owner at the direction of the participants. For the 2015
and 2017 awards, leavers (with the exception of gross misconduct)
retain their awards but they must withdraw their shares from the
SIP Trust.
Awards/rights made during the year
Average
Number Number fair
outstanding outstanding value
at at of awards
1 October Number Number Number 30 September at grant
Plan 2019 awarded forfeited released 2020 pence
------------------ ------------ ---------- ---------- ------------ ------------- ----------
DEP
2015 Demerger 28,224 - - (28,224) - 196.96
2016 Bonus 10,703 - - (10,703) - 266.03
2016 Commencement 20,404 - - (14,694) 5,710 266.03
2017 Bonus 231,070 - - (7,706) 223,364 313.20
2017 Commencement 5,109 - - (5,109) - 313.20
2018 Bonus 171,805 - - (1,156) 170,649 192.35
2019 Bonus - 1,710,334 (7,969) (1,610,437) 91,928 174.50
2019 Commencement - 67,528 - (35,890) 31,638 174.50
------------------ ------------ ---------- ---------- ------------ ------------- ----------
LTIP
2016 LTIP 2,028,468 - (803,312) (1,225,156) - 266.03
2017 LTIP 2,106,953 - (63,551) - 2,043,402 313.20
2018 LTIP 5,795,804 - (149,594) - 5,646,210 190.47
2019 LTIP - 8,976,526 (39,509) - 8,937,017 174.50
------------------ ------------ ---------- ---------- ------------ ------------- ----------
SIP
2015 Demerger 1,026,492 - (2,560) (95,903) 928,029 194.67
2017 Free Share 836,976 - (4,611) (62,328) 770,037 313.20
2019 Free Share 2,210,802 - (110,208) (119,802) 1,980,792 202.53
------------------ ------------ ---------- ---------- ------------ ------------- ----------
Determination of grant date fair values
The grant date fair value of the awards has been taken as the
market value of the Company's ordinary shares at the grant date.
Where awards are subject to non-market performance conditions, an
estimate is made of the number of awards expected to vest in order
to determine the overall share-based payment charge to be
recognised over the vesting period.
The Group has not issued awards under any plan with market
performance conditions.
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes
5.1 Contingent liabilities and commitments
Accounting policy
Financial guarantees
The Group provides guarantees in the normal course of business on behalf
of its customers. Guarantees written are conditional commitments issued
by the Group to guarantee the performance of a customer to a third
party and are primarily issued to support direct financial obligations
such as commercial bills or other debt instruments issued by a counterparty.
The rating of the Group as a guarantee provider enhances the marketability
of the paper issued by the counterparty in these circumstances.
The ECL requirements as described in note 3.2 apply to loan commitments
and financial guarantee contracts.
Contingent liabilities
Contingent liabilities are possible obligations whose existence will
be confirmed only by uncertain future events or present obligations
where the transfer of economic benefit is uncertain or cannot be reliably
measured. Contingent liabilities are not recognised on the balance
sheet but are disclosed unless they are remote.
The table below sets out the amounts of financial guarantees and
commitments which are not recorded on the balance sheet. Financial
guarantees and commitments are credit-related instruments which
include acceptances, letters of credit, guarantees and commitments
to extend credit. The amounts do not represent the amounts at risk
at the balance sheet date but the amounts that would be at risk
should the contracts be fully drawn upon and the customers default.
Since a significant portion of guarantees and commitments is
expected to expire without being drawn upon, the total of the
contract amounts is not representative of future liquidity
requirements.
Financial guarantees
2020 2019
GBPm GBPm
------------------------------------------------------ ------- ------
Guarantees and assets pledged as collateral security:
Due in less than 3 months 18 24
Due between 3 months and 1 year 15 24
Due between 1 year and 3 years 14 6
Due between 3 years and 5 years 2 11
Due after 5 years 46 48
------------------------------------------------------ ------- ------
95 113
------------------------------------------------------ ------- ------
Other credit commitments
Undrawn formal standby facilities, credit lines and
other commitments to lend at call 16,775 15,158
------------------------------------------------------ ------- ------
Of the Group's total loan commitments and financial guarantee
contracts of GBP16,870m, GBP15,155m (89.8%) are held under Stage 1
for IFRS 9 purposes, with GBP1,666m in Stage 2 and GBP49m in Stage
3. ECLs of GBP7m (2019: GBP5m) are held for undrawn exposures, of
which GBP1m was held under Stage 1 and GBP6m under Stage 2. In
terms of credit quality, over 95% of the loan commitments and
financial guarantee contracts were classed as either 'Good' or
'Strong' under the Group's internal PD rating scale.
Capital commitments
The Group had future capital expenditure which had been
contracted for, but not provided for, at 30 September 2020 of
GBP0.4m (2019: GBP0.2m).
The Group has committed to providing additional funding of up to
GBP10.9m over the next 12 months to support the strategic and
customer proposition development of UTM. AAM, the other shareholder
in UTM, has also committed to providing additional funding of up to
GBP10.9m over the same timeframe.
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 3.14 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.
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes
5.2 Notes to the statement of cash flows
2020 2019
GBPm GBPm
------------------------------------------------------------------- ------- --------
Adjustments included in the loss before tax
Interest receivable (2,137) (2,432)
Interest payable 854 918
Depreciation and amortisation (note 2.4) 149 108
Derivative financial instruments fair value movements 11 17
Impairment losses on credit exposures (note 3.2) 507 252
Software impairments and write-offs - 132
IFRS 16 impairment losses on PPE 6 -
Gain on sale of 50% (less one share) consideration in
Virgin Money Unit Trust Managers Limited - (35)
Equity based compensation (note 4.2) 10 4
Gain on disposal of fair value through other comprehensive
income assets (note 2.3) (16) -
Other non-cash movements 10 1
------------------------------------------------------------------- ------- --------
(606) (1,035)
------------------------------------------------------------------- ------- --------
Changes in operating assets
Net increase in:
Balances with supervisory central banks (38) (20)
Due from other banks - (143)
Derivative financial instruments (96) 64
Financial instruments at fair value through other comprehensive
income - 16
Financial assets at fair value through profit or loss 65 103
Loans and advances to customers 134 (2,663)
Defined benefit pension assets (35) (74)
Other assets (105) 174
------------------------------------------------------------------- ------- --------
(75) (2,543)
------------------------------------------------------------------- ------- --------
Changes in operating liabilities
Net increase in:
Due to other banks (1,531) (12)
Derivative financial instruments (23) (128)
Financial liabilities at fair value through profit or
loss (4) (11)
Customer deposits 3,728 2,837
Provisions for liabilities and charges (294) 128
Other liabilities 1 (184)
------------------------------------------------------------------- ------- --------
1,877 2,630
------------------------------------------------------------------- ------- --------
For the purposes of the statement of cash flows, cash and cash
equivalents comprise the following balances with less than three
months maturity from the date of acquisition. This includes cash
and liquid assets and amounts due to other banks (to the extent
less than 90 days).
2020 2019
GBPm GBPm
----------------------------------------------------- ----- -------
Cash and balances with central banks (less mandatory
deposits) 8,887 10,113
Due from other banks (less than three months) 927 1,018
----------------------------------------------------- ----- -------
9,814 11,131
----------------------------------------------------- ----- -------
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes
5.3 Related party transactions
2020 2019
GBPm GBPm
------------------------------------------------------------- ----- -----
Investments in joint ventures and associates
Virgin Money Unit Trust Managers Limited(1) 3 8
Salary Finance Loans Limited(2) - -
Loans and advances
Salary Finance Loans Limited(2) 119 53
Other assets
Amounts due from Virgin Money Unit Trust Managers Limited(1) 3 2
------------------------------------------------------------- ----- -----
Total assets with related entities 125 63
------------------------------------------------------------- ----- -----
Customer deposits
The Virgin Money Foundation - 1
Other liabilities
Group pension deposits(3) 17 17
Commissions and charges due to Virgin Atlantic Airways
Limited(4) 1 6
Trademark licence fees due to Virgin Enterprises Limited(5) 4 4
Total liabilities with related entities 22 28
------------------------------------------------------------- ----- -----
Non-interest income
Net fees and commissions to Virgin Atlantic Airways
Limited(4) (12) (15)
Share of post-tax result of Virgin Money Unit Trust
Managers Limited(1) (6) (1)
Gain on sale of 50% (less one share) consideration in
Virgin Money Unit Trust Managers Limited to Aberdeen
Asset Management(1) - 35
Operating and administrative expenses
Trademark licence fees to Virgin Enterprises Limited(5) (13) (11)
Costs recharged to Virgin Money Unit Trust Managers
Limited(1) 7 2
Donations to the Virgin Money Foundation(6) (1) (2)
------------------------------------------------------------- ----- -----
Total income statement (25) 8
------------------------------------------------------------- ----- -----
(1) The Group has a JV with AAM, named UTM. During the year, the
Group purchased additional shares in the JV totalling GBP1.6m as
part of a commitment to provide GBP12.5m of additional funding over
the 12 month period to April 2021. Amounts due from UTM and costs
recharged to UTM relate to the recharge of relevant Group costs
such as systems support, staff costs, and marketing.
(2) The Group has a JV with Salary Finance Limited, where both
shareholders own a 50% equity share in Salary Finance Loans
Limited. The JV connects to the payroll of participating employers
to offer salary-deducted loans. The Group provides a revolving
credit facility funding line, of which the current gross lending
balance is GBP119m (2019: GBP53m). The facility is held under Stage
1 for credit risk purposes with a minimal amount of ECLs held. The
undrawn facility is GBP81m (2019: GBP47m). The share of loss is
GBP0.2m (2019: GBP0.3m).
(3) The Group and the Trustee to the pension scheme have entered
into a contingent Security Arrangement which provides additional
support to the Scheme by underpinning recovery plan contributions
and some additional investment risk. The security is in the form of
a pre-agreed maximum level of assets that are set aside for the
benefit of the pension scheme in certain trigger events. These
assets are held by Red Grey Square Funding LLP, an insolvency
remote consolidated structured entity. The Group incurred costs in
relation to pension scheme administration. These costs, which
amounted to GBP0.1m (2019: GBP0.1m), were charged to the Group
sponsored scheme. Information on the pension schemes operated by
the Group is provided in note 3.10. Pension contributions of GBP35m
(2019: GBP83m) were made to the Scheme (note 3.10).
(4) The Group incurs credit card commissions and air mile
charges from Virgin Atlantic Airways Limited (VAA) in respect of an
agreement between the two parties. GBP1m (2019: GBP4m) of cash
costs payable to VAA have been deferred on the balance sheet.
(5) Licence fees of GBP13m (2019: GBP11m) were payable to Virgin
Enterprises Limited for the use of the Virgin Money brand
trademark.
(6) 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 GBP0.4m (2019: GBP0.6m) and is
included in the total value disclosed above.
The Group paid GBPNil (2019: GBP0.2m) ordinary dividends to
Virgin Group Holdings Limited during the year.
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes
5.3 Related party transactions continued
Compensation of key management personnel (KMP)
KMP comprises Directors of the Company and members of the
Executive Leadership Team.
2020 2019
GBPm GBPm
--------------------------------- ----- -----
Salaries and short-term benefits 10 14
Termination benefits 1 5
Equity based compensation(1) 4 2
--------------------------------- ----- -----
15 21
--------------------------------- ----- -----
(1) The expense recognised in the year is in accordance with
IFRS 2 'Equity based compensations', including associated
employers' NIC.
The following information regarding Directors' remuneration is
presented in accordance with the Companies Act 2006.
2020 2019
GBPm GBPm
-------------------------- ----- -----
Aggregate remuneration(1) 4 5
-------------------------- ----- -----
(1) Aggregate emoluments include amounts paid for the 2020 year
and amounts paid under LTIPs in 2020 relating to 2016 LTIP awards
released in 2020 (GBP0.3m).
None of the Directors were members of the Group's defined
contribution pension scheme during 2020 (2019: none).
None of the Directors were members of the Group's defined
benefit pension scheme during 2020 (2019: none). None of the
Directors hold share options and none were exercised during the
year (2019: none).
Transactions with KMP
KMP, their close family members, and any entities controlled or
significantly influenced by the KMP have undertaken the following
transactions with the Group in the normal course of business. The
transactions were made on the same terms and conditions as
applicable to other Group employees, or on normal commercial
terms:
2020 2019
GBPm GBPm
------------------- ----- -----
Loans and advances 4 4
Deposits 2 3
------------------- ----- -----
No provisions have been recognised in respect of loans provided
to the KMP (2019: GBPNil). There were no debts written off or
forgiven during the year to 30 September 2020 (2019: GBPNil).
Included in the above are eight (2019: four) loans totalling GBP1m
(2019: GBP1m) made to Directors. In addition to the above, there
are guarantees of GBPNil (2019: GBPNil) made to Directors and their
related parties.
5.4 Transition to IFRS 16 'Leases'
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.
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes
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:
Restated
As at Impact as at
30 September of IFRS 1 October
2019 16 2019
GBPm GBPm GBPm
------------------------------ ------------- -------- ----------
Property, plant and equipment 145 194 339
Other assets 237 - 237
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 GBP205m in respect of leased
properties previously accounted for as operating leases were
recognised at 1 October 2019. Offsetting this in the GBP196m
movement in other liabilities on adoption is a GBP9m 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 years 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
3.17.
5.5 Pillar 3 disclosures
Basel III Capital Requirements Directive IV
Pillar 3 disclosure requirements are set out in Part Eight of
the CRR. The consolidated disclosures of the Group, for the 2020
financial year, will be issued concurrently with the Annual Report
& Accounts and can be found at
www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/.
5.6 Post balance sheet events
Appointment of Group Chief Financial Officer
On 17 November 2020, we announced that Clifford Abrahams had
been appointed Executive Director and Group Chief Financial Officer
and that it was expected that he would join the Group in March
2021, subject to regulatory approval.
Additional information
Financial performance measures
As highlighted in the Business and financial review and the Risk
report, the Group utilises a range of performance measures(1) to
assess the Group's performance. These can be grouped under the
following headings:
-- profitability;
-- asset quality; and
-- capital optimisation.
The performance measures used are a combination of statutory,
regulatory and alternative performance measures; with the type of
performance measure used dependent on the component elements and
source of what is being measured.
Statutory performance measures (S)
These are used when the basis of the calculation is derived from
a measure that is required under generally accepted accounting
principles (GAAP). An example of this would be references to
earnings per share.
Regulatory performance measures (R)
These are used when the basis of the calculation is required and
specified by the Group's regulators. Examples of this would be the
leverage ratio and the Tier 1 ratio.
Alternative performance measures (A)
These are used when the basis of the calculation is derived from
a non-GAAP measure - also referred to as APMs. Examples of this
would be the statutory cost to income ratio and the statutory
RoTE.
Where a performance measure refers to an 'underlying' metric,
the detail on how this measure is arrived at, along with
management's reasoning for excluding the item from the Group's
current underlying performance rationale, can be found on page 129,
directly following this section. These adjustments to the Group's
statutory results made by management are designed to provide a more
meaningful underlying basis.
Descriptions of the performance measures used, including the
basis of calculation where appropriate, are set out below:
Profitability:
Term Type Definition
Net interest margin A Underlying NII as a percentage of average interest
(NIM) earning assets for a given year. Underlying NII
of GBP1,351m (2019: GBP1,433m) is divided by
average interest earning assets for a given year
of GBP86,826m (2019: GBP86,362m) (which has been
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 been
reduced by GBP16m (2019: GBPNil).
Statutory return A Statutory loss after tax attributable to ordinary
on tangible equity equity holders of GBP220m (2019: loss of GBP253m)
(RoTE) as a percentage of average tangible equity of
GBP3,554m (2019: GBP3,727m) (average total equity
less intangible assets, AT1 and non-controlling
interests) for a given year.
Statutory return A Statutory loss after tax as a percentage of average
on assets total assets for a given year.
Statutory basic S Statutory loss after tax attributable to ordinary
earnings per share equity shareholders of GBP220m (2019: loss of
(EPS) GBP253m), divided by the weighted average number
of ordinary shares in issue for a given year
of 1,440m shares (2019: 1,414m) (which includes
deferred shares and excludes own shares held
or contingently returnable shares).
Underlying RoTE A Underlying profit after tax attributable to ordinary
equity holders of GBP20m, (2019: GBP403m), as
a percentage of average tangible equity of GBP3,554m
(2019: GBP3,727m) (average total equity less
intangible assets, AT1 and non-controlling interests)
for a given year.
Underlying CIR A Underlying operating and administrative expenses
as a percentage of underlying total operating
income for a given year.
Underlying return A Underlying profit after tax as a percentage of
on assets average total assets for a given year.
Underlying basic A Underlying profit after tax attributable to ordinary
EPS equity holders of GBP20m, (2019: GBP403m), divided
by the weighted average number of ordinary shares
in issue for a given year of 1,440m shares (2019:
1,434m) (which includes deferred shares and excludes
own shares held or contingently returnable shares).
Underlying profit A Underlying profit before tax of GBP124m (2019:
after tax attributable GBP539m) less underlying tax charge of GBP25m
to ordinary equity (2019: GBP62m), less AT1 distributions of GBP79m
holders (2019: GBP41m), less distributions to non-controlling
interests of GBPNil (2019: GBP33m) and was equal
to GBP20m (2019: GBP403m). The underlying tax
charge (or credit) is the difference between
the statutory tax charge (or credit) and the
tax attributable to exceptional items.
(1) The term 'financial performance measure' covers all metrics,
ratios and percentage calculations used to assess the Group's
performance and is interchangeable with similar terminology used
such as highlights, key metrics, KPIs and key credit metrics.
Additional information
Financial performance measures
Asset quality:
Term Type Definition
Impairment charge A Impairment losses on credit exposures plus credit
to average customer risk adjustment on fair value loans to average
loans (cost of risk) customer loans (defined as loans and advances
to customers, other financial assets at fair
value and due from customers on acceptances).
Total provision A Total impairment provision on credit exposures
to customer loans as a percentage of total customer loans at a
given date.
Indexed loan to A The mortgage portfolio weighted by balance and
value (LTV) of the indexed using the MIAC Acadametrics indices for
mortgage portfolio the Clydesdale Bank PLC portfolio while the Virgin
Money Holdings (UK) PLC portfolio is indexed
using the Markit indices.
Capital optimisation:
Term Type Definition
Common Equity Tier R CET1 capital divided by RWAs at a given date.
1 (CET1) ratio
Tier 1 ratio R Tier 1 capital as a percentage of RWAs.
Total capital ratio R Total capital resources divided by RWAs at a
given date.
CRD IV leverage R This is a regulatory standard ratio proposed
ratio by Basel III as a supplementary measure to the
risk-based capital requirements. It is intended
to constrain the build-up of excess leverage
in the banking sector and is calculated by dividing
Tier 1 capital resources by a defined measure
of on and off-balance sheet items plus derivatives.
UK leverage ratio R The Group's leverage ratio on a modified basis,
excluding qualifying central bank claims from
the exposure measure in accordance with the policy
statement issued by the PRA in October 2017.
Tangible net asset A Tangible equity (total equity less intangible
value (TNAV) per assets, AT1 and non-controlling interests) as
share at the year end of GBP3,526m (2019: GBP3,590m)
divided by the number of ordinary shares in issue
at the year end of 1,444m (2019: 1,441m) (which
includes deferred shares of 6m (2019: 7m) and
excludes own shares held of 0.2m (2019: 0.5m)).
Loan to deposit R Customer loans as a percentage of customer deposits
ratio (LDR) at a given date.
Liquidity coverage R Measures the surplus (or deficit) of the Group's
ratio (LCR) high-quality liquid assets relative to weighted
net stressed cash outflows over a 30-day period.
It assesses whether the Group has sufficient
liquid assets to withstand a short-term liquidity
stress based on cash outflow assumptions provided
by regulators.
Minimum requirement R Total capital resources less ineligible AT1 and
for own funds and Tier 2 instruments at the year end of GBP4,935m
eligible liabilities (2019: GBP4,840m) plus senior unsecured securities
(MREL) ratio issued by Virgin Money UK PLC with greater than
one year to maturity at the year end of GBP2,002m
(2019: GBP1,550m) divided by RWAs at the period
end of GBP24,399m (2019: GBP24,046m).
Net stable funding R The total amount of available stable funding
ratio (NSFR) divided by the total amount of required stable
funding, expressed as a percentage. The Group
monitors the NSFR, based on its own interpretations
of current guidance available for CRD IV NSFR
reporting. Therefore, the reported NSFR may change
over time with regulatory developments. Due to
possible differences in interpretation of the
rules, the Group's ratio may not be directly
comparable with those of other financial institutions.
Additional information
Underlying adjustments to the statutory view of performance
On arriving at an underlying basis, the effects of certain items
that do not promote an understanding of historical or future trends
of earnings or cash flows are removed, as management consider that
this presents more comparable results year-on-year. These items are
all significant and are typically one-off in nature. Additional
detail is provided below where considered necessary to further
explain the rationale for their exclusion from underlying
performance, in particular for new items in the current year or
recurring non-underlying items:
Item 2020 2019 Reason for exclusion from the Group's
GBPm GBPm current underlying performance
-----
Integration and (139) (156) These are part of the Group's publicised
transformation costs three-year integration plan following
the acquisition of Virgin Money Holdings
(UK) PLC and comprise a number of one-off
expenses that are required to realise
the anticipated cost synergies. Also included
are one-off costs to support transformation.
This programme will improve our digital
capability and consequently enable super
straightforward efficiency.
Acquisition accounting (113) (87) This consists principally of the unwind
unwinds of the IFRS 3 fair value adjustments created
on the acquisition of Virgin Money Holdings
(UK) PLC in October 2018 (GBP96m charge)
and the IFRS 9 impairment impact in 2020
on acquired assets (GBP6m charge) with
other smaller items amounting to GBP11m.
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 (26) (433) These costs are historical in nature and
are not indicative of the Group's current
practices.
Other:
SME transformation (11) (30) These costs are significant and relate
to the Group's transformation of its Business
banking propositions and encompass process
re-engineering and customer journey improvements
required to support customers migrating
under the RBS incentivised switching proposition,
and certain costs in respect of government
backed schemes.
UTM transition costs (8) (1) These costs relate to UTM's transformation
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.
VISA Shares 5 - A one-off gain on conversion of Visa B
Preference shares to Series A preference
shares.
Intangible asset - (127) The charge for the software write-off
write-off in the prior year 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.
The alignment of accounting practices
was a one-off exercise arising from the
Mortgage EIR adjustments - 80 acquisition.
Virgin Money Holdings - (55) These costs related directly to the transaction
(UK) PLC transaction and comprised legal, advisory and other
costs associated costs required to complete
the transaction.
Consent solicitation - (18) One-off costs relating to the change in
obligor of senior debt from Virgin Money
Holdings (UK) PLC to CYBG on 20 August
2019.
Gain on sale of - 35 A one-off gain recognised on the disposal
UTM of 50% (less one share) of UTM.
GMP equalisation - (11) A one-off charge for GMP equalisation
cost in the Group's defined benefit scheme.
Legacy restructuring - (5) These legacy costs were significant in
and separation prior years and related to the Sustain
programme, and demerger from NAB, both
of which are now complete.
Gain on disposal
of VocaLink - 4
Total other (14) (128)
Additional information
Glossary
Term Definition
Additional Tier Securities that are considered additional Tier 1 capital
1 (AT1) in the context of CRD IV.
arrears A customer is in arrears when they fail to adhere
to their contractual payment obligations resulting
in an outstanding loan that is unpaid or overdue.
average assets Represents the average of assets over the year adjusted
for any disposed operations.
Bank Clydesdale Bank PLC.
Basel II The capital adequacy framework issued by the Basel
Committee on Banking Supervision (BCBS) in June 2004.
Basel III Reforms issued by the BCBS in December 2017 with subsequent
revisions.
basis points (bps) One hundredth of a percent (0.01%); meaning that 100
basis points is equal to 1%. This term is commonly
used in describing interest rate movements.
Board Refers to the Virgin Money UK PLC Board or the Clydesdale
Bank PLC Board as appropriate.
Bounce back loan A scheme implemented by the UK Government to provide
scheme (BBLS) financial support to businesses across the UK that
are losing revenue, and seeing their cashflow disrupted
as a result of COVID-19, and that can benefit from
GBP50,000 or less in finance.
Business lending Lending to non-retail customers, including overdrafts,
asset and lease financing, term lending, bill acceptances,
foreign currency loans, international and trade finance,
securitisation and specialised finance.
carbon related assets Assets tied to the energy and utilities sectors under
the Global Industry Classification Standard (mapped
to internal industry classifications), excluding water
utilities and independent power and renewable electricity
producer industries.
carrying value (also The value of an asset or a liability in the balance
referred to as carrying sheet based on either amortised cost or fair value
amount) principles.
cash and cash equivalents For the purposes of the statement of cash flows, cash
and cash equivalents comprise cash and non-mandatory
deposits with central banks and amounts due from other
banks with a maturity of less than three months.
Code The 2018 UK Corporate Governance Code.
collateral The assets of a borrower that are used as security
against a loan facility.
collective impairment Impairment assessment on a collective basis for homogeneous
provision groups of loans that are not considered individually
significant and to cover losses which have been incurred
but have not yet been identified on loans subject
to individual assessment.
Combined Group Virgin Money UK PLC, and its controlled entities following
the acquisition of Virgin Money Holdings (UK) PLC.
commercial paper An unsecured promissory note issued to finance short-term
credit requirements. These instruments have a specified
maturity date and stipulate the face amount to be
paid to the investor on that date.
Common Equity Tier The highest quality form of regulatory capital that
1 capital (CET1) comprises total shareholders' equity and related non-controlling
interests, less goodwill and intangible assets and
certain other regulatory adjustments.
Company Virgin Money UK PLC.
conduct risk The risk of treating customers unfairly and/or delivering
inappropriate outcomes resulting in customer detriment,
regulatory fines, compensation, redress costs and
reputational damage.
Coronavirus business A scheme implemented by the UK Government to provide
interruption loan financial support to smaller businesses across the
scheme (CBILS) UK that are losing revenue, and seeing their cashflow
disrupted, as a result of COVID-19.
Coronavirus large A scheme implemented by the UK Government to provide
business interruption financial support to mid-sized and larger businesses
loan scheme (CLBILS) across the UK that are suffering disruption to their
cashflow due to lost or deferred revenues as a result
of COVID-19.
counterparty The other party that participates in a financial transaction,
with every transaction requiring a counterparty in
order for the transaction to complete.
Coverage ratio Impairment allowance as at the year end shown as a
percentage of gross loans and advances as at the year
end.
covered bonds A corporate bond with primary recourse to the institution
and secondary recourse to a pool of assets that act
as security for the bonds on issuer default. Covered
bonds remain on the issuer's balance sheet and are
a source of term funding for the Group.
CRD IV European legislation to implement Basel III. It replaces
earlier European capital requirements directives with
a revised package consisting of a new Capital Requirements
Directive and a new Capital Requirements Regulation.
CRD IV sets out capital and liquidity requirements
for European banks and harmonises the European framework
for bank supervision. See also 'Basel III'.
credit conversion Credit conversion factors are used in determining
factor (CCF) the exposure at default in relation to a credit risk
exposure. The CCF is an estimate of the proportion
of undrawn and off-balance sheet commitments expected
to be drawn down at the point of default.
Credit impaired A financial asset that is in default or has an individually
financial asset assessed provision. This is also referred to as a
'Stage 3' impairment loss and subject to a lifetime
ECL calculation. The Group considers 90 DPD as a backstop
in determining whether a financial asset is credit
impaired.
Additional information
Glossary
Term Definition
Credit risk mitigation Techniques to reduce the potential loss in the event
(CRM) that a customer (borrower or counterparty) becomes
unable to meet its obligations. This may include the
taking of financial or physical security, the assignment
of receivables or the use of credit derivatives, guarantees,
credit insurance, set-off or netting.
credit risk adjustment/credit An adjustment to the valuation of financial instruments
valuation adjustment held at fair value to reflect the creditworthiness
of the counterparty.
customer deposits Money deposited by individuals or corporate entities
that are not credit institutions, and can be either
interest bearing, non-interest bearing or term deposits.
days past due (DPD) The number of days a facility has borrowing in excess
of an agreed or expired limit or, where facilities
are subject to a regular repayment schedule, contractual
payments are not fully up to date.
default A customer is in default when either they are more
than 90 DPD on a credit obligation to the Group, or
are considered unlikely to pay their credit obligations
in full without recourse to actions such as realisation
of security (if held).
delinquency See 'arrears'.
Demerger The demerger of the Group from NAB pursuant to which
all of the issued share capital of CYBI was transferred
to CYBG by NAB in consideration for the issue and
transfer of CYBG shares to NAB in part for the benefit
of NAB (which NAB subsequently sold pursuant to the
IPO) and in part for the benefit of NAB shareholders
under a scheme of arrangement under part 5.1 of the
Australian Corporations Act.
Demerger date 8 February 2016.
derivative A financial instrument that is a contract or agreement
whose value is related to the value of an underlying
instrument, reference rate or index.
effective interest The carrying value of certain financial instruments
rate (EIR) which amortises the relevant fees over the expected
life of the instrument.
encumbered assets Assets that have been pledged as security, collateral
or legally 'ring-fenced' in some other way which prevents
those assets being transferred, pledged, sold or otherwise
disposed.
exposure A claim, contingent claim or position which carries
a risk of financial loss.
Exposure at default The estimate of the amount that the customer will
(EAD) owe at the time of default.
fair value The price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
in the principal (or most advantageous) market at
the measurement date under current market conditions.
Financial Services The UK's compensation fund of last resort for customers
Compensation Scheme of authorised financial services firms and is funded
(FSCS) by the financial services industry. The FSCS may pay
compensation if a firm is unable, or likely to be
unable, to pay claims against it. This is usually
because it has stopped trading or has been declared
in default.
forbearance The term generally applied to the facilities provided
or changes to facilities provided to assist borrowers,
who are experiencing, or are about to experience,
a period of financial stress.
funding risk A form of liquidity risk arising when the liquidity
needed to fund illiquid asset positions cannot be
obtained at the expected terms and when required.
Group Virgin Money UK PLC and its controlled entities.
hedge ineffectiveness Represents the extent to which the income statement
is impacted by changes in fair value or cash flows
of hedging instruments not being fully offset by changes
in fair value or cash flows of hedged items.
IFRS 9 The financial instrument accounting standard which
was adopted by the Group with effect from 1 October
2018.
impairment allowances An ECL provision held on the balance sheet for financial
assets calculated in accordance with IFRS 9. The impairment
allowance is calculated as either a 12-month or a
lifetime ECL.
impairment losses The ECL calculated in accordance with IFRS 9 and recognised
in the income statement with the carrying value of
the financial asset reduced by creating an impairment
allowance. Impairment losses are calculated as either
a 12-month or lifetime ECL.
Internal Capital The Group's assessment of the levels of capital that
Adequacy Assessment it needs to hold through an examination of its risk
Process (ICAAP) profile from regulatory and economic capital viewpoints.
Internal Liquidity The Group's assessment and management of balance sheet
Adequacy Assessment risks relating to funding and liquidity.
Process (ILAAP)
Internal Ratings-Based A method of calculating credit risk capital requirements
approach (IRB) using internal, rather than supervisory, estimates
of risk parameters.
investment grade The highest possible range of credit ratings, from
'AAA' to 'BBB', as measured by external credit rating
agencies.
Level 1 fair value Financial instruments whose fair value is derived
measurements from unadjusted quoted prices for identical instruments
in active markets.
Level 2 fair value Financial instruments whose fair value is derived
measurements from quoted prices for similar instruments in active
markets and financial instruments valued using models
where all significant inputs are observable.
Level 3 fair value Financial instruments whose fair value is derived
measurements from valuation techniques where one or more significant
inputs are unobservable.
Additional information
Glossary
Term Definition
lifetime expected The expected credit loss calculation performed on
credit loss financial assets where a SICR since origination has
been identified.This can be either a 'Stage 2' or
'Stage 3' impairment loss depending on whether the
financial asset is credit impaired.
Listing Rules Regulations applicable to any company listed on a
United Kingdom stock exchange, subject to the oversight
of the UK Listing Authority (UKLA). The Listing Rules
set out mandatory standards for any company wishing
to list its shares or securities for sale to the public.
loan to value ratio A ratio that expresses the amount of a loan as a percentage
(LTV) of the value of the property on which it is secured.
Loss given default The estimate of the loss that the Group will suffer
(LGD) if the customer defaults (incorporating the effect
of any collateral held).
medium-term notes Debt instruments issued by corporates, including financial
institutions, across a range of maturities.
Minimum Requirement MREL is a minimum requirement for institutions to
for Own Funds and maintain equity and eligible debt liabilities, to
Eligible Liabilities help ensure that when an institution fails the resolution
(MREL) authority can use these financial resources to absorb
losses and recapitalise the continuing business.
net interest income The amount of interest received or receivable on assets,
(NII) net of interest paid or payable on liabilities.
Net Promoter Score This is an externally collated customer loyalty metric
(NPS) that measures loyalty between a provider, who in this
context is the Group, and a consumer.
operational risk The risk of loss resulting from inadequate or failed
internal processes, people strategies and systems
or from external events.
Overall Liquidity An FCA and PRA rule that firms must at all times maintain
Adequacy Rule (OLAR) liquidity resources which are adequate both as to
amount and quality, to ensure that there is no significant
risk that its liabilities cannot be met as they fall
due. This is included in the Group's risk appetite
and subject to approval by the Board as part of the
ILAAP.
pension risk The risk that, at any point in time, the available
assets to meet pension liabilities are at a value
below current and future scheme obligations.
Personal lending Lending to individuals rather than institutions and
excludes mortgage lending which is reported separately.
PPI redress Includes PPI customer redress and all associated costs
excluding fines.
probability of default The probability that a customer will default over
(PD) either the next 12 months or lifetime of the account.
regulatory capital The capital which the Group holds, determined in accordance
with rules established by the PRA.
residential mortgage-backed Securities that represent interests in groups or pools
securities (RMBS) of underlying mortgages. Investors in these securities
have the right to cash received from future mortgage
payments (interest and principal).
ring-fencing A regime of rules which require banks to change the
way that they are structured by separating retail
banking services from investment and international
banking. This is to ensure the economy and taxpayers
are protected in the event of any future financial
crises.
risk appetite The level and types of risk the Group is willing to
assume within the boundaries of its risk capacity
to achieve its strategic objectives.
risk-weighted assets On and off-balance sheet assets of the Group are allocated
(RWA) a risk weighting based on the amount of capital required
to support the asset.
sale and repurchase A short-term funding agreement that allows a borrower
agreement ('repo') to create a collateralised loan by selling a financial
asset to a lender. As part of the agreement, the borrower
commits to repurchase the security at a date in the
future repaying the proceeds of the loan. For the
counterparty (buying the security and agreeing to
sell in the future) it is a reverse repurchase agreement
or a reverse repo.
Scheme The Group's defined benefit pension scheme, the Yorkshire
and Clydesdale Bank Pension Scheme.
secured lending Lending in which the borrower pledges some asset (e.g.
property) as collateral for the lending.
securitisation The practice of pooling similar types of contractual
debt and packaging the cash flows from the financial
asset into securities that can be sold to institutional
investors in debt capital markets. It provides the
Group with a source of secured funding than can achieve
a reduction in funding costs by offering typically
'AAA' rated securities secured by the underlying financial
asset.
Significant increase The assessment performed on financial assets at the
in credit risk (SICR) reporting date to determine whether a 12-month or
lifetime ECL calculation is required. Qualitative
and quantitative triggers are assessed in determining
whether there has been a significant increase in credit
risk since origination. The Group considers 30 DPD
as a backstop in determining whether a significant
increase in credit risk since origination has occurred.
standardised approach In relation to credit risk, a method for calculating
credit risk capital requirements using External Credit
Assessment Institutions ratings and supervisory risk
weights. In relation to operational risk, a method
of calculating the operational capital requirement
by the application of a supervisory defined percentage
charge to the gross income of eight specified business
lines.
stress testing The term used to describe techniques where plausible
events are considered as vulnerabilities to ascertain
how this will impact the own funds or liquidity which
a bank holds.
Additional information
Glossary
Term Definition
structured entities An entity created to accomplish a narrow well-defined
(SE) objective (e.g. securitisation of financial assets).
An SE may take the form of a corporation, trust, partnership
or unincorporated entity. SEs are often created with
legal arrangements that impose strict limits on the
activities of the SE. May also be referred to as an
SPV.
subordinated debt Liabilities which rank after the claims of other creditors
of the issuer in the event of insolvency or liquidation.
Term Funding Scheme Launched in 2016 by the BoE to allow banks and building
(TFS) societies to borrow from the BoE at rates close to
base rate. This is designed to increase lending to
businesses by lowering interest rates and increasing
access to credit.
Tier 1 capital A measure of a bank's financial strength defined by
CRD IV. It captures CET1 capital plus other Tier 1
securities in issue, subject to deductions.
Tier 2 capital A component of regulatory capital, including qualifying
subordinated debt, eligible collective impairment
allowances and other Tier 2 securities as defined
by CRD IV.
unaudited Financial information that has not been subject to
validation by the Group's external auditor.
unsecured lending Lending in which the borrower pledges no assets as
collateral for the lending (such as credit cards and
current account overdrafts).
value at risk (VaR) A measure of the loss that could occur on risk positions
as a result of adverse movements in market risk factors
(e.g. rates, prices, volatilities) over a specified
time horizon and to a given level of confidence.
Virgin Money Virgin Money UK PLC. 'Virgin Money' is also used throughout
this report when referring to the acquired business
of Virgin Money Holdings (UK) PLC or subsequent integration
of the acquired business within the newly combined
Group.
Virgin Money Holdings Virgin Money Holdings (UK) PLC.
Additional information
Abbreviations
AAM Aberdeen Asset Managers PLC CSRBB Credit spread risk in the
banking book
ACS Annual cyclical scenario DEP Deferred Equity Plan
AFD Approaching financial difficulty DPD Days past due
AIRB Advanced internal ratings-based DTR Disclosure and Transparency
Rules
ALCO Asset and Liability Committee EAD Exposure at default
API Application programming interface EaR Earnings at risk
ASX Australian Securities Exchange EBA European Banking Authority
AT1 Additional Tier 1 EBT Employee benefit trust
ATM Automated teller machine EEL Excess expected loss
BAME Black, Asian and ethnic minority ECL Expected credit loss
BAU Business-as-usual EIR Effective interest rate
BBL Bounce back loan EL Expected loss
BBLS Bounce back loan scheme EPC Energy performance certificate
BCA Business current account EPS Earnings per share
BCBS Basel Committee on Banking ESG Environmental, social and
Supervision governance
BCR Banking Competition Remedies FCA Financial Conduct Authority
BoE Bank of England FIRB Foundation internal ratings-based
bps Basis points FPC Financial Policy Committee
BTL Buy-to-let FRC Financial Reporting Council
CAGR Compound Annual Growth Rate FSCS Financial Services Compensation
Scheme
CARE Career average revalued earnings FSMA Financial Services and Markets
Act 2000
CBIL Coronavirus business interruption FTE Full time equivalent
loan
CBILS Coronavirus business interruption FV Fair value
loan scheme
CCB Capital Conservation Buffer FVOCI Fair value through other
comprehensive income
CCF Credit conversion factor FVTPL Fair value through profit
or loss
CCyB Countercyclical Capital Buffer GDIA Group Director Internal Audit
CDI CHESS Depositary Interest GDP Gross Domestic Product
CDP Carbon Disclosure Project GDPR General Data Protection Regulation
CET1 Common Equity Tier 1 Capital GHG Greenhouse Gases
CIF Capability and Innovation Fund GMP Guaranteed Minimum Pension
CIR Cost to income ratio G-SII Global Systemically Important
Institution
CISRO Chief Information Security HMRC Her Majesty's Revenue and
and Resilience Officer Customs
CLBILS Coronavirus large business HPI House Price Index
interruption loan scheme
CMA Competition and Markets Authority HQLA High Quality Liquid Assets
COVID-19 Corona Virus Disease 2019 IAS International Accounting
Standard
CPI Consumer Price Index IASB International Accounting
Standards Board
CRD IV Capital Requirements Directive ICAAP Internal Capital Adequacy
IV Assessment Process
CRE Commercial real estate IFRS International Financial Reporting
Standard
CRH Capital Repayment Holidays ILAAP Internal Liquidity Adequacy
Assessment Process
CRM Credit risk mitigation IPO Initial Public Offering
CRR Capital Requirements Regulation IR Information request
CSR Corporate social responsibility IRB Internal ratings-based
Additional information
Abbreviations
IRHP Interest rate hedging products PRA Prudential Regulation Authority
IRRBB Interest rate risk in the banking PSD2 Payment Services Directive
book 2
ISA Individual Savings Account RAF Risk Appetite Framework
ISDA International Swaps and Derivatives RAS Risk Appetite Statement
Association
JV Joint venture RMBS Residential mortgage-backed
securities
KMP Key management personnel RMF Risk Management Framework
KPI Key Performance Indicator RoTE Return on Tangible Equity
LCR Liquidity coverage ratio RPI Retail Price Index
LDR Loan to deposit ratio RTS Regulatory Technical Standards
LGD Loss Given Default RWA Risk-weighted asset
LIBOR London Interbank Offered Rate SAYE Save As You Earn
LSE London Stock Exchange SDG Sustainable Development Goal
LTI Loan to income SICR Significant increase in credit
risk
LTIP Long-term incentive plan SIP Share Incentive Plan
LTV Loan to value SME Small or medium-sized enterprise
MDA Maximum Distributable Amount SMF Sterling Monetary Framework
MGC Model Governance Committee SONIA Sterling Overnight Index
Average
MREL Minimum Requirement for Own SRB Systemic Risk Buffer
Funds and Eligible Liabilities
MRT Material Risk Takers SVR Standard variable rate
NAB National Australia Bank Limited TCC Transactional Credit Committee
NII Net interest income TCFD Task Force on Climate-related
Financial Disclosures
NIM Net interest margin TFS Term Funding Scheme
NIST National Institute of Standards TFSME Term funding scheme with
and Technology additional incentives for
SMEs
NPS Net promoter score TNAV Tangible net asset value
NSFR Net stable funding ratio TSR Total Shareholder Return
PBT Profit before tax UN PRB United Nations' Principles
for Responsible Banking
PCA Personal current accounts UTM Virgin Money Unit Trust Managers
PD Probability of Default VAA Virgin Atlantic Airways
PMA Post model adjustment VaR Value at risk
POCI Purchased or originated credit VIU Value in use
impaired
PPI Payment protection insurance YoY Year-on-year
Additional information
Country by country reporting
The Capital Requirements (Country by Country Reporting)
Regulations 2013 came into effect on 1 January 2014 and place
certain reporting obligations on financial institutions that are
within the scope of the European Union's CRD IV. The purpose of the
Regulations is to provide clarity on the source of the Group's
income and the locations of its operations.
The vast majority of entities that are consolidated within the
Group's financial statements are UK registered entities. The
activities of the Group are described in the Strategic report
contained in the Group's Annual Report & Accounts.
2020
UK
-----
Average FTE employees (number) 8,256
Total operating income (GBPm) 1,443
Loss before tax (GBPm) 168
Corporation tax paid (GBPm) 12
Public subsidies received
(GBPm) -
-----
The only other non-UK registered entity of the Group is a
Trustee company that is part of the Group's securitisation vehicles
(Lanark and Lannraig). Lannraig Trustees Limited is registered in
Jersey. This entity plays a part in the overall securitisation
process by having the beneficial interest in certain mortgage
assets assigned to it. This entity has no assets or liabilities
recognised in its financial statements with the securitisation
activity taking place in other UK registered entities of the
structures. This entity does not undertake any external economic
activity and has no employees. The results of this entity as well
as those of the entire Lanark and Lannraig securitisation
structures are consolidated in the financial statements of the
Group.
Additional information
Other information
The financial information included in this results announcement
does not constitute statutory accounts within the meaning of
section 434 of the Companies Act 2006. Statutory accounts for the
year ended 30 September 2020 were approved by the directors on 24
November 2020 and will be delivered to the Registrar of Companies
following publication in December 2020. The auditor's report on
those accounts was unqualified and did not include a statement
under sections 498(2) (accounting records or returns inadequate or
accounts not agreeing with records and returns) or 498(3) (failure
to obtain necessary information and explanations) of the Companies
Act 2006.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
RNS may use your IP address to confirm compliance with the terms
and conditions, to analyse how you engage with the information
contained in this communication, and to share such analysis on an
anonymised basis with others as part of our commercial services.
For further information about how RNS and the London Stock Exchange
use the personal data you provide us, please see our Privacy
Policy.
END
FR KKQBPKBDBFDB
(END) Dow Jones Newswires
November 25, 2020 02:00 ET (07:00 GMT)
Ve Bionic Etf (LSE:CYBG)
Historical Stock Chart
Von Jun 2024 bis Jul 2024
Ve Bionic Etf (LSE:CYBG)
Historical Stock Chart
Von Jul 2023 bis Jul 2024
