TIDMVMUK TIDM91XR
RNS Number : 6328N
Virgin Money UK PLC
02 February 2021
2 February 2021
Virgin Money UK PLC: First Quarter 2021 Trading Update
Virgin Money UK PLC ("VMUK" or the "Group") confirms that
trading in the three months to 31 December 2020 was in line with
the Board's expectations.
David Duffy, Chief Executive Officer:
" Virgin Money had a profitable and positive first quarter and
continued to prioritise our customers and colleagues through this
uncertain external environment including through payment holidays
and Government lending schemes. We have made a good start to the
year with the launch of new customer propositions, further roll-out
of our rebrand programme and a return to statutory profit, while
maintaining a disciplined approach. The Group remains strongly
capitalised and we have good momentum as we look out into the
remainder of the year.
Given the current UK-wide restrictions and ongoing uncertainty,
we maintain the cautious economic outlook we outlined in November
and our full year guidance remains broadly unchanged. Looking
ahead, the vaccine roll-out and EU trade deal are encouraging for
the UK's economic recovery and we remain focused on disrupting the
market through a variety of innovative new products and
propositions with a customer and brand experience that is the best
in the market. "
Q1 Summary - Resilient pre-provision earnings, low cost of risk;
FY21 guidance re-affirmed
Stable balances reflect pricing discipline and COVID-19 restrictions
on customer behaviour
* Customer deposits increased in Q1 by 0.9% to
GBP68.1bn as further COVID-19 restrictions drove
lower Personal customer spending and Businesses
continued to maintain high levels of liquidity
* Q1 Mortgages reduced (0.2)% to GBP58.2bn as the Group
focused on margin management and prudent underwriting
standards given the uncertain macroeconomic outlook
* Q1 Business lending was +0.1% higher at GBP8.9bn with
lower BAU balances offset by growth in
Government-backed loans; BBLS: +14% to GBP923m,
CBILS/CLBILS: +19% to GBP422m
* Q1 Personal lending reduced (2.0)% to GBP5.1bn as the
impact of COVID-related restrictions resulted in
lower retail card spending and reduced demand for
personal loans
Stable Net Interest Margin (NIM) as expected; Favourable deposit
pricing opportunities
* NIM was stable in Q1 at 152bps (Q4: 152bps), as
expected, with higher liquidity and lower hedge
contributions offset by an improving mix and cost of
deposits, and supportive mortgage spreads
* The Group continues to expect a broadly stable FY21
NIM (vs FY20 level 156bps), based on the current
economic outlook and interest rate expectations with
the balance of risks and opportunities currently
weighted to the upside
* Deposit pricing dynamics are supportive looking
forward through the remainder of 2021
Low impairment charge reflects stable asset quality; Continued cautious
economic outlook
* Maintained cautious IFRS 9 economic scenarios and
weightings from FY20, with updated overlays
reflecting recent experience and expert credit
judgment
* The Group has not seen material changes in asset
quality or specific provisions to date - the
extension of Government support sees only a very
modest increase in arrears relative to FY20
* Balance sheet credit provisions of GBP726m (FY20:
GBP735m); coverage of 99bps (FY20: 102bps)
* Cost of risk 10bps (FY20: 68bps) reflects no change
in economics or material specific provisions
CET1 ratio benefitted from lower RWAs driven by planned initiatives
& HPI increases
* CET1 ratio increased c.50bps to 13.9%, including
c.40bps from software intangible changes, c.10bps
from the delivery of Business RWA opportunities,
partly offset by a GBP49m charge for PPI in the
period equivalent to 19bps
* The Group notes the PRA's anticipated consultation on
eligibility of software intangible assets, and now
expects a c.13% CET1 ratio in September 2021,
excluding the intangible asset benefit, subject to
the evolution of the economic environment
* P2A CET1 requirement reduced from 2.5% to 2.2%;
Reduced CRD IV CET1 minimum to 9.2%
* Significant c.GBP1.0bn buffer above CRD IV minimum
requirement (excluding software intangible benefits);
GBP726m of provisions, leaves the Group cautiously
positioned for an uncertain outlook
Supporting our customers
(GBPbn) 30 Sep-20 31 Dec-20 Q1 growth YTD annualised
--------------------- ---------- ---------- ---------- ---------------
Mortgages 58.3 58.2 (0.2)% (0.9)%
Business 8.9 8.9 0.1% 0.5%
o/w BBLS 0.8 0.9 14% n/a
o/w CBILS/CLBILS 0.4 0.4 19% n/a
Personal 5.2 5.1 (2.0)% (8.1)%
Customer lending 72.5 72.2 (0.3)% (1.2)%
Customer deposits 67.5 68.1 0.9% 3.5%
o/w relationship
deposits 25.7 27.0 5.0% 19.8%
--------------------- ---------- ---------- ---------- ---------------
Strong levels of customer deposit inflows continued in Q1 with
growth of 0.9% in the period. This reflected lower consumer
spending given tighter COVID-related restrictions, and increased
levels of business liquidity driving growth in relationship
deposits of 5.0%, across Personal and Business customers.
There were early signs of some recovery in customer spending
before tighter COVID-restrictions were imposed, however the
combination of the most recent restrictions and customers' caution
in the context of the economic outlook resulted in continued
inflows. The increase in deposits saw the loan-to-deposit ratio
fall to 106% (FY20: 107%). The Group continues to expect some
reduction in deposit balances as we continue our strategy of
optimising our deposit mix.
The total loan book declined by (0.3)% to GBP72.2bn as the Group
continued to focus on margin management, prudent underwriting and
supporting customers in a continued uncertain environment. A small
reduction in mortgages and unsecured balances was partially offset
by growth in Business lending.
Mortgage balances contracted modestly in Q1 by (0.2)%, as the
Group focused on writing selective new business within a supportive
pricing backdrop. The Group maintained prudent underwriting and
valuation criteria in the quarter against an uncertain economic
environment. Over the remainder of the year, the removal of
temporary stimulus measures, such as the Stamp Duty holiday, may
see market volumes slow. The Group will continue to be selective,
focusing on balancing volumes and pricing carefully.
Business lending grew 0.1% in Q1, where a decline in BAU lending
was more than offset by additional demand from customers through
the Government-guarantee lending schemes. BBLS volumes increased
14% to GBP923m in the quarter, whilst CBILS/CLBILS increased 19% to
GBP422m. The BAU book declined 2% to GBP7.6bn with more limited
activity levels seen, particularly in overdraft facilities.
Personal lending balances reduced (2.0)% as the impacts of
further COVID-related restrictions saw lower levels of new business
and customers prudently reduce debt levels. Our resilient balance
transfer book remained stable in the period and now represents 68%
of the cards portfolio. The Personal Loan and Salary Finance
portfolio performed resiliently against lower market demand and the
Group has continued to focus on delivering strong margins on new
business.
VMUK has also continued to support Mortgage and Personal
customers through the Pandemic with payment holidays ("PHs") where
appropriate. The stock of active payment holidays continued to
decline across all portfolios. The proportion of customers
requiring further support upon exiting their payment holiday has
increased modestly, as anticipated, and remains within the level
assumed in our provision. As noted at FY20, these cohorts of
customers continue to have significantly higher provision coverage
relative to the overall portfolio.
- c.GBP12.1bn Mortgage PHs granted at Dec-31 (FY20: GBP11.9bn)
or c.21% of balances; currently GBP0.6bn or 1% active. Of matured
payment holidays 98% have returned to payment (FY20: 98%)
- c.GBP265m Credit Card PHs granted at Dec-31 (FY20: GBP219m) or
c.6% of balances; currently GBP35m or 1% active. Of matured payment
holidays 88% have returned to payment (FY20: 92%)
- c.GBP119m Personal Loans PHs granted at Dec-31 (FY20: GBP103m)
or c.14% of balances; currently GBP8m or 1% active. Of matured
payment holidays 92% have returned to payment (FY20: 95%)
Stable NIM with momentum in deposit repricing; Subdued
Non-interest income reflects dynamics of COVID
Group NIM was stable in the quarter at 152bps compared to Q4:
152bps. In Q1, higher levels of liquidity and the impact of a
reduced contribution from the Group's structural hedge position,
given the flat and low rate environment, were offset by deposit
pricing improvements and supportive mortgage spreads.
As previously guided, NIM is expected to improve during Q2 and
the Group continues to expect FY21 NIM to be broadly flat on FY20
levels, based on the current economic outlook and no change in base
rates. However the balance of risks and opportunities are currently
weighted to the upside given deposit repricing opportunities.
Higher growth in lower-cost relationship deposits and a reduction
in term deposits during Q1 provides additional opportunities to
optimise the overall cost of deposits, subject to market conditions
through the remainder of the year. Additionally, continued elevated
deposit balances offer funding flexibility through reduced
wholesale funding requirements, supporting the outlook for NIM.
Non-interest income performance remained subdued in the quarter,
as increased COVID restrictions resulted in more muted economic
activity.
Maintaining coverage levels given economic uncertainty
The Group has not yet seen any material changes in overall
portfolio asset quality, nor been required to make any significant
COVID-related specific provisions. Arrears have increased modestly
in the quarter, from the subdued levels seen at FY20 but remain
below historic average levels as customers benefit from the support
available.
VMUK has maintained its cautious economic scenarios and
weightings used at FY20. The Group's macroeconomic inputs are based
on a probability-weighted combination of three economic scenarios
from our 3(rd) party economics provider Oxford Economics (i) Upside
(5% weighting), (ii) Base (50%), and (iii) Downside (45%). The
weighted economic scenario includes a c.15% GDP trough, peak
unemployment of c.10% and a peak-to-trough house price decline of
>20%.
To supplement the modeled output, the Group continues to apply
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. Overall
modelled and individual ECL of GBP549m was unchanged (FY20:
GBP549m) whilst PMAs of GBP177m (FY20: GBP186m) have been updated
to reflect recent experience and the behaviour of customers on
payment holidays.
In aggregate the GBP726m of credit provisions leaves the Group
cautiously positioned for the forward economic environment. The Q1
impairment charge of GBP18m equates to a net cost of risk of 10bps
which reflects cautious and unchanged economic assumptions, and the
lack of any material specific charges or deterioration in asset
quality in the period.
Credit provisions Credit provisions Gross Lending Coverage Annualised
at 30 Sep-20 at 31 Dec-20 at 31 Dec-20 ratio (bps) net cost
(GBPm) (GBPm) of risk (bps)
(GBPbn)
------------ ------------------ ------------------ -------------- ------------- ---------------
Mortgages 131 122 58.4 20 (7)
Personal 301 301 5.3 603 124
Business 303 303 8.8 394* 51
Total 735 726 72.5 99* 10
o/w stage
2 465 470 12.6 367
o/w stage
3 134 126 0.9 1340
------------ ------------------ ------------------ -------------- ------------- ---------------
* Government guaranteed lending balances excluded for purpose of
coverage ratio calculation
Total credit provision coverage ratio declined 3bps to 99bps*,
with Personal increasing by 12bps to 603bps, Mortgages reduced by
3bps to 20bps. Business coverage increased 3bps to 394bps* in the
period.
The outlook for cost of risk for 2021 remains subject to the
evolution of the forward-looking economic environment as well as
the scale of underlying asset quality deterioration once government
support measures are eventually removed. Given the extension of
government support measures into the Spring, this deterioration is
likely to be delayed further into FY 21.
Continuing to improve efficiency
The Group entered the year with good momentum in its cost
reduction programme and has made further progress over the course
of the quarter in line with expectations. Planned efficiency
improvements are expected to deliver greater benefits in the second
half and the Group continues to expect to deliver underlying
operating costs of <GBP875m (inclusive of GBP10-15m of COVID19
related costs) in FY21. Exceptional items in Q1 totalled GBP101m
including Integration and Transformation costs of GBP29m,
acquisition accounting unwind of GBP20m, Legacy conduct costs of
GBP49m and other items of GBP3m.
Strategic progress
At 31 December 2020, the Group had made good progress in
rebranding the network with 74 stores representing nearly 50% of
the network completed to date and we continue to expect to conclude
the programme during H1. In line with our expectations laid out at
FY20, we have delivered multiple innovative propositions in Q1;
with Exclusive ISA savings offers, Brighter Money Bundles, and the
second phase of our Home Buying Coach app all launched into the
market. Alongside these new product launches, VMUK continues to
focus on enhancing its digital capability. The delivery of new
functionality in our digital offering, the launch of APIs for
mortgage intermediaries and the ongoing digitisation of the
customer journey, continue to underpin the long-term foundations
for VMUK to Disrupt the Status Quo.
Well positioned for an uncertain environment
The Group's capital position remains resilient with the IFRS9
transitional CET1 ratio of 13.9% increasing c.50bps in the quarter
(IFRS9 fully-loaded CET1 ratio: 12.9%). This increase was primarily
driven by the updated treatment of software intangible assets
adding c.40bps and the benefit of Business RWA model updates which
added c.10bps, partly offset by 19bps for PPI. Q1 RWAs reduced by
1% to GBP24.2bn primarily reflecting the GBP0.2bn reduction from
Business model updates and with mortgage RWAs benefiting from
stronger HPI performance in the quarter. VMUK's Total Capital and
UK Leverage ratios remained resilient in the quarter at 20.8% and
5.0% respectively.
The Group notes the PRA's recent announcement on the prudential
treatment of software assets, and its intention to consult in due
course, in respect of fully deducting all software assets.
To date, the Group has not seen material RWA inflation, given
stable asset quality, with recent house price movements benefitting
RWAs and the CET1 ratio in the period. The expected 2021 RWA and
capital position remain subject to economic developments and
delivery of RWA initiatives, subject to relevant PRA approval.
Based on current expectations, the Group anticipates delivering a
c.13% year-end FY21 CET1 ratio excluding the current software
intangible benefit.
Funding and liquidity also remained robust, supported by the
elevated deposit balances from consumers and businesses, the
Group's LCR position has increased to 151%. In January, the Bank of
England confirmed that it expects the Group to meet an end-state
MREL requirement (plus buffers) of 27.3% of RWAs from 2022. The
Group's IFRS9 transitional MREL ratio of 29.0% (FY20: 28.4%)
exceeds this end-state requirement, and now anticipates a modest
GBP0.5bn of MREL senior debt issuance in 2021 as the Group
continues to build a prudent management buffer to regulatory
requirements.
In line with PRA policy statements, the Group received an
updated P2A requirement in Q1 with the CET1 element reducing from
2.5% to 2.2%. While this has been offset by other regulatory
requirements, the Group's CRD IV minimum CET1 capital requirement
(or MDA threshold) has reduced to 9.2%. The current transitional
CET1 ratio equates to c.GBP1.0bn buffer to this regulatory minimum,
excluding the benefit from the change in software intangible
treatment in the period.
Legacy Conduct
The Group completed the final processing of all legacy PPI
complaints on Monday 25th January. Since the beginning of the
programme a total of c.740k complaints have been processed at a
cost of GBP3.1bn. As a result of the completion of that activity,
the Group has assessed a further charge of GBP49m is required. A
higher conversion of IRs into complaints, driven by the final
validation of IRs to complaints as the programme concluded, saw a
small increase in the final number of complaints and drove some
additional expense. The Group also saw a higher level of average
redress and higher uphold rates on the final cohort of complaints
relative to expectations and long-term trends. Further, the Group
has set aside some of the provision to cover final review and
validation work as the programme finally completes, in line with
regulatory requirements and expectations. Notwithstanding the
charge, the Group remained profitable in the period. Legacy PPI
operations are expected to conclude in the short-term.
Outlook
The economic outlook remains highly uncertain and given the
extension of Government support measures it will be further into FY
21 before greater clarity emerges. The recent UK-EU trade agreement
and accelerating delivery of the UK's COVID-19 vaccination
programme are both supportive to the longer-term economic recovery.
However, recent further restrictions across the UK as a result of
record infection levels are likely to delay the pace of normalised
economic and transaction activity. As a consequence, VMUK continues
to adopt a cautious view on economic assumptions and this is
reflected in coverage levels, underwriting standards and liquidity
levels.
The BoE 2020 ACS was cancelled as a result of COVID-19, to free
up operational capacity and to help lenders continue to meet the
needs of UK households and businesses. The Group will take part in
its first concurrent stress test in 2021.
As previously guided, NIM is expected to improve during Q2 and
the Group continues to expect FY21 NIM to be broadly flat on FY20
levels, based on the current economic outlook and no change in base
rates. However the balance of risks and opportunities are currently
weighted to the upside given deposit repricing opportunities.
The Group returned to statutory profit in Q1 2021, continues to
perform resiliently, is robustly capitalised, and reaffirms the
FY21 guidance and targets set out at FY20 results.
For further information, please contact:
Investors and Analysts
Richard Smith +44 7823 443 150
(Interim) Head of 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
-------------------------------------
Announcement authorised for release by Lorna McMillan, Group
Company Secretary.
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In light of these risks, uncertainties and assumptions, the
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representation or warranty is made that any forward looking
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