TIDMVMUK TIDM91XR
RNS Number : 3747K
Virgin Money UK PLC
05 May 2022
VIRGIN MONEY UK PLC
INTERIM FINANCIAL REPORT
SIX MONTHS TO 31 MARCH 2022
BASIS OF PRESENTATION
Virgin Money UK PLC ('Virgin Money', 'VMUK' or 'the Company'), together
with its subsidiary undertakings (which together comprise the 'Group'),
operate under the Clydesdale Bank, Yorkshire Bank and Virgin Money brands.
This release covers the results of the Group for the six months ended
31 March 2022.
Statutory basis: Statutory information is set out on page 19 and within
the interim condensed consolidated financial statements.
Underlying basis: Management exclude certain items from the Group's
statutory position to arrive at an underlying performance basis. A reconciliation
from the underlying results to the statutory basis is shown on page
20 and rationale for the adjustments is shown on page 91.
Alternative performance measures: the financial key performance indicators
(KPIs) used in monitoring the Group's performance and reflected throughout
this report are determined on a combination of bases (including statutory,
regulatory and alternative performance measures (APMs)), as detailed
at 'Measuring financial performance - glossary' on pages 322 to 323
of the Group Annual Report and Accounts for the year ended 30 September
2021. 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
This document and any other written or oral material discussed
or distributed in connection with the results (the 'Information')
may include forward-looking statements, which are based on
assumptions, expectations, valuations, targets and estimates about
future events. These can be identified by the use of words such as
'expects', 'aims', 'anticipates', 'plans', 'intends', 'prospects',
'outlooks', 'projects', 'forecasts', 'believes', 'potential',
'possible', and similar words or phrases. These statements 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 consequences of the integration of the business of
Virgin Money Holdings (UK) PLC and its subsidiaries into the
Group), trends in its operating industry, changes to customer
behaviours and covenant, macroeconomic and/or geopolitical factors,
the repercussions of the outbreak of coronaviruses (including but
not limited to the COVID-19 outbreak), changes to its Board and/or
employee composition, exposures to terrorist activity, IT system
failures, cybercrime, fraud and pension scheme liabilities, changes
to law and/or the policies and practices of the Bank of England
(BoE), the Financial Conduct Authority (FCA) and/or other
regulatory and governmental bodies, inflation, deflation, interest
rates, exchange rates, tax and national insurance 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 Russia's invasion of Ukraine, the
repercussions of the UK's exit from the European Union (EU)
(including any change to the UK's currency and the terms of any
trade agreements (or lack thereof) between the UK and the EU),
Eurozone instability, and any referendum on Scottish
independence.
These forward-looking statements involve inherent risks and
uncertainties and should be viewed as hypothetical. The events they
refer to may not occur as expected and other events not taken into
account may occur which could significantly affect the analysis of
the statements. No member of the Group or their respective
directors, officers, employees, agents, advisers or affiliates
(each a 'VMUK Party') gives any representation, warranty or
assurance that any such events, projections or estimates will occur
or be realised, or that actual returns or other results will not be
materially lower than those expected.
Whilst every effort has been made to ensure the accuracy of the
Information, no VMUK Party takes any responsibility for the
Information or to update or revise it. They will not be liable for
any loss or damages incurred through the reliance on or use of it.
The Information is subject to change. No representation or
warranty, express or implied, as to the truth, fullness, fairness,
merchantability, accuracy, sufficiency or completeness of the
Information is given.
The Information contains certain industry, market and
competitive position data, some of which comes from third parties
and some of which comes from the Group's own internal research and
estimates based on the knowledge and experience of the Group's
management in the markets in which the Group operates. Whilst the
Group reasonably believes that such data is reputable, reasonable
and reliable, no VMUK Party has independently verified the third
party data and no independent source has verified the Group's
research, estimates, methodology and assumptions (except to the
extent any such data has been reviewed by the Group's auditors as
part of their review of the Group's interim and year-end financial
statements). Accordingly, undue reliance should not be placed on
any such industry, market or competitive position data.
The Information does 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. The distribution of the Information in certain
jurisdictions may be restricted by law. Recipients are required to
inform themselves about and to observe any such restrictions. No
liability is accepted in relation to the distribution or possession
of the Information in any jurisdiction.
Interim financial report
For the six months ended 31 March 2022
Contents
Virgin Money UK PLC Interim Results 2022 1
Business and financial review 3
Risk management 21
Risk overview 22
Credit risk 24
Financial risk 52
Statement of Directors' responsibilities 64
Independent review report to Virgin Money UK PLC 65
Financial statements 66
Interim condensed consolidated income statement 66
Interim condensed consolidated statement of comprehensive income 67
Interim condensed consolidated balance sheet 68
Interim condensed consolidated statement of changes in equity 69
Interim condensed consolidated statement of cash flows 70
Notes to the interim condensed consolidated financial statements 71
Additional information 91
Virgin Money UK PLC Interim Results 2022
David Duffy, Chief Executive Officer:
"We've made good progress against our strategy, while delivering
a significant increase in profit. We have positive momentum in
attracting new customers to Virgin Money through record credit card
sales, good growth in personal current account openings and a
strong uptake of our new digital fee-free business current
account.
"We have upgraded our net interest margin guidance given strong
growth in unsecured lending, combined with the rising interest rate
environment. Looking ahead, while the macroeconomic outlook is
uncertain and there are increased cost pressures on consumers, we
remain prudently provisioned and are confident in the quality of
our loan portfolio."
Summary financials
6 months 6 months 6 months
to to to
31 Mar 2022 31 Mar Change 30 Sep Change
2021 2021
GBPm GBPm % GBPm %
Underlying net interest income
(NII) 782 677 16 735 6
Underlying non-interest income 83 66 26 94 (12)
----------------------------------------- ----------- -------- ------- -------- ----------
Total underlying operating income 865 743 16 829 4
Underlying operating and administrative
expenses (456) (460) (1) (442) 3
----------------------------------------- ----------- -------- ------- -------- ----------
Underlying operating profit before
impairment losses 409 283 45 387 6
Impairment (losses)/credit on credit
exposures (21) (38) (45) 169 n/a
----------------------------------------- ----------- -------- ------- -------- ----------
Underlying profit on ordinary activities
before tax 388 245 58 556 (30)
Adjusting items (73) (173) (58) (211) (65)
----------------------------------------- ----------- -------- ------- -------- ----------
Statutory profit on ordinary activities
before tax 315 72 338 345 (9)
----------------------------------------- ----------- -------- ------- -------- ----------
Key performance indicators(1)
----------------------------------------- ----------- -------- ------- -------- ----------
Net interest margin (NIM) 1.83% 1.56% 27bps 1.69% 14bps
Statutory return on tangible equity
(RoTE) 9.1% 2.2% 6.9%pts 17.9% (8.8)%pts
Common Equity Tier 1 (CET1) ratio
(IFRS 9 transitional) 14.7% 14.4% 0.3%pts 14.9% (0.2)%pts
----------------------------------------- ----------- -------- ------- -------- ----------
(1) For definitions of the KPIs, refer to 'Measuring financial performance
- glossary' on pages 322 to 323 of the Group's 2021 Annual Report and
Accounts. The KPIs include statutory, regulatory and alternative performance
measures. Where applicable certain KPIs are calculated on an annualised
basis for the periods to 31 March.
Momentum in our financial performance; NIM guidance for FY
upgraded
-- Significantly improved underlying PBT compared to H1 2021;
underlying profit increased 58% YoY to GBP388m (H1 2021: GBP245m)
primarily reflecting stronger income. This drove improvement in
statutory PBT and statutory RoTE of 9.1% (H1 2021: 2.2%)
-- NIM expanded further to 1.83% in H1 (H1 2021: 1.56%) due to
the benefit of higher rates, lower deposit costs from ongoing
repricing and mix benefit, and a higher yielding lending mix,
offsetting mortgage spread pressures
-- Underlying non-interest income of GBP83m, up 26% YoY
reflecting higher card spending and business activity levels
-- Underlying costs of GBP456m were 1% lower YoY, as expected
cost savings from ongoing digital transformation and restructuring
were offset by inflation, including agreed pay rises, along with
targeted growth and planned higher digital development costs
-- Impairment charge of GBP21m (6bps cost of risk) reflects
updated macroeconomics and judgements; limited specific provisions
and changes in asset quality metrics in the period, with a
defensively positioned portfolio as the outlook becomes more
uncertain
Strong early delivery against our digital strategy - attracting
new customers and progress on digital transformation
-- Customer and propositions : Strong reaction to new digital
products with sales of BCAs & PCAs doubling QoQ, record
quarterly card sales & 97% of personal sales (ex. mortgages)
are digital. 42% of key customer journeys now automated (FY21:
27%)
-- Colleagues and property: A Life More Virgin supporting higher
engagement; property and branch footprint reduced c.20%
-- Digital: Mobilising cloud migration and removal of legacy
applications; adoption of Agile approach to change is giving
customers faster delivery of new features at a lower overall unit
cost
Balance sheet well positioned; continued to optimise deposits
and growth in target segments
-- Strong relationship deposits growth, increasing 4.2% to
GBP31.9bn, reflecting new current account customer acquisition;
overall deposits managed lower, down 3.7% to GBP64.4bn with
continued successful optimisation of deposit mix and funding
costs
-- Targeted volume growth saw a stable loan book at GBP71.9bn:
o Unsecured lending grew 7.0% to GBP5.8bn driven by strong cards
growth, reflecting customer demand and new propositions
o Business lending declined 2.5% to GBP8.3bn; BAU returned to
growth in Q2, and government lending ran off as expected
o Stable mortgage balances at GBP57.8bn with volumes managed
tactically, prioritising margin in a competitive environment
-- Solid credit quality maintained across portfolios with robust
coverage of 66bps (FY21: 70bps); above pre-pandemic levels
-- Strong capital base: transitional CET1 ratio of 14.7% (FY21:
14.9%) and 14.4% fully loaded with underlying capital generation
during the half offset by the planned removal of the software
intangible benefit
FY22 outlook upgraded
-- Expect FY22 NIM between 180 and 185bps based on current rate expectations
-- Costs anticipated to remain broadly stable compared to FY21 level
-- Expect cost of risk to rise towards through the cycle range
Updated capital framework and distribution policy
-- CET1 target range of 13 - 13.5% in the long-term; expect to
operate above the range for the time being
-- Expect a 30% full year dividend pay-out level; given strong
capital position, declaring an interim dividend of 2.5p per
share
-- Dividends supplemented by buybacks, subject to ongoing
assessment of surplus capital, market conditions and regulatory
approval
Contact details
For further information, please contact:
Investors and Analysts
Richard Smith +44 7483 399 303
Head of Investor Relations richard.smith@virginmoneyukplc.com
Amil Nathwani +44 7702 100 398
Senior Manager, Investor Relations amil.nathwani@virginmoneyukplc.com
Martin Pollard +44 7894 814 195
Senior Manager, Investor Relations martin.pollard@virginmoneyukplc.com
Media (UK)
Matt Magee +44 7411 299477
Head of Media Relations matthew.magee@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
Citigate Dewe Rogerson
Caroline Merrell +44 7852 210 329
Media (Australia)
P&L Communications
Ian Pemberton +61 402 256 576
Sue Frost +61 409 718 572
Virgin Money UK PLC will today be hosting a presentation for
analysts and investors covering the 2022 interim financial results
starting at 08:30 BST (17:30 AEST) with a pre-recorded presentation
followed by live Q&A call:
https://webcast.openbriefing.com/vmuk-interim22/
A recording of the webcast and conference call will be made
available on our website shortly after the meeting at:
https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/
A call for fixed income investors will be held at 10:00 BST on
Monday 9 May 2022: Dial-in details: UK: 0800 640 6441; All other
locations: +44 20 3936 2999; Access code: 107091
The Group will publish its inaugural interim Pillar 3 on Friday
27 May 2022.
Business and financial review
Financial performance - summary
Summary income statement
6 months 6 months 6 months
to to to
31 Mar 31 Mar 2021 Change 30 Sep 2021 Change
2022
GBPm GBPm % GBPm %
Underlying net interest income (NII) 782 677 16 735 6
Underlying non-interest income 83 66 26 94 (12)
------------------------------------------ -------- ------------ ------ ----------- ------
Total underlying operating income 865 743 16 829 4
Underlying operating and administrative
expenses (456) (460) (1) (442) 3
------------------------------------------ -------- ----------- ------ ----------- ------
Underlying operating profit before
impairment losses 409 283 45 387 6
Impairment (losses)/credit on credit
exposures (21) (38) (45) 169 n/a
------------------------------------------ -------- ----------- ------ ----------- ------
Underlying profit on ordinary activities
before tax 388 245 58 556 (30)
- Restructuring charges (46) (49) (6) (97) (53)
- Acquisition accounting unwinds (14) (47) (70) (41) (66)
- Legacy conduct costs (5) (71) (93) (5) -
- Other items (8) (6) 33 (68) (88)
------------------------------------------ -------- ----------- ------ ----------- ------
Statutory profit on ordinary activities
before tax 315 72 338 345 (9)
Tax (expense)/credit (77) 8 n/a 49 n/a
------------------------------------------ -------- ----------- ------ ----------- ------
Statutory profit after tax 238 80 198 394 (40)
------------------------------------------ -------- ----------- ------ ----------- ------
Key performance indicators(1)
6 months 6 months 6 months
to to to
31 Mar
2022 31 Mar 2021 Change 30 Sep 2021 Change
Profitability:
Net interest margin (NIM) 1.83% 1.56% 27bps 1.69% 14bps
Underlying return on tangible
equity (RoTE) 11.7% 10.1% 1.6%pts 25.7% (14.0)%pts
Underlying cost to income
ratio (CIR) 53% 62% (9)%pts 53% -%pts
Underlying earnings per share
(EPS) 17.6p 12.6p 5.0p 35.3p (17.7)p
Statutory RoTE 9.1% 2.2% 6.9%pts 17.9% (8.8)%pts
Statutory CIR 60% 84% (24)%pts 78% (18)%pts
Statutory EPS 13.7p 2.8p 10.9p 24.5p (10.8)p
(1) For a definition of each of the KPIs, refer to 'Measuring financial
performance - glossary' on pages 322 to 323 of the Group's 2021 Annual
Report and Accounts. The KPIs include statutory, regulatory and alternative
performance measures. Where applicable certain KPIs are calculated
on an annualised basis for the periods to 31 March.
Business and financial review
Financial performance - summary
Key performance indicators (continued)
31 Mar 30 Sep
As at: 2022 31 Mar 2021 Change 2021 Change
Asset quality
Cost of risk(1) 0.06% 0.11% (5)bps (0.18)% 24bps
Total provision to
customer loans 0.66% 1.00% (34)bps 0.70% (4)bps
Indexed loan to value
ratio (LTV)
of mortgage portfolio(2) 54.4% 55.2% (0.8)%pts 55.3% (0.9)%pts
--------------------------- ----------------- ------------------ --------- -------- ------------------
Regulatory Capital:
CET1 ratio (IFRS 9
transitional) 14.7% 14.4% 0.3%pts 14.9% (0.2)%pts
CET1 ratio (IFRS 9 fully
loaded) 14.4% 13.2% 1.2%pts 14.4% -%pts
Total capital ratio 21.8% 21.2% 0.6%pts 22.0% (0.2)%pts
Minimum requirement for
own funds
and eligible liabilities
(MREL)
ratio 31.7% 29.3% 2.4%pts 31.9% (0.2)%pts
UK leverage ratio 5.1% 5.2% (0.1)%pts 5.2% (0.1)%pts
Tangible net asset value
(TNAV)
per share 313.2p 257.5p 55.7p 289.8p 23.4p
Funding and Liquidity:
Loan to deposit
ratio (LDR) 112% 105% 7%pts 108% 4%pts
Liquidity coverage ratio
(LCR) 139% 151% (12)%pts 151% (12)%pts
(1) Cost of risk is calculated on an annualised basis.
(2) LTV of the mortgage portfolio is defined as mortgage portfolio weighted
by balance.
Summary balance sheet
As at
31 Mar 30 Sep 2021 Change
2022
GBPm GBPm %
Customer loans 71,854 71,996 (0.2)%
----------------------------------- ------- ----------------- -------
of which Mortgages 57,798 58,104 (0.5)%
of which Unsecured 5,793 5,415 7.0%
of which Business 8,263 8,477 (2.5)%
----------------------------------- ------- ----------------- -------
Other financial assets 14,676 15,035 (2.4)%
Other non-financial assets 2,079 2,069 0.5%
Total assets 88,609 89,100 (0.6)%
Customer deposits 64,386 66,870 (3.7)%
----------------------------------- ------- ----------------- -------
of which relationship
deposits(1) 31,887 30,596 4.2%
of which non-linked
savings 20,784 21,285 (2.4)%
of which term deposits 11,715 14,989 (21.8)%
----------------------------------- ------- ----------------- -------
Wholesale funding 15,497 13,596 14.0%
Other liabilities 3,158 3,161 (0.1)%
Total liabilities 83,041 83,627 (0.7)%
Ordinary shareholders'
equity 4,871 4,558 6.9%
Additional Tier 1 (AT1)
equity 697 915 (23.8)%
Equity 5,568 5,473 1.7%
Total liabilities and
equity 88,609 89,100 (0.6)%
----------------------------------- ------- ----------------- -------
Risk Weighted Assets
(RWAs) 24,184 24,232 (0.2)%
----------------------------------- ------- ----------------- -------
(1) Current account and linked savings balances
Business and financial review
Chief Executive Officer's statement
Delivering our Digital First strategy
"We've made good progress against our strategy, while delivering
a significant increase in profit. We have positive momentum in
attracting new customers to Virgin Money through record credit card
sales, good growth in personal current account openings and a
strong uptake of our new digital fee-free business current
account.
"We have upgraded our net interest margin guidance given strong
growth in unsecured lending, combined with the rising interest rate
environment. Looking ahead, while the macroeconomic outlook is
uncertain and there are increased cost pressures on consumers, we
remain prudently provisioned and are confident in the quality of
our loan portfolio."
David Duffy, CEO
Dear stakeholder,
Since we announced our Digital First strategy alongside our FY21
results, we have made a strong start in delivering our key
objectives of profitable growth and greater cost-efficiency. We're
already seeing early signs of a positive response as personal and
business customers take advantage of our new digital propositions
and loyalty programmes. We have good early momentum in delivering
the gross cost savings set out, with the reduction in our physical
footprint on track. The launch of key initiatives, which will drive
improved customer experience through greater automation and
digitisation of the bank's core customer journeys, is also
progressing well.
Although it is still early in the delivery of our Digital First
strategy, we are seeing signs of our strategic delivery starting to
support improved financial performance, including growth in our key
focus segments, and well-controlled operating expenses. Over the
course of the half, we've also benefited from an improving rate
backdrop, which has supported our net interest margin as we've
continued to reduce deposit costs further in supportive market
conditions, and seen improved income from our structural hedge. We
have also benefited from lower impairment levels compared to a year
ago and, taken together, these factors have underpinned a
significant increase in profitability. I'm pleased to be able to
update our capital framework today, giving investors clarity about
future returns, while also announcing an interim dividend of 2.5p.
As we look to the remainder of the year, the Group is well placed
to continue to deliver innovative propositions and profitable
growth in our target segments, despite a more uncertain
environment.
Our strategy remains the right one against a macroeconomic
backdrop that has become more uncertain over the course of the six
months. Following a period of strong recovery in Gross Domestic
Product (GDP) as COVID restrictions were lifted and consumer
spending levels improved, the impact of higher inflation has seen
expectations for further growth start to temper. As a domestic UK
bank, the Group doesn't have direct lending exposure in Ukraine or
Russia, but we are monitoring carefully for any second-order
impacts arising from the conflict, particularly upon inflationary
pressures in the UK. We have seen only limited changes in asset
quality across the portfolios to date but have taken steps to
factor the higher cost of living into our affordability
assessments. It remains too early to assess the full implications
of the changing backdrop and we will continue to help customers
where needed. Our thoughts are with all of those impacted by the
conflict, and I'm incredibly proud of the way our colleagues
responded to launch a basic bank account for refugees fleeing the
conflict in just 8 days, while the Group has also donated GBP300k
to the Disasters Emergency Committee ( DEC) appeal.
Strategic delivery - Growth in our target segments
As we continue to focus on digital-led growth in key target
segments, we've made a good start to the year with relationship
deposits and unsecured balances continuing to benefit from strong
demand, the launch of new propositions and extended loyalty
programmes. Our relaunch of the Business bank ensures we are well
placed for growth over the remainder of the year as sector volumes
recover.
Relationship deposits grew 4.2% in H1, benefitting from higher
new sales of our Virgin Money Personal and Business Current
Accounts (BCA). Personal Current Account (PCA) sales continue to be
supported by attractive switching offers and we added the option
for debit card cashback to PCAs in January, with c.120k customers
already signing up and earning on average c.7.5% cashback on
qualifying purchases. In March, we refreshed the proposition
further, enhancing the interest rates on offer, following the
recent Bank of England rate increases. PCA sales in Q2 were double
those of Q1, and since the launch of the re-branded Virgin Money
PCA in late 2020, we have opened c.180k new PCAs. The latest offer,
launched in Q3, will give customers 20,000 Virgin Points to switch
(equivalent to a flight to New York) for each current account
opened and leaves the Group well placed to continue to drive PCA
sales. We're replicating the same rewards model for businesses with
our new, fee-free digital BCA, the M-Account, which was launched in
November offering debit card cashback. The strength of this new
proposition has driven new BCA accounts in Q2 to double those
achieved in Q1, supported by ongoing improvements to the digital
sales channel which are delivering improved conversion rates. The
M-account also offers businesses access to other proposition
developments which will include M-Track and Marketplace.
Business and financial review
Chief Executive Officer's statement
Unsecured lending grew 7.0% over the half, supported by record
new credit card account opening levels - Q2 saw c.175k opened,
beating the previous record set in Q1. Our overall proposition
remains strong, with prudent underwriting, and offers customers
good value and competitively priced and versatile credit cards,
including cashback on purchases, for which c.350k customers have
now signed up (FY21: c.230k). To this we have added Instalment
Credit capability, allowing our customers access to 'Buy Now Pay
Later' functionality in the credit card mobile app, offered within
customers' existing, fully underwritten and affordability-stressed
credit limit. The strength of our proposition has seen us deliver
above-market growth, and we now have a c.8% share of the UK cards
market.
In Business banking, we expected to build momentum throughout
the year as the sector recovered and in Q2 we have seen growth
returning to the BAU segment, alongside the anticipated run-off of
government scheme lending. BAU business lending saw a 20% increase
in drawdowns QoQ as the lending pipeline builds into H2. This
supported BAU business balance growth of c.1% in Q2, although the
overall book reduced 2.5% in the half, reflecting a 13% reduction
in the government scheme lending book. The government lending book
is performing as expected; some customers have chosen to pay back
their loans in full, while others have begun making monthly
repayments as per their schedule. Currently whilst there has been a
modest increase in stage 3 Bounce back loans (BBLs), claims for
defaults have been paid in full by HMT, and incidences of fraud are
very low.
Strategic delivery - Delivering digital efficiency
We have made a positive start against all three of our key
themes laid out at FY21: Customer and Propositions, Colleagues and
Property, and Digital. Within Customer and Propositions, we are
making progress in offering customers an improved, digital-first
customer experience. From a starting point of 70% of customer
service interactions being voice-led at FY21, we've already seen a
10%pt reduction, as digital solutions such as chatbots are being
introduced to enhance the customer service experience. Chatbots
were first deployed in January and have now dealt with c.650k
customer queries, resolving 55% of these queries without colleague
intervention, freeing up colleagues and delivering stronger
customer service. We have more work to do to improve customer
service through greater automation and we are rapidly digitising
key customer journeys, with 42% now fully digitised, up from 27% at
FY21. Digital sales of personal banking products (ex. mortgages)
are now 97% of total sales, and PCA digital adoption has picked up
from 62% to 64%, driving towards our 80% target by FY24.
We are continuing to make progress in the Colleagues and
Property workstream as VMUK transforms its colleague operating
model, building on capabilities introduced over the last year, to
embed fully the new A Life More Virgin (ALMV) flexible working
model. ALMV features harmonised working terms, enhanced colleague
benefits and enables flexible, remote working, allowing us to tap
into new, more diverse talent pools. These changes have been very
well received by colleagues, reflected in improved engagement
scores in the period, up to 73% from 68% at FY21, and external
commentators continue to be very keen to talk to us to understand
the changes we've made to give our colleagues greater flexibility
and freedom. In order to drive productivity, we continue to
implement new IT infrastructure and have initiated programmes that
will use the full power of Microsoft's Cloud computing
product-suite, enhancing the way we work and supporting colleague
collaboration. Greater remote working is also enabling the Group to
reduce its property footprint, reducing costs and supporting the
environment. The property footprint is down more than 20% since
FY21, and branch numbers reduced as announced in September 2021,
reflecting the changes in customer demand seen during the
pandemic.
Our Digital investment continues to focus on driving our
three-year transformation programme to deliver a scalable, more
efficient digital growth platform, featuring migration to Cloud
infrastructure and the deployment of Agile methodology and tools to
increase the pace and delivery of change, at lower cost. We are
still in the mobilisation phase of our Cloud migration in
partnership with Microsoft, with significant planning underway, and
this is set to commence in FY23, enabling us to begin exiting
physical data centres in late FY23. In the meantime, we are making
progress on the digitisation of the bank and the Agile delivery of
change. We are in the process of starting to de-commission legacy
applications, while building the new applications required to
support the new Cloud infrastructure. We are deploying Microsoft
tools, such as AI and robotics, and rolling out Agile methodology
across our new change programmes. This is delivering new
functionality for customers at greater pace at an average of c.20%
lower unit costs.
Improving financial momentum and capital framework
We have seen a strong improvement in our financial performance
compared to a year ago, supported by early strategic delivery
combined with an improved rate environment. Statutory profit before
tax of GBP315m was significantly higher (H1 2021: GBP72m), with
stronger underlying profit of GBP388m which improved 58% (H1 2021:
GBP245m).
The loan book remained broadly stable in the period, but with
improved momentum in our key target segments including the strong
growth in unsecured lending and the stabilisation of BAU business
lending balances discussed above, which broadly offset the decline
in government scheme lending and a small reduction in mortgages
where we continued to trade tactically in a competitive market. We
continued to optimise the deposit book, which reduced 3.7% over the
period but with growing relationship deposit balances, which were
up 4.2%, and now represent half of all deposits.
Total income improved 16% vs H1 2021 with a stronger
contribution from both net interest income and other income, driven
by a stronger rate environment supporting hedge income and ongoing
deposit cost optimisation, along with a continued improvement in
customer activity levels. Our net interest margin strengthened
significantly in the half to 183 basis points (bps) (H1 2021:
156bps) and we now expect a stronger outlook for FY22 NIM of
between 180 and 185bps. Other income of GBP83m also improved 26%
compared to a year ago reflecting higher customer and business
activity, including increased card spending as the cards book grew
significantly in H1.
Business and financial review
Chief Executive Officer's statement
Underlying costs of GBP456m were broadly stable year-on-year (H1
2021: GBP460m), tracking in line with expectations as the benefit
of gross savings from ongoing digital transformation and
restructuring were offset by the costs of growth, ongoing planned
investment in new propositions, and the impacts of inflation,
including agreed pay rises and the harmonisation of colleague
terms. Despite the higher inflationary backdrop than at the time we
set our plan, we continue to be well placed to achieve our broadly
stable guidance for FY22 and our objective of GBP175m of gross cost
savings by FY24. The delivery of these gross savings will be
enabled by restructuring charges, with GBP46m incurred in H1 2022
and we continue to expect to incur c.GBP275m across FY22-FY24 with
around half in FY22.
Overall adjusting items of GBP73m in H1 were much improved
year-on-year (H1 2021: GBP173m) given the reduction in legacy
conduct costs.
Asset quality remained robust in the period, with a low
impairment charge of GBP21m or 6bps cost of risk. Since FY21, the
UK initially saw a continued recovery post-COVID, although more
recently the Ukraine conflict has seen greater uncertainty in the
outlook and some reduction of forecasts. Overall, forecasts for
unemployment remain below pre-COVID levels, albeit with a slightly
lower pace of GDP growth. We have not yet seen the impacts of
higher inflation on our customers, but have already taken actions
to ensure we tighten affordability criteria, and our track record
of prudent underwriting across our portfolios leaves the loan book
well positioned. Our coverage remains strong at 66bps (FY21:
70bps), and above pre-pandemic levels, despite the modest reduction
in the period.
Having returned to paying a dividend alongside our FY21 results,
and following the Group's successful participation in its inaugural
stress test last year, we're able to update the market on our
capital framework and returns policy. The Group will operate in a
CET1 target range of 13 - 13.5% in the long term, although we will
operate above this level for the time being due to heightened
macroeconomic uncertainty. The Group will target a 30% full year
dividend payout ratio and the interim dividend is expected to
represent around 1/3(rd) of the prior year's total dividend,
beginning H1 2023. Dividends will be supplemented by buybacks,
subject to ongoing assessment of surplus capital, market conditions
and regulatory approval. Given a strong capital position and robust
H1 performance, the Board has announced an interim dividend of
2.5p.
Building momentum in delivering our Environmental, Social and
Governance (ESG) ambitions
Recognising the challenges that Ukrainian people may face when
trying to open an account in the UK, I was very proud of how
quickly our colleagues responded , deliver ing an updated account
opening process for refugees within 8 days. We've donated GBP300 k
to the DEC Ukraine Humanitarian Appeal and are supporting our staff
who are offering up their homes to Ukrainian families and using
volunteering days to support fundraising activities. We've achieved
c. GBP 200k in fundraising for our charity partner Macmillan and
rolled out our national
Macmillan Guides support service to support people living with or affected by c ancer.
In November, we launched our new purpose-driven 'A Life More
Virgin' employment package, offering equal , gender neutral family
leave, 30 days' holiday and an additional five paid wellbeing days
to all colleagues from day one of their employment. As we continue
to evolve our senior leadership team for our digital future, we
continue to focus on the diversity of our senior leadership. Women
continued to comprise 42% of senior management roles and 4% of
these roles are undertaken by colleagues from an ethnic background
(FY21: 2%). There remains more to do here to achieve our 2025
targets which include senior gender diversity of 45-55%, ethnicity
of 10%, LGBTQ+ of 4%, and disability of 8%, but we are continuing
to make progress.
From a financial inclusion perspective, w e continue to work
with Smart Data Foundry to define a national measure for the
poverty premium and, in partnership with Turn2Us, are helping
people across the UK make sure they are not missing out on benefits
they are entitled to. Our social media campaign, which targeted
over 65's, has reached over 175,000 people, and resulted in more
than 1,000 benefit calculator assessments being completed .
We are continuing to mak e progress in embedding our climate
strategy and in developing baselines, roadmaps and targets to net
zero in line with the Net-Zero Banking Alliance commitment made in
September 2021. We included climate-related financial disclosures
within the Group's 2021 Annual Report and Accounts and will make
disclosures aligned to the Task Force on Climate-related Financial
Disclosures (TCFD) recommendations in the 2022 Annual Report and
Accounts. Recognising the increased relevance and materiality to
the Group's risk profile, we've elevated climate risk to p rincipal
r isk status.
Developing our leadership to deliver our strategy
I'd like to welcome Syreeta Brown, who joined the Group in
November 2021 as Group Chief People and Communications Officer.
Syreeta joined from Citi, where she spent 11 years in a number of
HR roles, the most recent of which was Managing Director, Head of
HR for Global Functions, Operations and Technology, and led the HR
strategy for 20,000 employees across Europe, Middle East and
Africa. She brings a wealth of experience in cultural
transformation, talent development and in building a workforce that
is fit for the future and has hands-on, senior-level experience
embedding a digital agenda within a major financial services
business.
Business and financial review
Chief Executive Officer's statement
I would also like to welcome Susan Poot who joined the Group in
January 2022 as Group Chief Risk Officer following Mark
Thundercliffe's retirement. Susan joined from ING Bank, where she
spent over 20 years in a number of commercial and risk roles, the
most recent of which was Chief Risk Officer, Retail Banking, where
she was responsible for credit risk, compliance and operational
risk management across all of ING's retail markets, managing a team
of over 1,000 people and overseeing a lending book of EUR400
billion. Susan brings with her a wealth of experience across a
range of risk disciplines, with broad banking experience across
both retail and wholesale banking.
I would like to take this opportunity to thank Kate Guthrie,
Mark Thundercliffe and Helen Page for their contributions to my
leadership team during their time with the Group, which spanned the
acquisition of Virgin Money Holdings and the significant
integration and rebrand activity that has laid the platform for our
exciting future. In addition, Amy Stirling will leave the Board
today and I thank her for her contribution to the Board since
joining as part of the Virgin Money acquisition. Finally, Paul Coby
will leave the Board in June and I'd also like to thank him for his
significant contribution over the past 6 years.
Outlook
Over the first half of the year, we've made good initial
progress delivering against the accelerated digital strategy
launched alongside our FY21 results. We will continue to focus in
H2 on growing in our target segments and delivering exciting new
digital propositions for customers, while continuing to improve our
efficiency and customer service.
It's encouraging to see our strategy, and an improving rate
environment, are combining to drive stronger financial performance.
The improved NIM outlook, well controlled costs and low impairment
charge have driven a significant improvement compared to a year ago
underpinning all other guidance for FY22 and adding to our
conviction in achieving our medium-term targets. The announcement
of our updated capital framework provides a clear guide for capital
returns going forwards, while we maintain a robust balance
sheet.
The macroeconomic outlook has become more uncertain over the
course of the six months. Following a positive recovery in
expectations post-COVID, recent events have seen forecasts
moderate. As we enter a more uncertain environment, we are
monitoring carefully the impacts of higher inflation on the cost of
living and implications for customers, as well as the second-order
impacts from the conflict in Ukraine, but aren't yet seeing signs
of significant stress in the book. We enter this period with
prudent coverage, robust underwriting and a defensive
portfolio.
We will say more on the Group's outlook and prospects for
profitable growth alongside our FY22 results in November and I
strongly believe the Group is well placed to deliver its strategy.
We have a unique brand, and access to a complementary set of
partner companies in the Virgin Group, while our deepening
relationship with Virgin Red offers exciting possibilities for our
customers to earn and spend Red points, with Virgin Money products
and propositions at the heart of deeper, more loyal customer
relationships. We will continue to make progress in developing our
digital wallet over the second half of the year combining many of
these unique features with instalment credit, loyalty and payment
capabilities.
Overall, we continue to have the right strategy and are
executing on the key components that will underpin our delivery of
improved returns and profitable growth over the coming years, as we
fulfil our purpose to Make You Happier About Money.
David Duffy, Chief Executive Officer - 4 May 2022
Business and financial review
Chief Financial Officer's review
Driving sustainable improvements in returns
"The Group has made good initial progress on its Digital First
strategy and it's pleasing to see strategic delivery supporting a
strong financial performance to start 2022. Profitability improved
substantially in the period with continued financial momentum
across the business."
Clifford Abrahams, Group CFO
Financial Highlights
Statutory profit before Underlying profit before Statutory RoTE
tax tax 9.1%
GBP315m GBP388m H1 2021: 2.2%
H1 2021: GBP72m H1 2021: GBP245m
----------------------- ------------------------ --------------------
NIM Underlying CIR Cost of risk
1.83% 53% 6bps
H1 2021: 1.56% H1 2021: 62% H1 2021: 11bps
----------------------- ------------------------ --------------------
CET1 ratio Loan growth Relationship deposit
growth
14.7% (0.2)% 4.2%
2021: 14.9% H1 2021: (0.3)% H1 2021: +12.0%
Business and financial review
Chief Financial Officer's review
Strong start to Digital First delivery
The Group has built good momentum in the first half of the
financial year, with a strong set of financial results and initial
delivery against the accelerated digital strategy. We are
continuing to invest in our Digital First strategy, driving cost
efficiency and unlocking our growth potential in key target
segments. We have a clear opportunity to digitise further and
accelerate profitable growth, and remain committed to delivering
double digit returns. Following our successful inaugural
participation in the BoE Solvency Stress Test (SST) exercise last
year, we are also able to update the market on our capital
framework and the outlook for capital returns.
Delivering growth in target segments
The Group has had a strong start to the year with ongoing
improvement in customer propositions supporting growth in key
target segments. The investment we are making in further digitising
customer journeys, adding innovative new customer offerings and
expanding product features, is encouraging for our future growth
prospects. Relationship deposit growth has been strong year-to-date
and will continue to be a key area of focus for the Group,
providing a low-cost base for above-market lending growth in target
segments over time. The further development of our proposition in
the PCA market, including debit card cashback and a compelling
linked saver account, saw us reach c.180k new PCA sales since the
launch of the new PCA proposition in late 2020, while the launch of
the digital fee-free BCA in November has resulted in a 100%
increase in sales QoQ and will continue to support the growth of a
lower cost funding base. In unsecured lending, we delivered record
sales for new credit cards in Q2 and have consistently seen our
market share grow. We continue to expect good momentum in this area
supported by our innovative new digital propositions. In Business,
the strength of our developing proposition, supported by the
fee-free digital BCA as well as the broader improvement in
activity, give us confidence in delivering future above-market
growth in this sector.
Strong financial performance in H1
The Group delivered an underlying profit in H1 of GBP388m, a
significant improvement compared to last year (H1 2021: GBP245m),
resulting in underlying RoTE of 11.7% (H1 2021: 10.1%) driven
primarily by improved income and lower impairments. NIM of 1.83%
(H1 2021: 1.56%) was significantly improved year-on-year due to the
higher rate environment, supportive conditions in the deposit
market and improved liability mix, offsetting mortgage spread
pressure, with the second quarter NIM increasing to 1.89%.
Non-interest income of GBP83m was 26% higher year-on-year driven by
improved customer activity. Overall, this resulted in total income
that was 16% higher compared to a year ago. Operating costs were 1%
lower at GBP456m compared to H1 2021 as expected gross cost savings
were largely offset by inflation, growth and planned higher digital
development costs. The improvement in income resulted in a 9%pts
reduction in the cost: income ratio to 53% and drove a 45% increase
in pre-provision profit year-on-year. Impairments remained low in
the first half of the year at GBP21m, resulting in a cost of risk
of 6bps.
The Group also reported an improved statutory profit before tax
in the period delivering GBP315m (H1 2021: GBP72m) and a statutory
RoTE of 9.1% (H1 2021: 2.2%). This reflected the improved
underlying profit, and that GBP100m fewer adjusting items were
incurred in H1 2022, due primarily to the non-recurrence of legacy
conduct charges for payment protection insurance (PPI) and a lower
level of acquisition accounting unwind. H1 2022 saw GBP73m of
adjusting items: GBP46m of restructuring charges, GBP14m of
acquisition accounting unwind, GBP5m of legacy conduct costs, and
GBP8m of other charges.
As a result of the strong performance in the first half, the
Board has announced an interim dividend of 2.5p.
Resilient balance sheet with robust capital, liquidity and
funding position
Given higher uncertainty in the outlook, the Group has reduced
the weighting to the upside scenario and maintained elevated PMAs.
The Group maintained a conservative balance sheet position with
credit provisions totalling GBP479m (FY21: GBP504m) equivalent to a
coverage ratio of 0.66% (FY21: 0.70%), which remains above
pre-pandemic levels. The Group continues to have a defensive
portfolio comprising 80% low-risk mortgages, 12% business lending
and 8% in our high-quality, higher affluence-focused unsecured
book. Macroeconomic assumptions from our 3(rd) party provider
Oxford Economics have been fully refreshed in the period.
During the period, lending volumes were 0.2% lower at GBP71.9bn.
Deposit balances reduced 3.7% to GBP64.4bn given ongoing
optimisation of the funding base as relationship deposits grew by
4.2%. The CET1 ratio remains strong having reduced from 14.9% at
FY21 to 14.7% at H1, including the removal of the Capital
Requirements Regulation (CRR)2 software benefit of c.50bps.
I was pleased with the Group's performance in its inaugural PRA
stress test where VMUK remained above all reference rates and
performed well relative to peers. Our updated capital framework
provides flexibility to support sustainable payouts to investors,
while allowing for capital generation to support our growth plans.
We will operate in a target range of 13 - 13.5% in the long term,
although we will operate above this level for the time being due to
heightened macroeconomic uncertainty. The Group will target a 30%
full year dividend payout ratio and the interim dividend is
expected to represent around 1/3(rd) of the prior year's total
dividend, beginning H1 2023. Dividends will be supplemented by
buybacks, subject to ongoing assessment of surplus capital, market
conditions and regulatory approval.
Outlook
We have made good initial progress on driving our accelerated
Digital First strategy, which will deliver value for investors over
time. The Group continues to invest in digitally-led customer
propositions, driving growth in key target segments and is
supporting strong financial momentum in H1. With continued digital
investment, the Group is creating the key elements to deliver
strong profitable growth at low incremental costs and I'm looking
forward to helping drive the business towards those ambitions.
Business and financial review
Chief Financial Officer's review
Underlying income
6 months 6 months 6 months
to to to
31 Mar 31 Mar 2021 30 Sep
2022 2021
GBPm GBPm Change GBPm Change
Underlying net interest income 782 677 16% 735 6%
Underlying non-interest income 83 66 26% 94 (12)%
Total underlying operating income 865 743 16% 829 4%
NIM 1.83% 1.56% 27bps 1.69% 14bps
Average interest earning assets 85,729 87,134 (2)% 86,751 (1)%
Overview
Operating income of GBP865m was 16% higher compared with H1 2021
and 4% higher than H2 2021 as the Group continued to build
financial momentum. NII improved 16% year-on-year as NIM increased
27bps to 1.83%, with a Q2 NIM of 1.89%. Other income of GBP83m was
26% higher compared to H1 2021 driven by higher activity levels in
Business and a continued improvement in consumer spending.
NII and NIM
Asset yields increased 14bps compared to H1 2021 at an aggregate
level. Within this, mortgage yields declined 10bps given the
competitive backdrop impacting headline mortgage pricing. The Group
remained selective in terms of participation in the market in the
first half, with lower average balances also driving a reduction in
NII.
In Business, a 25bps increase in yields was driven by a
reduction of lower-yielding government-backed lending, and the
benefit of bank base rate increasing. NII was broadly stable as an
increase in the yield was offset by lower average balances.
In Unsecured, average balances increased by 10% relative to H1
2021, while yields contracted 64bps. The key driver of the
reduction in yield compared to H1 2021 was the credit card book
which was impacted by mix changes as customers paid down
higher-yielding unsecured balances and new business was written at
lower yields. Elsewhere, the average yield on the Group's liquid
assets increased 18bps reflecting the higher rate environment.
Liability rates decreased 14bps relative to H1 2021, with the
reduction driven broadly across lower savings costs and lower term
deposit costs more than offsetting higher current account and
wholesale funding costs. We continued to see an increase in average
balances across lower-cost current accounts and savings products.
Term deposits fell as a proportion of the book and were also 32bps
cheaper, while savings costs reduced by 15bps in the period to
33bps (H1 2021: 48bps), reflecting the impact of repricing
activity. Wholesale funding costs increased in the period, driven
mainly by an increase in average balances with the continued
optimisation of overall funding.
In FY22 we now anticipate a full year NIM of 1.80% to 1.85%.
This reflects the benefit of a higher proportion of low-cost
relationship deposits, a higher-yielding asset mix, structural
hedge contributions and the higher rate environment partially
mitigated by competitive pressure on mortgage spreads.
Business and financial review
Chief Financial Officer's review
Underlying net interest income
6 months ended 31 March 6 months ended 31
2022 March 2021
---------------------------------------------- --------------------------------------------
Average
Interest yield/ Interest Average
Average income/ (rate) Average income/ yield/
balance (expense) (1) balance (expense) (rate)(1)
Average balance GBPm GBPm % GBPm GBPm %
sheet
Interest earning
assets:
Mortgages 57,976 641 2.22 58,303 673 2.32
Unsecured lending 5,902 195 6.62 5,344 194 7.26
Business
lending(2) 8,314 149 3.59 8,916 149 3.34
Liquid assets 12,563 24 0.38 12,860 13 0.20
Due from other
banks 970 - 0.05 1,707 - (0.03)
Swap income/other - 9 n/a - (55) n/a
Other interest
earning assets 4 - n/a 4 - n/a
Total average
interest earning
assets 85,729 1,018 2.38 87,134 974 2.24
Total average
non-interest
earning assets 3,218 3,450
Total average
assets 88,947 90,584
Interest bearing
liabilities:
Current accounts 15,467 (13) (0.17) 14,000 (4) (0.06)
Savings accounts 31,388 (52) (0.33) 29,284 (71) (0.48)
Term deposits 13,348 (68) (1.02) 19,892 (133) (1.34)
Wholesale funding 15,059 (102) (1.36) 13,767 (87) (1.27)
Other interest
earning
liabilities 150 (1) n/a 168 (2) n/a
Total average
interest bearing
liabilities 75,412 (236) (0.63) 77,111 (297) (0.77)
Total average
non-interest
bearing
liabilities 7,987 8,477
Total average
liabilities 83,399 85,588
Total average
equity 5,548 4,996
Total average
liabilities
and average
equity 88,947 90,584
Net interest
income 782 1.83 677 1.56
(1) Average yield is calculated by annualising the interest income/expense
for the period.
(2) Includes loans designated at fair value through profit or loss (FVTPL).
Underlying non-interest income
Non-interest income improved GBP17m relative to H1 2021 to
GBP83m. The key drivers of the improvement were GBP7m stronger
performance in Personal as activity levels recovered, a GBP4m
benefit from improved business fee performance, and GBP6m benefit
from fair value movements. The improvement in Personal fee income
was driven by the benefit of easing lockdown restrictions and
higher interchange fees as consumer spending increased.
Following the rebound of non-interest income to more normalised
pre-COVID levels, the delivery of the Group's strategic initiatives
are targeted to drive a further improvement over the coming
years.
Business and financial review
Chief Financial Officer's review
Underlying costs
6 months 6 months 6 months
to to to
31 Mar 31 Mar 2021(1) 30 Sep 2021(1)
2022
Operating and GBPm GBPm Change GBPm Change
administrative
expenses
Staff costs 184 176 5% 172 7%
Property and
infrastructure 20 21 (5)% 22 (9)%
Technology and
communications 57 61 (7)% 52 10%
Corporate and
professional
services 54 49 10% 52 4%
Depreciation,
amortisation and
impairment 67 81 (17)% 74 (9)%
Other expenses 74 72 3% 70 6%
------------------- ------------- -------------- ------------- -------------- --------------
Total underlying
operating and
administrative
expenses 456 460 (1)% 442 3%
Underlying CIR 53% 62% (9)%pts 53% -%pts
(1) In the Group's 2021 Annual Report and Accounts, the methodology for
categorising operating and administrative expenses before impairment
losses was refined to provide a more accurate reflection of what these
costs represent. The 6 months to 31 March 2021 and the 6 months to
30 September 2021 comparatives have been amended to conform with the
current period's presentation. Refer to note 2.4 for further detail.
Underlying operating expenses reduced 1% relative to H1 2021 to
GBP456m with the cost: income ratio reducing 9% pts to 53% compared
with H1 2021 due primarily to the higher income, which benefitted
from strategic delivery and the higher rate environment. The Group
delivered gross cost savings of c.GBP30m in the first half of the
year relative to H1 2021. These benefits were broadly offset by
higher wage inflation and costs linked to balance sheet growth, as
well as increased digital development costs, in line with our
guidance at FY21. The Group continues to expect broadly stable
costs for FY22 compared to FY21.
Impairments
Credit Coverage Net cost % of loans % of loans
provisions Gross lending ratio of risk(1) in in
As at 31 March 2022 GBPm GBPbn bps bps Stage 2 Stage 3
---------------------------- ------------- --------------- ---------- ------------ ----------- -----------
Mortgages 66 58.1 11 (7) 9.1% 1.1%
Unsecured: 221 6.2 404 257 10.5% 1.3%
---------------------------- ------------- --------------- ---------- ------------ ----------- -----------
of which credit cards 199 5.1 422 330 11.1% 1.3%
of which personal loans
and overdrafts 22 1.1 297 (157) 7.3% 1.3%
---------------------------- ------------- --------------- ---------- ------------ ----------- -----------
Business 192 8.1 258(2) (64) 24.8% 3.7%
---------------------------- ------------- --------------- ---------- ------------ ----------- -----------
Total 479 72.4 66 6 11.0% 1.4%
---------------------------- ------------- --------------- ---------- ------------ ----------- -----------
of which Stage 2 247 7.9 315
of which Stage 3 101 1.0 1,070
(1) Cost of risk is calculated on an annualised basis.
(2) Government-guaranteed element of loan balances excluded for the purposes
of calculating the Business and total coverage ratio.
Credit Gross Coverage Net cost % of loans % of loans
provisions lending ratio of risk in in
As at 30 September 2021 GBPm GBPbn bps bps Stage 2 Stage 3
---------------------------- --------------- ----------- ---------- ---------- ------------- -------------
Mortgages 87 58.5 15 (7) 12.3% 1.1%
Unsecured: 194 5.8 380 (64) 9.7% 1.2%
---------------------------- --------------- ----------- ---------- ---------- ------------- -------------
of which credit cards 160 4.7 379 5 10.7% 1.3%
of which personal loans
and overdrafts 34 1.1 386 (386) 5.0% 1.1%
---------------------------- --------------- ----------- ---------- ---------- ------------- -------------
Business 223 8.3 306(1) (62) 29.2% 2.8%
---------------------------- --------------- ----------- ---------- ---------- ------------- -------------
Total 504 72.6 70 (18) 14.1% 1.3%
---------------------------- --------------- ----------- ---------- ---------- ------------- -------------
of which Stage 2 302 10.2 302
of which Stage 3 91 1.0 959
(1) Government-guaranteed element of loan balances excluded for the purposes
of calculating the Business and total coverage ratio.
Business and financial review
Chief Financial Officer's review
Total credit provisions reduced to GBP479m at H1 2022 (FY21:
GBP504m), resulting in aggregate coverage of 66bps (FY21: 70bps)
which remains in excess of coverage levels prior to the
pandemic.
The key macroeconomic inputs and weightings have been updated
based on scenarios provided by our 3rd party provider Oxford
Economics with more conservative weightings applied than previously
assumed, to adjust for the more uncertain economic backdrop. These
include a 10% weighting to the Upside scenario, 55% to the Base
scenario and 35% to the Downside. The weighted economic scenarios
include a 2.5% recovery in GDP in 2022, peak unemployment of 4.8%
and a decline in House Price Index (HPI) across 2023 and 2024.
The model updates and overlays have resulted in limited adverse
portfolio stage migration, with loans classified as Stage 2
reducing from 14.1% of the portfolio to 11.0% at H1 2022. Although
this is higher relative to pre-pandemic levels, 98% of Stage 2
lending balances remain <30 days past due (DPD), with most not
past due. Stage 3 assets increased modestly from 1.3% to 1.4% of
Group lending driven primarily by movements in the business book.
Modelled provisions were broadly stable in the period at GBP262m
(30 September 2021: GBP266m), as reductions in the mortgage and
business portfolios offset an increase in cards.
To supplement the modelled expected credit loss (ECL) provision,
the Group applied expert credit risk judgement through post-model
adjustments (PMAs), designed to account for factors that the models
cannot incorporate. Through this process, the Group applied PMAs of
GBP179m (FY21: GBP207m) which are deemed appropriate for our
portfolio at the current time. This includes a new affordability
stress PMA of GBP26m across the Retail portfolios in order to
account for potential impacts of the current cost of living shock
that is likely to be underestimated in the modelled outcome.
Across all portfolios, the Group has adequate provision coverage
that remain ahead of pre-pandemic levels. In Mortgages, the
coverage ratio of 11bps is deemed appropriate for the conservative
loan book. The mortgage portfolio continues to evidence strong
underlying credit performance, with no notable deterioration in
asset quality.
Our Unsecured lending book coverage ratio of 404bps includes
422bps of coverage for our high-quality credit card portfolio which
focuses on more affluent customers, and 297bps of coverage for our
smaller personal loans and overdrafts book. The modelled provision
increased due to a modest increase in early stage arrears and
updated credit appetite as well as a return to more normalised
customer indebtedness model inputs, which together more than offset
the positive impact of current macroeconomics. Overall arrears
levels remain modest across the portfolio with 98% of Unsecured
balances in stage 1 or stage 2 not past due.
In Business, the coverage ratio of 258bps reflects a 48bps
decrease in the period. There has been limited change in underlying
asset quality performance and, as yet, no significant increase in
specific provision recognition. The lending book continues to be
biased away from sectors likely to experience more disruption from
higher cost of living such as hospitality and retail, towards
sectors expected to be resilient, such as agriculture and health
and social care.
Business and financial review
Chief Financial Officer's review
Adjusting items and statutory profit
6 months to
-------------------------------------------
31 Mar 2022 31 Mar 2021 30 Sep 2021
GBPm GBPm GBPm
Underlying profit on ordinary activities before
tax 388 245 556
Adjusting items
- Restructuring charges (46) (49) (97)
- Acquisition accounting unwinds (14) (47) (41)
- Legacy conduct costs (5) (71) (5)
- Other items (8) (6) (68)
Statutory profit on ordinary activities
before tax 315 72 345
Tax (expense)/credit (77) 8 49
--------------------------------------------------- ------------- ------------- -------------
Statutory profit for the period 238 80 394
--------------------------------------------------- ------------- ------------- -------------
Underlying RoTE 11.7% 10.1% 25.7%
Statutory RoTE 9.1% 2.2% 17.9%
TNAV per share 313.2p 257.5p 289.8p
------------------------------------------------------ ------------- ------------- -------------
Overview
The Group made a statutory profit before tax of GBP315m after
deducting GBP73m of adjusting items. The adjusting items charged in
H1 2022 reflect the Group's investment in its digital growth
strategy as well as acquisition accounting unwind costs, legacy
conduct charges and other items. Overall adjusting items were
GBP100m lower than those incurred in H1 2021, primarily reflecting
the non-recurrence of legacy conduct charges for PPI and lower
acquisition accounting unwinds.
TNAV per share increased 23.4p in H1 2022 relative to H2 2021,
to 313.2p. The key drivers of the increase were 18.2p of retained
earnings and a further 3.3p of positive reserve movements.
Restructuring charges
The Group incurred GBP46m of costs reflecting the Digital First
investment programme and associated severance and property closure
costs. Overall, the Group still anticipates a total of c.GBP275m of
costs to support the digital strategy between FY22-24, with around
half incurred in FY22.
Acquisition accounting unwinds
The Group recognised fair value accounting adjustments at the
time of the Virgin Money acquisition that unwind through the income
statement over the remaining life of the related assets and
liabilities (c.5 years). GBP14m was reflected in H1 2022. The Group
expects a further c.GBP40m of total acquisition accounting unwind
charges by end of FY24.
Legacy conduct
Charges of GBP5m were incurred in H1 202 2, mainly in respect of
a number of non-PPI customer redress matters, legal proceedings,
and claims arising in the ordinary course of the Group's
business.
Other items
The Group incurred GBP8m of other one-off adjusting costs during
the first half of the year, primarily relating to the investment
joint venture.
Taxation
In respect of a statutory pre-tax profit of GBP315m, there was a
GBP77m tax charge reflecting an effective tax rate of 24%.
Business and financial review
Chief Financial Officer's review
Balance sheet
As at
31 Mar 30 Sep 2021
2022
GBPm GBPm Change
Mortgages 57,798 58,104 (0.5)%
Unsecured 5,793 5,415 7.0%
Business(1) 8,263 8,477 (2.5)%
--------------------------- ----------------------- ------------------------ --------
Total customer lending 71,854 71,996 (0.2)%
-------------------------- ----------------------- ----------------------- --------
Relationship deposits(2) 31,887 30,596 4.2%
Non-linked savings 20,784 21,285 (2.4)%
Term deposits 11,715 14,989 (21.8)%
Total customer deposits 64,386 66,870 (3.7)%
-------------------------- ----------------------- ----------------------- --------
Wholesale funding 15,497 13,596 14.0%
--------------------------- ----------------------- ------------------------ --------
of which TFS - 1,244 (100)%
of which TFSME 7,200 4,650 54.8%
--------------------------- ----------------------- ------------------------ --------
LDR 112% 108% 4%pts
LCR 139% 151% (12)%pts
(1) Of which, GBP1,148m government lending (30 September 2021:
GBP1,318m)
(2) Current account and linked savings balances.
Overview
At an aggregate level, Group lending reduced by 0.2% to
GBP71.9bn as growth in Unsecured lending was more than offset by a
reduction in Mortgages and Business lending. Total customer
deposits reduced by 3.7% to GBP64.4bn reflecting careful
management, while relationship deposits grew 4.2% to GBP31.9bn as
the Group continued to successfully improve its deposit mix.
Mortgage balances reduced by 0.5% to GBP57.8bn as the Group
continued to prioritise margin in an increasingly competitive
environment. With slower market demand post the Stamp Duty holiday
in the first half of the financial year, market competition
intensified as increases in customer rates being offered were more
than offset by higher swap rates, reducing spreads.
Unsecured balances increased by 7.0% to GBP5.8bn led by
above-market growth in credit card balances. The Group has
benefitted from improved customer activity following the
significant removal of pandemic-related restrictions, with
competitive pricing, innovative product features and ongoing
investment in the overall, digitally-led proposition.
Business lending reduced 2.5% to GBP8.3bn, driven by reductions
in government-guaranteed lending schemes as borrowers continued to
repay balances following the expiry of the 1-year interest free
period. BAU balances were broadly stable given generally subdued
market activity, though with growth in Q2 in line with the broader
economic recovery and improved business confidence.
Customer deposits reduced 3.7% in the period to GBP64.4bn. The
Group continued to optimise the deposit base with a 21.8% reduction
in term deposits and a 4.2% growth in relationship deposits,
supported by the strength of the PCA and BCA propositions,
including compelling new Brighter Money Bundles, added product
features such as the launch of debit card cashback and an improved
customer experience, supported by the further roll-out of digital
on-boarding.
Wholesale funding and liquidity
The Group maintains a robust funding and liquidity position. The
Group's LDR increased 4% points in the period to 112% (FY21: 108%),
primarily as a result of the continued reduction in more expensive
term deposits. While opting to manage liquidity slightly lower, the
Group's LCR of 139% (FY21: 151%) continues to comfortably exceed
both regulatory requirements and our more prudent internal risk
appetite metrics, ensuring a substantial buffer in the event of any
outflows due to the cost of living squeeze.
The Group made further drawings of GBP2.6bn from the BoE's Term
Funding Scheme with additional incentives for small or medium sized
enterprises (TFSME) during the period ahead of its closure, taking
the total outstanding amount to GBP7.2bn at H1 2022, while at the
same time repaying its remaining GBP1.2bn of TFS drawings. The
incremental TFSME drawings, along with a successful GBP600m 5-year
covered bond transaction during the period, meant wholesale funding
increased to GBP15.5bn as at H1 2022 (FY21: GBP13.6bn), offsetting
the reduction in term deposits.
Business and financial review
Chief Financial Officer's review
Capital As at
31 Mar 30 Sep Change
2022 2021
CET1 ratio (IFRS 9 transitional) 14.7% 14.9% (0.2)%pts
CET1 ratio (IFRS 9 fully loaded) 14.4% 14.4% -%pts
Total capital ratio 21.8% 22.0% (0.2)%pts
MREL ratio 31.7% 31.9% (0.2)%pts
UK leverage ratio 5.1% 5.2% (0.1)%pts
RWAs (GBPm) 24,184 24,232 (0.2)%
----------------------------------------- ------------------------------- ------ ---------
of which Mortgages (GBPm) 10,023 10,010 0.1%
of which Unsecured (GBPm) 4,602 4,311 6.8%
of which Business (GBPm) 6,007 6,040 (0.5)%
----------------------------------------- ------------------------------- ------ ---------
(1) Unless where stated, data in the table shows the
capital position
on a Capital Requirements Directive (CRD) IV
'fully loaded' basis
with International Financial Reporting Standard
(IFRS) 9 transitional
adjustments applied.
(2) The capital ratios include unverified profits.
Overview
The Group has maintained a robust capital position with a CET1
ratio (IFRS 9 transitional basis) of 14.7%, which includes the
removal of the CRR2 software benefit of 53bps and a total capital
ratio of 21.8%. The Group's CET1 ratio on an IFRS 9 fully loaded
basis remained stable at 14.4%. The Group's latest Pillar 2A
requirement has a CET1 element of 1.7%. Overall, the Group's CRD IV
minimum CET1 capital requirement (or MDA threshold) remains
8.7%.
CET1 capital
CET1 reduced by 18bps in the period with the movements set out
in the table below. The removal of the software benefit that was
introduced as part of the CRR Quick Fix reduced the CET1 ratio by
53bps.
CET1 Capital movements 6 months
to
31 Mar 2022
%/bps
---------------------------------------- ------------
Opening CET1 ratio 14.9%
Capital generated (bps) 103
RWA growth (bps) (6)
AT1 distributions (bps) (10)
----------------------------------------- ------------
Underlying capital generated (bps) 87
----------------------------------------- ------------
Restructuring charges (bps) (14)
Acquisition accounting unwind (bps) (4)
Conduct (bps) (2)
Foreseeable ordinary dividends (bps) (25)
Other (bps) (7)
Impact of intangible asset relief (bps) (53)
----------------------------------------- ------------
Net capital absorbed (bps) (18)
----------------------------------------- ------------
Closing CET1 ratio 14.7%
----------------------------------------- ------------
(1) The table shows the capital position on a CRD IV 'fully loaded' basis
with IFRS 9 transitional adjustments applied
MREL
The Group's transitional MREL ratio remained broadly stable
during the period at 31.7% (FY21: 31.9%), representing prudent
headroom of 7.0% or c.GBP1.7bn over the Group's 2022 end-state MREL
(plus buffers) requirement of 24.7% of RWAs. Given the surplus to
end state requirements and with no maturities in FY22, the Group is
not planning any MREL issuance over the remainder of the year.
Business and financial review
Chief Financial Officer's review
Outlook and guidance
FY22 financial guidance
NIM
NIM expected to be 180-185bps
----------------------------------------------------------------------
Underlying costs
Underlying costs expected to be broadly stable in FY22
----------------------------------------------------------------------
Cost of risk
Expect cost of risk to rise towards through the cycle range
Capital return
Dividend pay-out 30% at FY22; buybacks subject to ongoing assessment
of surplus capital, market conditions and regulatory approval
Medium-term outlook:
The Board believes that, assuming no significant further deterioration
in expectations for the economic outlook, Virgin Money has a clear path
to delivering sustainable double digit statutory returns on tangible equity
in FY24
Based on the latest outlook and good momentum in NIM in H1, the
Group expects NIM for FY22 to be around 180-185bps, assuming three
further rate increases during FY22.
The Group expects underlying operating expenses to be broadly
stable reflecting higher costs from inflation, targeted growth and
digital development, which are expected to be broadly offset by
gross savings from ongoing digital transformation and
restructuring. The Group continues to anticipate c.GBP275m of
restructuring costs relating to the Digital First strategy across
FY22-24, with around half in FY22.
Cost of risk is expected to rise towards the through the cycle
range.
The Group will operate in a CET1 target range of 13 - 13.5% in
the long term, although we will operate above this level for the
time being due to heightened macroeconomic uncertainty. The Group
will target a 30% full year dividend pay-out ratio and the interim
dividend is expected to represent around 1/3(rd) of the prior
year's total dividend, beginning H1 2023. Dividends will be
supplemented by buybacks, subject to ongoing assessment of surplus
capital, market conditions and regulatory approval.
The Board will review the timing of possible buybacks on an
ongoing basis when it assesses that the Group has excess capital.
Given the importance of the Annual Cyclical Scenario (ACS) stress
test results, and subsequent calibration of capital buffers in
assessing excess capital, it is anticipated that any distributions
via buybacks would ordinarily be aligned to interim results from
FY23. Any buyback considerations in FY22 would be conducted in line
with the framework announced, with due consideration to the current
uncertain environment, and would remain subject to regulatory
approval.
In the medium term, the Board believes that, assuming no
significant further deterioration in expectations for the economic
outlook, Virgin Money has a clear path to delivering sustainable
double digit statutory returns on tangible equity in FY24. The
improvement in returns will be underpinned by above-market growth
in Business (non-government) and Unsecured, mix driven NIM
expansion, with OOI to rise as a proportion of total income and a
cost to income ratio of c.50% by FY24.
Clifford Abrahams, Chief Financial Officer - 4 May 2022
Business and financial review
Financial review - statutory basis
Summary income statement
6 months 6 months 6 months
to to to
31 Mar 31 Mar 2021 Change 30 Sep Change
2022 2021
GBPm GBPm % GBPm %
Net interest income 777 646 20 711 9
Non-interest income 67 49 37 83 (19)
Total operating income 844 695 21 794 6
Operating and administrative expenses (508) (585) (13) (618) (18)
------------------------------------- -------- --------------- ------ -------- ------
Operating profit before impairment
losses 336 110 205 176 91
Impairment (losses)/credit on credit
exposures (21) (38) (45) 169 n/a
------------------------------------- -------- --------------- ------ -------- ------
Statutory profit on ordinary
activities
before tax 315 72 338 345 (9)
Tax (expense)/credit (77) 8 n/a 49 n/a
------------------------------------- -------- --------------- ------ -------- ------
Statutory profit after tax 238 80 198 394 (40)
The Group has recognised a statutory profit before tax of
GBP315m (31 March 2021: profit before tax of GBP72m). The increase
in statutory profit is largely reflective of a significant increase
in operating income and a reduction in operating and administrative
expenses. The Group continues to expect that the difference between
underlying and statutory profit will reduce over time as we deliver
our strategy and adjusting items reduce.
Key performance indicators(1)
6 months 6 months 12 months
to to to
31 Mar 31 Mar
2022 2021 Change 30 Sep 2021(2) Change
Profitability:
Statutory RoTE 9.1% 2.2% 6.9%pts 10.2% (1.1)%pts
Statutory CIR 60% 84% (24)%pts 81% (21)%pts
Statutory EPS 13.7p 2.8p 10.9p 27.3p (13.6)p
(1) For a definition of each of the KPIs, refer to 'Measuring financial
performance - glossary' on pages 322 to 323 of the Group's 2021 Annual
Report and Accounts. The KPIs include statutory, regulatory and alternative
performance measures. Where applicable certain KPIs are calculated
on an annualised basis for the periods to 31 March.
(2) Profitability KPIs are provided with a full year to 30 September
2021 comparative in line with the statutory income statement presentation
in the financial statements and as previously reported in the Group's
2021 Annual Report and Accounts.
Business and financial review
Reconciliation of statutory to underlying results
The statutory basis presented within this section reflects the
Group's results as reported in the financial statements. The
underlying basis reflects the Group's financial performance
prepared on an underlying basis as presented to the CEO, Executive
Leadership Team and Board and exclude certain items that are part
of the statutory results. 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 91.
Acquisition
Statutory Restructuring accounting Legacy Underlying
results charges unwinds conduct Other basis
6 months to 31 Mar 2022 GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ------------- ----------- -------- ------
Net interest income 777 - 5 - - 782
Non-interest income 67 - 8 - 8 83
Total operating income 844 - 13 - 8 865
Total operating and administrative
expenses before impairment
losses (508) 46 1 5 - (456)
Operating profit before impairment
losses 336 46 14 5 8 409
Impairment losses on credit
exposures (21) - - - - (21)
Profit on ordinary activities
before tax 315 46 14 5 8 388
----------------------------------- ------------- ----------- -------- ------
Financial performance measures
RoTE 9.1% 1.6% 0.5% 0.2% 0.3% 11.7%
CIR 60.2% (4.7)% (1.4)% (0.5)% (0.9)% 52.7%
Basic EPS 13.7p 2.5p 0.7p 0.3p 0.4p 17.6p
Acquisition
Statutory Restructuring accounting Legacy Underlying
results charges unwinds conduct Other basis
6 months to 30 Sep 2021 GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ------------- ----------- -------- ------
Net interest income 711 - 24 - - 735
Non-interest income 83 - 11 - - 94
Total operating income 794 - 35 - - 829
Total operating and administrative
expenses before impairment
losses (618) 97 6 5 68 (442)
Operating profit before impairment
losses 176 97 41 5 68 387
Impairment credit on credit
exposures 169 - - - - 169
Profit on ordinary activities
before tax 345 97 41 5 68 556
----------------------------------- ------------- ----------- -------- ------
Financial performance measures
RoTE 17.9% 3.6% 1.5% 0.2% 2.5% 25.7%
CIR 77.8% (11.2)% (4.8)% (0.6)% (7.9)% 53.3%
Basic EPS 24.5p 4.9p 2.1p 0.3p 3.5p 35.3p
----------------------------------- ------------- ----------- -------- ------
Acquisition
Statutory Restructuring accounting Legacy Underlying
results charges unwinds conduct Other basis
6 months to 31 Mar 2021 GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ------------- ----------- -------- ------
Net interest income 646 - 31 - - 677
Non-interest income 49 - 12 - 5 66
Total operating income 695 - 43 - 5 743
Total operating and administrative
expenses before impairment
losses (585) 49 4 71 1 (460)
Operating profit before impairment
losses 110 49 47 71 6 283
Impairment losses on credit
exposures (38) - - - - (38)
Profit on ordinary activities
before tax 72 49 47 71 6 245
----------------------------------- ------------- ----------- -------- ------
Financial performance measures
RoTE 2.2% 2.2% 2.2% 3.2% 0.3% 10.1%
CIR 84.2% (6.3)% (6.1)% (9.1)% (0.8)% 61.9%
Basic EPS 2.8p 2.8p 2.7p 4.0p 0.3p 12.6p
Risk management
Risk Report
Risk overview 22
---------------- ---
Credit risk 24
---------------- ---
Financial risk 52
---------------- ---
Risk management
Risk overview
Effective risk management is critical to realising the Group's
strategy of pioneering growth. The safety and soundness of the
Group is aligned to Our Purpose and is a fundamental requirement to
enable our customers and stakeholders to be 'happier about
money'.
Risk exists in everything we do, from day-to-day operational
activities to strategic change initiatives; without risk we will
never achieve our strategic goals but when taking risks, we must
ensure we do so in an appropriate way.
A strong risk culture, grounded in the understanding of the
Group's risks, is key to enabling our strategy to disrupt the
status quo. Our Purpose and Values play a big part in our risk
culture by setting out what we want to do and how we want to do it.
Personal accountability is at the heart of this and is enabled
through the risk management accountability model and formal
delegation framework, which supports us in making risk-based
decisions and fulfilling our obligations under the Senior Managers
and Certification Regime.
The Group identifies and manages risk in line with the Risk
Management Framework (RMF). The RMF is the totality of systems,
structures, policies, processes and people that identifies,
measures, evaluates, controls, mitigates, monitors and reports all
internal and external sources of material risk. The RMF aligns to
Our Purpose by establishing a single and complete view of the end
to end risk lifecycle, in order to protect the interests of all
customers and stakeholders. The RMF applies to all areas of the
Group and is the responsibility of the Board. It is approved
formally on an annual basis and is subject to ongoing review to
ensure that it remains fit for purpose.
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 internal
stakeholders and provides a view on the risk-taking activities the
Board is comfortable with, guiding decision-makers in their
strategic and business decisions.
Principal risks
Principal risks are those which could result in events or
circumstances that might threaten the Group's business model,
future performance, solvency, liquidity or reputation.
The Group's principal risks are listed below and remain as
disclosed in the 2021 Annual Report and Accounts, with the
exception of climate risk, which has been reclassified from a
cross-cutting risk to a principal risk due to its increasing
relevance and materiality to the Group's risk profile. Operational
resilience is now included within Operational and resilience
risk.
Principal risks Definitions
------------------------- ---------------------------------------------------------------
Credit risk The risk that a borrower or counterparty fails to pay
the interest or capital due on a loan or other financial
instrument. Credit risk manifests in the financial
instruments and products that the Group offers and
in which it invests and can arise in respect of both
on- and off-balance sheet exposures.
------------------------- ---------------------------------------------------------------
Financial risk Financial risk includes capital risk, funding risk,
liquidity risk, market risk and pension risk, all of
which have the ability to impact the financial performance
of the Group, if managed improperly.
------------------------- ---------------------------------------------------------------
Model risk The potential for adverse consequences from decisions
based on incorrect or misused model outputs and reports.
------------------------- ---------------------------------------------------------------
Regulatory and The risk of failing to comply with relevant laws and
compliance risk regulation, failing to implement new regulatory requirements,
or not keeping the regulators informed of relevant
issues or responding effectively to regulatory requests,
leading to regulatory sanction.
------------------------- ---------------------------------------------------------------
Conduct risk The risk of undertaking business in a way that is contrary
to the interests of customers, resulting in customer
harm, regulatory censure, redress costs and reputational
damage.
------------------------- ---------------------------------------------------------------
Operational and The risk of loss or customer harm resulting from inadequate
resilience risk or failed internal processes, people and systems or
from external events, incorporating the inability to
maintain critical services, recover quickly and learn
from unexpected/adverse events.
------------------------- ---------------------------------------------------------------
Technology risk The risk of loss or customer harm resulting from inadequate
or failed information technology processes. Technology
risk includes cyber security, IT resilience, information
security, data risk and payment risk.
------------------------- ---------------------------------------------------------------
Financial crime The risk that products and services will be used to
and fraud risk facilitate financial crime, resulting in harm to customers,
the Group, or third parties. This includes money laundering,
counter terrorist financing, sanctions, fraud and bribery
and corruption.
------------------------- ---------------------------------------------------------------
Strategic and enterprise The risk of significant loss of earnings or damage
risk from decisions or actions that impact the long-term
interests of the Group's stakeholders or from an inability
to adapt to external developments, including potential
execution risk as a result of transformation activity.
------------------------- ---------------------------------------------------------------
People risk The risk of not having sufficiently skilled and motivated
colleagues, who are clear on their responsibilities
and accountabilities and behave in an ethical way.
------------------------- ---------------------------------------------------------------
Climate risk The risk of exposure to physical and transition risks
arising from climate change.
------------------------- ---------------------------------------------------------------
Further detail on the Group's principal risks and how they are
managed is available in the 2021 Annual Report and Accounts.
Risk management
Risk overview
Emerging risks
The Group considers an emerging risk to be any risk which has a
material unknown and unpredictable component, with the potential to
significantly impact the future performance of the Group or result
in customer harm. The Group's emerging risks are continually
reassessed and reviewed through a horizon scanning process, with
escalation and reporting to the Board. The horizon scanning process
fully considers all relevant internal and external factors and is
designed to capture those risks which are current but have not yet
fully crystallised, as well as those which are expected to
crystallise in future periods.
The emerging risk classifications reported in the Group's 2021
Annual Report and Accounts have been retained. In addition, a new
emerging risk, New Digital Asset Classes, has been included. Risk
summaries have been refreshed since the year-end disclosure, with
important developments and areas most relevant to the Group's
strategy shown.
Emerging risks Trend Description
------------------ ------ ----------------------------------------------------------
External emerging
risks
Political and Geopolitical tensions, including the war in Ukraine,
economic risk are creating volatility within domestic and global
markets, leading to wide ranging impacts affecting
inflation, global trade and consumer confidence.
These risks in aggregate, alongside the substantial
increase in the cost of living in the UK, could
impact customer resilience and consequently debt
affordability.
Uncertainty remains over the ability for economies
and society to adapt to future variants of existing
viruses or new strains. An increase in restrictions
could pose a range of social, economic and technological
risks.
================== ====== ==========================================================
Regulatory change The Group remains subject to high levels of oversight
and a complex programme of regulatory change from
a number of different regulatory bodies. The regulatory
landscape continues to evolve, needing ongoing
responses to the emerging prudential and conduct
driven developments and delivery of associated
implementation requirements.
================== ====== ==========================================================
ESG risk Previously positioned solely around climate risk,
this broader ESG risk acknowledges the uncertainty
around the exact nature and impact of climate change
on the Group's strategy, performance and operating
model, as well as capturing the increased focus
on how companies report the impact of their activities
on the environment and on the social challenges
to which company business models must respond.
================== ====== ==========================================================
Third-party risk The Group's accelerated digitisation strategy could
lead to complex and significant dependencies on
third party services, requiring effective assessment
and management of the levels of reliance that will
be placed on these suppliers.
------------------ ------ ----------------------------------------------------------
Internal emerging
risks
Data stewardship The Group's accelerated digitisation strategy,
combined with changing regulatory requirements
and technological advancements such as Cloud solutions,
places increasing importance on the effective and
ethical use of data.
================== ====== ==========================================================
Resilience risk The rapid pace of technological change, coupled
with changing customer requirements, creates increasing
demand on systems resilience and our people. This
could be heightened by the Group's accelerated
digital strategy given the volume and pace of change
required.
================== ====== ==========================================================
Changing skill Against the backdrop of the Group's digitisation
requirements strategy, challenges remain in respect to recruiting
talent, with skill shortages affecting a number
of areas and uncertainty over future talent attraction.
The Group has implemented its a Life More Virgin
Model to help support colleagues and to strengthen
our proposition in the market.
================== ====== ==========================================================
New digital asset There is a risk of industry transformation due
classes to digital asset and transaction innovation, which
generates competition risk and uncertainty as to
the future digital customer proposition and market
landscape. The Group horizon scans external developments
in the financial technology landscape to mitigate
risks and to identify strategic opportunities.
------------------ ------ ----------------------------------------------------------
Further detail on the Group's emerging risks and how they are
managed is available in the 2021 Annual Report and Accounts.
Risk management
Credit risk
Section Page Tables Page
-------------------------------------- ---- --------------------------------------- ----
Credit risk overview 25
-------------------------------------- ---- --------------------------------------- ----
Managing credit risk within our
asset portfolios 25
Risk appetite 25
Measurement 25
Mitigation 26
Monitoring 26
Forbearance 26
Measuring credit risk within our
asset portfolios 27
Individually assessed 27
Collectively assessed 27
Maximum exposure to credit risk
on financial assets, contingent
liabilities and credit-related
Group credit risk exposures 28 commitments 28
-------------------------------------- ---- --------------------------------------- ----
Key credit metrics 29 Key credit metrics 29
Gross loans and advances ECL and
coverage 30
Stage 2 balances 31
Credit risk exposure, by internal
probability of default (PD) rating,
by IFRS 9 stage allocation 32
Movement in gross balances and
impairment loss allowance 33
-------------------------------------- ---- --------------------------------------- ----
Mortgage credit performance 34 Breakdown of mortgage portfolio 34
Average LTV of mortgage portfolio
Collateral 35 by staging 35
Forbearance 36 Forbearance 36
IFRS 9 staging 37 IFRS 9 staging 37
-------------------------------------- ---- --------------------------------------- ----
Unsecured credit performance 38 Breakdown of unsecured credit portfolio 38
Forbearance 39 Forbearance 39
IFRS 9 staging 40 IFRS 9 staging 40
-------------------------------------- ---- --------------------------------------- ----
Business credit performance 41 Breakdown of business credit portfolio 41
Forbearance 43 Forbearance 43
IFRS 9 staging 44 IFRS 9 staging 44
-------------------------------------- ---- --------------------------------------- ----
Macroeconomic assumptions, scenarios,
and weightings 45
Macroeconomic assumptions 45 Scenarios 45
Five-year simple averages for the
most sensitive inputs of unemployment,
GDP and HPI 46
-------------------------------------- ---- --------------------------------------- ----
The use of estimates, judgements
and sensitivity analysis 47
The use of estimates 47 Economic scenarios 47
ECL impact of HPI changes 48
ECL impact of unemployment rate
changes 48
Impact of changes to significant
increase in credit risk ( SICR)
The use of judgements 48 thresholds on staging 49
Impact of PMAs on the Group's ECL
allowance and coverage ratio 50
Macroeconomic assumptions 51
-------------------------------------- ---- --------------------------------------- ----
Risk management
Credit risk
Credit risk overview
Credit risk is the risk that a borrower or counterparty fails to
pay the interest or capital due on a loan or other financial
instrument. Credit risk manifests itself in the financial
instruments and products that the Group offers and in which it
invests and can arise in respect of both on- and off-balance sheet
exposures.
Close monitoring, clear policies and a disciplined approach to
credit risk management support the Group's operations and have
underpinned its resilience in recently challenging times. While the
effects of COVID-19 have eased considerably, we still expect the
emergence of some delayed COVID-19 impacts. This, together with the
significant inflationary headwinds, have the potential to affect
both Retail and Business customers' resilience and debt
affordability. The Group is taking a number of steps to support
customers through this period of heightened affordability pressure
and ensure that the credit risk framework and associated policies
remain effective and appropriate.
Managing credit risk within our asset 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, timely changes to
application scorecards and supporting credit strategies, regular
asset quality reviews and the independent oversight of credit
decisions and portfolios.
The FY22 RAS continues to recognise some of the delayed impacts
of COVID-19 and updates have been made to tighten underwriting
criteria and review metric calibration, to reflect the uncertain
economic environment and the significant inflationary headwinds and
cost of living pressures that are expected to emerge. The RAS is
positioned to ensure a controlled approach to portfolio management
and new lending origination.
Climate risk is considered an important component of the broader
RMF and is reflected through the inclusion of climate-related risk
factors within the FY22 RAS. The framework embeds climate risk
considerations across various aspects of customer lending and
credit risk management practices. Further detail is provided in the
TCFD report, on pages 218 to 234 of the Group's 2021 Annual Report
and Accounts.
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 internal ratings-based (IRB) capital
calculation for the Mortgage and Business portfolios and account
management activity for all portfolios.
Further information on the measurement and calculation of ECLs
and the Group's approach to the impairment of financial assets can
be found on page 27.
The Group's portfolios are subject to regular stress testing,
including participation in the BoE SST exercise for the first time
during 2021. Stress test scenarios are regularly prepared to assess
the adequacy of the Group's impairment provision and the potential
impact on RWA 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.
As highlighted on page 23 , Political and economic risk is an
emerging risk for the Group with specific focus on the heightened
inflationary pressures prevalent in the UK. This includes the
future impact of macroeconomic variables which are used in the
calculation of the Group's modelled ECL output. Further detail on
the Group's use of macroeconomic variables in the year can be found
on pages 4 5 to 4 6 .
Risk management
Credit risk
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 product,
industry, geographic concentrations and delinquency trends.
There is regular analysis of the borrowers' 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.
Further details on the Group's mitigating measures can be found
on page 154 of the 2021 Annual Report and Accounts.
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. It also determines and
approves strategies to adjust the portfolio to react to changes in
market conditions including the response to COVID-19, customer
resilience, debt affordability concerns and climate risk.
-- RAS: Measures are reported monthly to ensure adherence to
appetite. Formal annual review is carried out to ensure 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 the external environment,
outlook and comparison against market benchmarks.
-- Single large exposure excesses: Excesses on exposures under
the delegated commitment authority of the Transactional Credit
Committee are reported to the committee where the amount of excess
is >GBP250k (senior Business Credit Risk personnel have
delegated authority to manage excesses <GBP250k). All excess
reports include a proposed route to remediation. Exposures are also
managed in accordance with the large exposure reporting
requirements of the CRR.
-- Portfolio Monitoring: Continuous monitoring of the portfolio
composition and performance is undertaken through weekly and
monthly reviews.
Forbearance
Forbearance is considered to exist where customers are
experiencing or about to experience financial difficulty and the
Group grants a concession on a non-commercial basis. The Group's
forbearance policies and definitions comply with the guidance
established by the European Banking Authority (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. The Group also complies with the regulations
of the Debt Respite Scheme which was implemented in 2021. The Debt
Respite Scheme provides eligible individuals in England and Wales
with problem debt the right to legal protection from their
creditors, including almost all enforcement action, during a period
of 'breathing space'. The Scheme, also referred to as the
'Breathing Space Regulations', does not apply to mortgages, except
for arrears which are uncapitalised at the date of the application
under the Breathing Space Regulations. In Scotland, eligible
individuals are afforded similar legal protection under the
Bankruptcy (Scotland) Act 2016.
Risk management
Credit risk
Measuring credit risk within our asset portfolios
The Group adopts two approaches to the measurement of credit
risk under IFRS 9:
Individually assessed
A charge is taken to the income statement when an individually
assessed provision has been recognised or a direct write-off has
been applied to an asset balance. These loans will be classified as
Stage 3.
Collectively assessed
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 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 about past events, current conditions
and forecasts of future economic conditions.
The ECL is then calculated as either 12 month (Stage 1) or
lifetime (Stage 2 or Stage 3). Stage 2 is applied where there has
been a SICR since origination. Stage 3 applies where the loan is
credit impaired or is a purchased or originated credit impaired
asset (POCI).
ECLs under IFRS 9 use economic forecasts, models and judgement
to provide a forward-looking assessment of the required provisions.
Adjustments have been made to address known limitations in the
Group's models or data; this includes early adoption of a limited
number of enhancements to better reflect the Group's assessment of
risk. Due to the current economic conditions, government and Group
interventions to support customers, reliance has not solely been
placed upon modelled outcomes alone. Following detailed analysis,
expert credit judgement has been applied, resulting in additional
adjustments to ensure the ECL calculation reflects the full set of
plausible circumstances including data limitations, customer
support measures, and the rapidly changing nature customer
behaviours.
Further details on the Group's measurement of credit risk can be
found on page 157 of the 2021 Annual Report and Accounts.
Both the accounting and regulatory definitions of default are
aligned with default being triggered at 90 DPD, with the exception
of the heritage Virgin Money mortgage models which apply a 180 DPD
regulatory default trigger under existing approved permissions. The
definition of default will be fully aligned to 90 DPD when the
regulatory models are updated in line with hybrid model
adoption.
The Group aligns the regulatory cure periods for forborne
exposures in its IFRS 9 staging criteria at a minimum period of
either 24 (performing) or 36 (non-performing) months depending on
the forbearance programme utilised. Where exposures are classified
as Stages 2 or 3 as a result of not being in a forbearance
programme, these can cure when the relevant staging trigger is
removed and no longer applicable.
Risk management
Credit risk
Group credit risk exposures
The Group is exposed to credit risk across all of its financial
asset classes, however its principal exposure to credit risk arises
on customer lending balances. Given the relative significance of
customer lending exposures to the Group's overall credit risk
position, the disclosures that follow are focused principally on
customer lending.
The Group is also exposed to credit risk on its other banking
and treasury-related activities. It holds GBP9.5bn of cash and
balances with central banks and GBP0.9bn due from other banks at
amortised cost (30 September 2021: GBP9.7bn), with a further
GBP4.4bn of financial assets at fair value through other
comprehensive income (FVOCI). GBP7.7bn of cash is held with the BoE
(30 September 2021: GBP7.9bn), and balances with other banks and
financial assets at FVOCI are primarily held with senior investment
grade counterparties. All other banking and treasury related
financial assets are classed as Stage 1 with no material ECL
provision held.
Maximum exposure to credit risk on financial assets, contingent
liabilities and credit-related commitments
The following tables show the levels of concentration of the
Group's loans and advances, contingent liabilities and
credit-related commitments:
Contingent
Gross loans liabilities
and advances and credit-related
to customers commitments Total
31 March 2022 GBPm GBPm GBPm
-------------- -------------------- --------
Mortgages 58,130 3,575 61,705
Unsecured 6,151 10,856 17,007
Business 8,136 3,895 12,031
----------------------------------------- -------------- -------------------- --------
Total 72,417 18,326 90,743
Impairment provisions held on credit
exposures(1) (472) (7) (479)
Fair value hedge adjustment (532) - (532)
----------------------------------------- -------------- -------------------- --------
Maximum credit risk exposure on lending
assets 71,413 18,319 89,732
Cash and balances with central banks 9,527
Financial assets at FVOCI 4,423
Due from other banks 858
Other financial assets at fair value 120
Derivative financial assets 189
----------------------------------------- -------------- -------------------- --------
Maximum credit risk exposure on all
financial assets(2) 104,849
----------------------------------------- -------------- -------------------- --------
30 September 2021
----------------------------------------- -------------- -------------------- --------
Mortgage 58,441 2,845 61,286
Unsecured 5,770 10,507 16,277
Business 8,340 3,769 12,109
----------------------------------------- -------------- -------------------- --------
Total 72,551 17,121 89,672
Impairment provisions held on credit
exposures(1) (496) (8) (504)
Fair value hedge adjustment (179) - (179)
----------------------------------------- -------------- -------------------- --------
Maximum credit risk exposure on lending
assets 71,876 17,113 88,989
Cash and balances with central banks 9,711
Financial assets at FVOCI 4,352
Due from other banks 800
Other financial assets at fair value 153
Derivative financial assets 140
----------------------------------------- -------------- -------------------- --------
Maximum credit risk exposure on all
financial assets(2) 104,145
----------------------------------------- -------------- -------------------- --------
(1) The total ECL provision covers both on and off-balance sheet
exposures which are reflected in notes 3.1 and 3.7 respectively.
All tables and ratios that follow are calculated using the combined
on- and off-balance sheet ECL, which is consistent for all periods
reported.
(2) 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
Key credit metrics
6 months 12 months 6 months
to to to
31 Mar 2022 30 Sep 2021 31 Mar 2021
GBPm GBPm GBPm
----------------------------------------------- ------------ ------------ ------------
Impairment charge/(credit) on credit exposures
Mortgage lending (21) (44) (1)
Unsecured lending 69 (32) 27
Business lending (27) (55) 12
----------------------------------------------- ------------ ------------ ------------
Total Group impairment charge/(credit) 21 (131) 38
----------------------------------------------- ------------ ------------ ------------
Underlying impairment charge/(credit)(1) to
average customer loans (cost of risk) 0.06% (0.18)% 0.11%
----------------------------------------------- ------------ ------------ ------------
6 months 12 months
to to
31 Mar 2022 30 Sep 2021
-------------------------- --------------------------------- --------------------------------
Key asset quality ratios
% Loans in Stage 2 11.03% 14.09%
% Loans in Stage 3 1.40% 1.32%
Total book coverage(2) 0.66% 0.70%
Stage 2 coverage(2) 3.15% 3.02%
Stage 3 coverage(2) 10.70% 9.59%
-------------------------- --------------------------------- --------------------------------
(1) Inclusive of gains/losses on assets held at fair value and
elements of fraud loss.
(2) This includes the government-backed portfolio of BBLs, Recovery
Loan Scheme (RLS), Coronavirus business interruption loan
scheme (CBILs) and Coronavirus large business interruption
loan scheme (CLBILs).
As the world marked the 2(nd) anniversary of COVID-19 in this
six-month period, the Group has continued to maintain a stable
lending book with gross lending to customers of GBP72.4bn at 31
March 2022 (30 September 2021: GBP72.6bn). Modest growth in the
Unsecured lending book was offset by a reduction in Mortgages and
Business lending as consumer spending activity increased with the
easing of restrictions, whilst more significant investment remained
subdued.
Asset quality was robust in the period; most of the key asset
quality ratios remained stable, with only the credit card portfolio
showing signs of a shift in quality commensurate with the Group's
risk appetite in this market. The overall stability has been
influenced by the extended period of customer support measures
provided by the government in response to COVID-19 and prudent
action taken by customers, combined with the Group's controlled
risk appetite and continued focus on continued customer support and
responsible lending decisions.
The UK Government's approach for 'living with COVID' offers some
economic optimism. However, other significant economic and
geopolitical factors have the potential to impact the short to
medium term performance of the portfolio, with the most significant
of these anticipated to be the wide range of cost of living
pressures. The Group continues to support customers through this
challenging period.
While the lending portfolio continues to show resilience, the
Group impairment provision has nevertheless been determined against
a backdrop of global macro-economic uncertainty following the
Russian invasion of Ukraine and a UK-wide cost of living crisis. It
is likely that certain borrowers will suffer increased stress from
the cost of living crisis, as such a temporary affordability stress
PMA of GBP26m has been introduced across the retail portfolios. The
Group has also retained certain other PMAs where deemed
appropriate, following a full review in the period; further detail
on the nature of each PMA is provided in the respective product
performance section on the following pages.
Taking all these factors into account, the Group has recorded a
total impairment provision of GBP479m at 31 March 2022, reflecting
a small reduction of GBP25m from GBP504m at 30 September 2021 and a
corresponding reduction in coverage from 70bps to 66bps. Within
this, the modelled provision is broadly stable at GBP300m (30
September 2021: GBP297m) as the releases in the Mortgage and
Business portfolios due to the more favourable macroeconomic inputs
have been offset by growth in Unsecured lending. PMAs have reduced
in the period to GBP179m (30 September 2021: GBP207m).
The net reduction in provision has been offset by individually
assessed impairments of GBP53m in the period (12 months to 30
September 2021: GBP79m), resulting in a net charge to the income
statement of GBP21m (12 months to 30 September 2021: net credit of
GBP131m), and an associated cost of risk for the period of 6bps (12
months to 30 September 2021: (18)bps).
Risk management
Credit risk
Credit quality of loans and advances
The following tables outline the staging profile of the Group's
customer lending portfolios which is key to understanding their
asset quality.
Gross loans and advances(1) ECL and coverage
Unsecured
Loans and
Mortgages Cards Overdrafts Combined Business(2) Total
---------------- --------------- --------------- --------------- ----------------
31 March
2022 GBPm % GBPm % GBPm % GBPm % GBPm % GBPm %
------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Stage 1 52,217 89.8% 4,484 87.6% 947 91.4% 5,431 88.3% 5,819 71.5% 63,467 87.6%
Stage 2 -
total 5,283 9.1% 566 11.1% 75 7.3% 641 10.4% 2,020 24.8% 7,944 11.0%
------------ ------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Stage 2:
0 DPD 4,997 8.6% 530 10.3% 67 6.5% 597 9.6% 1,976 24.2% 7,570 10.4%
Stage 2:
< 30 DPD 154 0.3% 18 0.4% 4 0.4% 22 0.4% 14 0.2% 190 0.3%
Stage 2:
> 30 DPD 132 0.2% 18 0.4% 4 0.4% 22 0.4% 30 0.4% 184 0.3%
------------ ------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Stage 3(3) 630 1.1% 66 1.3% 13 1.3% 79 1.3% 297 3.7% 1,006 1.4%
------------ ------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
58,130 100.0% 5,116 100.0% 1,035 100.0% 6,151 100.0% 8,136 100.0% 72,417 100.0%
------------ ------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
ECLs
Stage 1 7 10.6% 57 28.6% 9 40.9% 66 29.9% 58 30.2% 131 27.3%
Stage 2 -
total 44 66.7% 109 54.8% 7 31.8% 116 52.5% 87 45.3% 247 51.6%
------------ ------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Stage 2:
0 DPD 42 63.7% 89 44.8% 4 18.2% 93 42.1% 87 45.3% 222 46.4%
Stage 2:
< 30 DPD 1 1.5% 9 4.5% 1 4.5% 10 4.5% - - 11 2.3%
Stage 2:
> 30 DPD 1 1.5% 11 5.5% 2 9.1% 13 5.9% - - 14 2.9%
------------ ------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Stage 3(3) 15 22.7% 33 16.6% 6 27.3% 39 17.6% 47 24.5% 101 21.1%
------------ ------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
66 100.0% 199 100.0% 22 100.0% 221 100.0% 192 100.0% 479 100.0%
------------ ------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Coverage
Stage 1 0.01% 1.39% 1.28% 1.38% 1.09% 0.21%
Stage 2 -
total 0.81% 20.88% 12.66% 20.07% 4.64% 3.15%
------------ ------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Stage 2:
0 DPD 0.82% 18.21% 7.86% 17.24% 4.65% 2.95%
Stage 2:
< 30 DPD 0.59% 55.83% 34.47% 52.38% 3.91% 6.34%
Stage 2:
> 30 DPD 0.97% 62.82% 64.47% 63.09% 1.86% 8.86%
------------ ------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Stage 3(3) 2.40% 53.97% 66.74% 55.83% 19.93% 10.70%
------------ ------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
0.11% 4.22% 2.97% 4.04% 2.58% 0.66%
------------ ------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Unsecured
Loans and
Mortgages Cards Overdrafts Combined Business(2) Total
---------------- --------------- --------------- --------------- ----------------
30
September
2021 GBPm % GBPm % GBPm % GBPm % GBPm % GBPm %
------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Stage 1 50,596 86.6% 4,100 88.1% 1,048 94.0% 5,148 89.2% 5,672 68.0% 61,416 84.7%
Stage 2 -
total 7,192 12.3% 497 10.7% 56 5.0% 553 9.6% 2,433 29.2% 10,178 14.0%
------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Stage 2:
0 DPD 6,918 11.9% 466 10.1% 46 4.2% 512 8.9% 2,390 28.7% 9,820 13.5%
Stage 2:
< 30 DPD 128 0.2% 16 0.3% 5 0.4% 21 0.4% 25 0.3% 174 0.2%
Stage 2:
> 30 DPD 146 0.2% 15 0.3% 5 0.4% 20 0.3% 18 0.2% 184 0.3%
------- ------- ------ ------- ------ ------- ------ ------- ------ ------- -------
Stage 3(3) 653 1.1% 58 1.2% 11 1.0% 69 1.2% 235 2.8% 957 1.3%
------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
58,441 100.0% 4,655 100.0% 1,115 100.0% 5,770 100.0% 8,340 100.0% 72,551 100.0%
------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
ECLs
Stage 1 4 4.6% 32 20.0% 9 26.5% 41 21.1% 66 29.6% 111 22.0%
Stage 2 -
total 64 73.6% 99 61.9% 19 55.9% 118 60.9% 120 53.8% 302 59.9%
------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Stage 2:
0 DPD 61 70.2% 82 51.3% 13 38.2% 95 49.0% 120 53.8% 276 54.8%
Stage 2:
< 30 DPD 1 1.1% 8 5.0% 2 5.9% 10 5.2% - - 11 2.1%
Stage 2:
> 30 DPD 2 2.3% 9 5.6% 4 11.8% 13 6.7% - - 15 3.0%
------- ------- ------ ------- ------ ------- ------ ------- ------ ------- -------
Stage 3(3) 19 21.8% 29 18.1% 6 17.6% 35 18.0% 37 16.6% 91 18.1%
------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
87 100.0% 160 100.0% 34 100.0% 194 100.0% 223 100.0% 504 100.0%
------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Coverage
Stage 1 0.01% 0.85% 1.13% 0.91% 1.35% 0.18%
Stage 2 -
total 0.88% 22.12% 42.01% 23.92% 5.43% 3.02%
------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Stage 2:
0 DPD 0.87% 19.51% 33.66% 20.64% 5.48% 2.84%
Stage 2:
< 30 DPD 0.85% 58.36% 52.88% 57.27% 1.51% 6.90%
Stage 2:
> 30 DPD 1.36% 64.46% 99.65% 73.48% 2.85% 8.99%
------- ------- ------ ------- ------ ------- ------ ------- ------ ------- -------
Stage 3(3) 2.81% 54.13% 64.02% 55.65% 17.31% 9.59%
------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
0.15% 3.79% 3.86% 3.80% 3.06% 0.70%
------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
(1) Excludes loans designated at fair value through profit or loss
(FVTPL), balances due from customers on acceptances, accrued interest
and deferred and unamortised fee income.
(2) Business and total coverage ratio excludes the guaranteed element
of government-backed loans.
(3) Stage 3 includes POCI for gross loans and advances of GBP63m for
Mortgages and GBP1m for Unsecured (30 September 2021: GBP67m and
GBP2m respectively); and ECL of (GBP1m) for Mortgages and (GBP2m)
for Unsecured (30 September 2021: GBPNil and (GBP2m) respectively).
Nil for business in both periods.
Risk management
Credit risk
Credit quality of loans and advances (continued)
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 being classed
as Stage 2:
Unsecured
Mortgages Cards Loans & Overdrafts Combined Business Total
31 March 2022 GBPm % GBPm % GBPm % GBPm % GBPm % GBPm %
PD deterioration 4,243 80% 341 60% 15 20% 356 56% 1,162 58% 5,761 73%
Forbearance 151 3% 8 1% 56 75% 64 10% 255 13% 470 6%
AFD or Watch List(1) 7 0% - - - - - - 573 28% 580 7%
> 30 DPD 132 2% 18 3% 4 5% 22 3% 30 1% 184 2%
Other(2) 750 15% 199 36% - - 199 31% - - 949 12%
5,283 100% 566 100% 75 100% 641 100% 2,020 100% 7,944 100%
ECLs
PD deterioration 27 61% 55 50% 3 42% 58 51% 40 46% 125 51%
Forbearance 7 16% 2 2% 2 29% 4 3% 17 20% 28 11%
AFD or Watch List(1) - - - - - - - - 30 34% 30 12%
> 30 DPD 1 2% 11 10% 2 29% 13 11% - - 14 6%
Other(2) 9 21% 41 38% - - 41 35% - - 50 20%
44 100% 109 100% 7 100% 116 100% 87 100% 247 100%
Unsecured
Mortgages Cards Loans & Overdrafts Combined Business Total
30 September 2021 GBPm % GBPm % GBPm % GBPm % GBPm % GBPm %
PD deterioration 6,100 85% 300 60% 48 86% 348 63% 1,445 59% 7,893 78%
Forbearance 176 2% 11 2% 3 5% 14 3% 374 15% 564 6%
AFD or Watch
List(1) 11 - - - - - - - 584 24% 595 6%
> 30 DPD 146 2% 15 3% 5 9% 20 4% 18 1% 184 2%
Other(2) 759 11% 171 35% - - 171 30% 12 1% 942 8%
7,192 100% 497 100% 56 100% 553 100% 2,433 100% 10,178 100%
ECLs
PD deterioration 43 67% 51 52% 14 74% 65 55% 52 43% 160 53%
Forbearance 4 6% 2 2% 1 5% 3 3% 24 20% 31 10%
AFD or Watch
List(1) - - - - - - - - 32 27% 32 11%
> 30 DPD 2 3% 9 9% 4 21% 13 11% - - 15 5%
Other(2) 15 24% 37 37% - - 37 31% 12 10% 64 21%
64 100% 99 100% 19 100% 118 100% 120 100% 302 100%
(1) Approaching Financial Difficulty (AFD) and Watch markers
are early warning indicators of Business 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 high indebtedness, county court judgement
and previous arrears, 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
The distribution of the Group's credit exposures by internal PD
rating is analysed below:
Gross carrying value
Stage 1 Stage 2 Stage 3 (1) Total
31 March 2022 GBPm % GBPm % GBPm % GBPm %
Mortgages PD range
Strong 0 - 0.74 48,626 93% 3,582 68% - - 52,208 90%
Good 0.75 - 2.49 3,292 6% 1,004 19% - - 4,296 7%
Satisfactory 2.50 - 99.99 299 1% 697 13% - - 996 2%
Default 100 - - - - 630 100% 630 1%
Total 52,217 100% 5,283 100% 630 100% 58,130 100%
Unsecured
Strong 0 - 2.49 4,937 91% 112 18% - - 5,049 82%
Good 2.50 - 9.99 486 9% 348 54% - - 834 14%
10.00 -
Satisfactory 99.99 8 - 181 28% - - 189 3%
Default 100 - - - - 79 100% 79 1%
Total 5,431 100% 641 100% 79 100% 6,151 100%
Business
Strong 0 - 0.74 4,616 79% 1,010 50% - - 5,626 69%
Good 0.75 - 9.99 1,203 21% 947 47% - - 2,150 26%
10.00 -
Satisfactory 99.99 - - 63 3% - - 63 1%
Default 100 - - - - 297 100% 297 4%
Total 5,819 100% 2,020 100% 297 100% 8,136 100%
Gross carrying value
Stage 1 Stage 2 Stage 3(1) Total
30 September 2021 GBPm % GBPm % GBPm % GBPm %
Mortgages PD range
Strong 0 - 0.74 46,984 93% 4,555 63% - - 51,539 88%
Good 0.75 - 2.49 3,313 6% 1,888 27% - - 5,201 9%
Satisfactory 2.50 - 99.99 299 1% 749 10% - - 1,048 2%
Default 100 - - - - 653 100% 653 1%
Total 50,596 100% 7,192 100% 653 100% 58,441 100%
Unsecured
Strong 0 - 2.49 4,730 92% 85 15% - - 4,815 83%
Good 2.50 - 9.99 411 8% 325 59% - - 736 13%
10.00 -
Satisfactory 99.99 7 - 143 26% - - 150 3%
Default 100 - - - - 69 100% 69 1%
Total 5,148 100% 553 100% 69 100% 5,770 100%
Business
Strong 0 - 0.74 3,298 58% 505 21% - - 3,803 46%
Good 0.75 - 9.99 2,374 42% 1,823 75% - - 4,197 50%
10.00 -
Satisfactory 99.99 - - 105 4% - - 105 1%
Default 100 - - - - 235 100% 235 3%
Total 5,672 100% 2,433 100% 235 100% 8,340 100%
(1) Stage 3 includes POCI of GBP63m for Mortgages and GBP1m for Unsecured
(30 September 2021: GBP67m and GBP2m respectively). Nil for Business
in both periods.
Risk management
Credit risk
Movement in gross lending balances and impairment loss
allowance
The following table shows the changes in the loss allowance and
gross carrying value of the portfolios. 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
loans ecl loans ecl loans ecl loans Total provisions
31 March 2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening balance at 1 October 2021 61,416 111 10,178 302 957 91 72,551 504
Transfers from Stage 1 to Stage 2 (4,614) (17) 4,587 142 - - (27) 125
Transfers from Stage 2 to Stage 1 5,287 12 (5,316) (79) - - (29) (67)
Transfers to Stage 3 (48) - (286) (43) 332 49 (2) 6
Transfers from Stage 3 24 - 66 5 (91) (6) (1) (1)
Changes to model methodology - - - - - - - -
New assets originated or purchased(2) 10,741 114 719 85 113 21 11,573 220
Repayments and other movements(3) (1,129) 4 (284) (51) (43) (5) (1,456) (52)
Repaid or derecognised (8,210) (93) (1,720) (114) (200) (55) (10,130) (262)
Write-offs - - - - (62) (62) (62) (62)
Cash recoveries - - - - - 15 - 15
Individually assessed impairment charge - - - - - 53 - 53
Closing balance at 31 March 2022 63,467 131 7,944 247 1,006 101 72,417 479
Stage 1 Stage 2 Stage 3(1)
Total
Gross Gross Gross gross Total
30 September loans ecl loans ecl loans ecl loans provisions
2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening balance
at 1 October
2020 59,219 136 12,844 465 862 134 72,925 735
Transfers from
Stage 1
to Stage 2 (11,131) (62) 11,076 389 - - (55) 327
Transfers from
Stage 2
to Stage 1 10,397 58 (10,484) (284) - - (87) (226)
Transfers to
Stage 3 (115) (1) (623) (91) 734 108 (4) 16
Transfers from
Stage 3 33 - 217 23 (253) (25) (3) (2)
Changes to model - - - - - - - -
methodology
New assets
originated
or purchased(2) 19,276 206 1,621 158 132 22 21,029 386
Repayments and
other
movements(3) (2,955) (59) (933) (140) (16) (72) (3,904) (271)
Repaid or
derecognised (13,308) (167) (3,540) (218) (376) (55) (17,224) (440)
Write-offs - - - - (126) (126) (126) (126)
Cash recoveries - - - - - 26 - 26
Individually
assessed
impairment
charge - - - - - 79 - 79
Closing balance
at 30
September 2021 61,416 111 10,178 302 957 91 72,551 504
(1) Stage 3 includes POCI for gross loans and advances of GBP63m for Mortgages
and GBP1m for Unsecured (30 September 2021: GBP67m and GBP2m respectively),
and ECL of (GBP1m) for Mortgages and (GBP2m) for Unsecured (30 September
2021: GBPNil and (GBP2m) respectively). Nil for Business in both periods.
(2) Includes assets where the term has ended, and a new facility has been
provided.
(3) 'Repayments' comprises payments made on customer lending which are
not yet fully paid at the reporting date and the customer arrangement
remains live at that date. 'Repaid' refers to payments made on customer
lending which is either fully repaid or derecognised by the reporting
date and the customer arrangement is therefore closed at that date.
In addition to the above on-balance sheet position, the Group
also has GBP18,326m of loan commitments and financial guarantee
contracts (30 September 2021: GBP17,121m) of which GBP17,067m
(93.1%) are held under Stage 1, GBP1,222m in Stage 2 and GBP37m in
Stage 3 (30 September 2021: GBP16,001m (93.5%) held under Stage 1,
GBP1,090m in Stage 2 and GBP30m in Stage 3). ECLs of GBP7m (30
September 2021: GBP8m) are included in the table above, of which
GBP1m (30 September 2021: GBP2m) is held under Stage 1 and GBP6m
(30 September 2021: GBP6m) under Stage 2.
The overall improvement in staging evidenced in a shift from
Stage 2 to Stage 1 in the period is driven by a variety of factors
at portfolio levels, with further detail provided in the following
portfolio performance pages. Customer repayment activity remains
strong as customers deleverage as much as possible. Low levels of
default are evident across the portfolio.
The contractual amount outstanding on loans and advances that
were written off during the reporting period or still subject to
enforcement activity was GBP4.2m ( 30 September 2021: GBP2.6m). The
Group has not purchased any lending assets in the year ( 30
September 2021: none). Further information on staging profile is
provided at a portfolio level in the respective portfolio
performance section on the following pages.
Risk management
Credit risk
Mortgage credit performance
The table below presents key information which is important for
understanding the asset quality of the Group's Mortgage portfolio
and should be read in conjunction with the supplementary data
presented in the following pages of this section.
Breakdown of Mortgage portfolio
Gross Modelled Total Average
lending ECL PMA ECL Net lending Coverage LTV
31 March 2022 GBPm GBPm GBPm GBPm GBPm % %
Residential - capital
repayment 35,005 14 10 24 34,981 0.06% 56.1%
Residential - interest
only 8,296 4 1 5 8,291 0.07% 46.6%
Buy-to-let (BTL) 14,829 6 31 37 14,792 0.24% 54.4%
Total Mortgage portfolio 58,130 24 42 66 58,064 0.11% 54.4%
30 September 2021
Residential - capital
repayment 35,192 19 21 40 35,152 0.10% 57.2%
Residential - interest
only 8,341 6 2 8 8,333 0.10% 47.2%
BTL 14,908 8 31 39 14,869 0.24% 54.8%
Total Mortgage portfolio 58,441 33 54 87 58,354 0.15% 55.3%
Mortgage lending reduced in the period to GBP58.1bn (30
September 2021: GBP58.4bn) as the Group continued to prioritise
margin in an increasingly competitive environment.
The portfolio continues to evidence strong underlying credit
performance with 90% of loans held in Stage 1 (30 September 2021:
87%). During the period the volume and value of loans in
forbearance has reduced to 4,771 / GBP662m from 6,743/GBP830m, this
followed the completion of the probation period for some loans and
a return to fully performing status. The relative stability in the
book and low LTV mix of the portfolio mirrors conditions in the UK
housing market, which continues to perform well following the
easing of government restrictions applied during the COVID-19
pandemic. The weighted average LTV remains low at 54.4% (30
September 2021: 55.3%). Further detail on LTV bandings and
forbearance measures is provided on the following pages.
The stability in the Mortgage portfolio metrics together with
the improvement in the applicable economic metrics, such as house
prices, have contributed to a release of GBP9m in the modelled ECL,
taking the provision to GBP24m at 31 March 2022 (from GBP33m at 30
September 2021). Total PMAs have similarly reduced in the period,
as detailed below, from GBP54m at 30 September 2021 to GBP42m at 31
March 2022. The total Mortgage portfolio impairment provision
therefore stands at GBP66m at 31 March 2022, down from GBP87m at 30
September 2021.
The Group has maintained PMA's for the Mortgage portfolio to
address the ongoing heightened uncertainty over anticipated future
default rates across the portfolio. The most significant of these
is the PMA on the BTL portfolio which has held broadly stable at
GBP29m (30 September 2021: GBP28m) and reflects that the Group
continues to take a cautious approach on this component of the loan
book. A PMA for payment holidays, which was introduced in 2020 at
the outset of the COVID-19 pandemic, has continued to unwind as
customers have successfully exited payment holiday arrangements and
returned to normal repayment patterns; this PMA is now GBP8m at 31
March 2022 (30 September 2021: GBP22m). In the current environment,
with high inflation and rising fuel costs, the Group considers that
there is likely to be a group of borrowers who will suffer
increased stress from the heightened cost of living pressure; a
GBP3m temporary affordability stress PMA has been introduced in
response to this. Other small PMAs totalling GBP2m (30 September
2021: GBP4m) have also been retained.
The release of modelled provisions and previously applied PMAs
is the primary driver of the impairment credit in the income
statement of GBP21m (12 months to 30 September 2021: credit of
GBP44m) and associated cost of risk of (7)bps for the period (12
months to 30 September 2021: (7)bps). The total book coverage has
reduced to 11bps but remains substantially higher than the
pre-pandemic level of 7bps.
Risk management
Credit risk
Mortgage credit performance (continued)
Collateral
The quality of the Group's Mortgage portfolio can be considered
in terms of the average LTV of the portfolio and the staging of the
portfolio, as set out in the following tables:
Average LTV of Mortgage portfolio by staging
31 March 2022 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% 20,451 39% 2 2,186 42% 6 282 44% 2 22,919 40% 10
50% to 75% 25,753 49% 3 2,700 51% 26 258 41% 3 28,711 50% 32
76% to 80% 3,450 7% 1 262 5% 3 37 6% 1 3,749 6% 5
81% to 85% 1,843 4% 1 111 2% 2 16 3% 1 1,970 3% 4
86% to 90% 523 1% - 14 - - 10 2% 1 547 1% 1
91% to 95% 151 - - 2 - 1 8 1% - 161 - 1
96% to 100% 11 - - 3 - - 4 1% - 18 - -
Greater than
100% 35 - - 5 - 6 15 2% 7 55 - 13
52,217 100% 7 5,283 100% 44 630 100% 15 58,130 100% 66
30 September Stage 1 Stage 2 Stage 3(2)
2021 Total
Loans ECL Loans ECL Loans ECL Loans ECL
LTV(1) GBPm % GBPm GBPm % GBPm GBPm % GBPm GBPm % GBPm
Less than 50% 19,907 39% 1 2,268 32% 6 274 41% 2 22,449 38% 9
50% to 75% 24,383 49% 1 3,648 51% 37 256 39% 3 28,287 49% 41
76% to 80% 3,123 6% 1 729 10% 9 49 8% 1 3,901 7% 11
81% to 85% 2,346 5% 1 426 6% 6 30 5% 1 2,802 5% 8
86% to 90% 715 1% - 102 1% 3 17 3% 1 834 1% 4
91% to 95% 79 - - 7 - - 8 1% 1 94 - 1
96% to 100% 8 - - 2 - - 5 1% - 15 - -
Greater than
100% 35 - - 10 - 3 14 2% 10 59 - 13
50,596 100% 4 7,192 100% 64 653 100% 19 58,441 100% 87
(1) L T V of the Mo r t gage po r t f olio is defined as Mo r t gage po
r t f olio w eigh t ed by balance. The po r t f olio is ind e x ed
using the MI AC Acadametrics indices at a gi v en da te.
(2) Stag e 3 includes GBP63m (30 September 2021: GBP67m) of POCI g r oss
loans and ad v ances.
The Mortgage portfolio remains highly secured with 88.8% of
mortgages, by loan value, having an indexed LTV of less than 75%
(30 September 2021: 86.8%), and an average portfolio LTV of 54.4%
(30 September 2021: 55.3%). New lending has increased the value of
loans in stage 1 with an LTV between 91% to 95%. The increase from
September 2021 is exacerbated as higher LTV lending was not
available during most of the lockdown period.
Risk management
Credit risk
Mortgage credit performance (continued)
Forbearance
A key indicator of underlying Mortgage portfolio health is the
level of loans subject to forbearance measures. Forbearance can
occur when a customer experiences longer-term financial difficulty.
In such circumstances, the Group considers the customer's
individual circumstances, uses judgement in assessing whether SICR,
an impairment or default event has occurred, and then applies
tailored forbearance measures in order to support the customer in a
route to stability. 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.
The table below summarises the level of forbearance in respect
of the Group's Mortgage portfolio at each balance sheet date. All
balances subject to forbearance are classed as either Stage 2 or
Stage 3 for ECL purposes.
Impairment allowance
on loans and advances
Total loans and advances subject to forbearance
subject to forbearance measures measures
Gross carrying Impairment
Number of amount % of total allowance Coverage
31 March 2022 loans GBPm portfolio GBPm %
Formal arrangements 1,160 137 0.24 5.8 4.26
Temporary arrangements 571 86 0.14 2.7 3.12
Payment arrangement 1,222 128 0.22 0.9 0.67
Payment holiday 281 27 0.05 0.1 0.28
Interest only conversion 1,322 264 0.46 0.9 0.33
Term extension 91 8 0.01 - 0.46
Other 17 2 - - 0.60
Legal 107 10 0.02 0.2 2.11
Total mortgage forbearance 4,771 662 1.14 10.6 1.60
30 September 2021
Formal arrangements 1,115 133 0.23 4.9 3.66
Temporary arrangements 675 100 0.17 6.8 6.81
Payment arrangement 1,865 176 0.30 2.3 1.30
Payment holiday 1,436 123 0.21 0.5 0.41
Interest only conversion 1,390 273 0.47 1.3 0.47
Term extension 127 12 0.02 0.1 0.57
Other 19 2 0.01 - 0.68
Legal 116 11 0.02 0.3 3.09
Total mortgage forbearance 6,743 830 1.43 16.2 1.95
As at 31 March 2022, forbearance totalled GBP662m (4,771
customers), a decrease from the 30 September 2021 position of
GBP830m (6,743 customers). This represents 1.14% of total mortgage
balances ( 30 September 2021: 1.43%) with the decrease primarily
driven by loans exiting the reporting probation period.
When all other avenues of resolution, including forbearance,
have been explored, the Group will take steps to repossess and sell
underlying collateral. In the 6 months to 31 March 2022, there were
28 repossessions of which 6 were voluntary (2021 Full year: 33
including 13 voluntary). The key driver of the increase was the
removal of the possession moratorium, part of the government's
measures to support borrowers throughout COVID-19, part way through
2021 rather than a change in policy as the Group remains committed
to supporting the customer and place the right outcome for them at
the centre of the strategy.
Risk management
Credit risk
Mortgage credit performance (continued)
IFRS 9 staging
The Group closely monitors the staging profile of the Mortgage
portfolio over time which can be indicative of general trends in
book health. Movements in the staging profile of the portfolio in
the current and prior year are presented in the tables below.
Stage 1 Stage 2 Stage 3(1)
Total
Gross Gross Gross gross
loans ecl loans ecl loans ecl loans Total provisions
31 March 2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening balance at 1
October 2021 50,596 4 7,192 64 653 19 58,441 87
Transfers from Stage
1 to Stage 2 (3,376) (1) 3,354 29 - - (22) 28
Transfers from Stage
2 to Stage 1 4,643 2 (4,657) (34) - - (14) (32)
Transfers to Stage 3 (24) - (102) (3) 125 2 (1) (1)
Transfers from Stage
3 15 - 52 3 (68) (2) (1) 1
Changes to model methodology - - - - - - - -
New assets originated
or purchased(2) 4,409 - 8 - 1 - 4,418 -
Repayments and other
movements(3) (893) 2 (78) (9) (10) (2) (981) (9)
Repaid or derecognised (3,153) - (486) (6) (70) (1) (3,709) (7)
Write-offs - - - - (1) (1) (1) (1)
Cash recoveries - - - - - - - -
Individually assessed - - - - - - - -
impairment charge
Closing balance at 31
March 2022 52,217 7 5,283 44 630 15 58,130 66
Stage 1 Stage 2 Stage 3(1)
Total
Gross Gross Gross gross
loans ecl loans ecl loans ecl loans Total provisions
30 September 2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening balance at 1
October 2020 49,970 14 8,166 95 516 22 58,652 131
Transfers from Stage
1 to Stage 2 (8,172) (4) 8,140 113 - - (32) 109
Transfers from Stage
2 to Stage 1 7,479 5 (7,522) (101) - - (43) (96)
Transfers to Stage 3 (64) - (367) (9) 429 7 (2) (2)
Transfers from Stage
3 24 - 108 13 (137) (4) (5) 9
Changes to model methodology - - - - - - - -
New assets originated
or purchased(2) 9,662 2 76 2 2 - 9,740 4
Repayments and other
movements(3) (2,141) (11) (405) (36) (38) (3) (2,584) (50)
Repaid or derecognised (6,162) (2) (1,004) (13) (118) (2) (7,284) (17)
Write-offs - - - - (1) (1) (1) (1)
Cash recoveries - - - - - 1 - 1
Individually assessed
impairment charge - - - - - (1) - (1)
Closing balance at 30
September 2021 50,596 4 7,192 64 653 19 58,441 87
(1) Stage 3 includes POCI for gross loans and advances of GBP63m (30 September
2021: GBP67m), and ECL of (GBP1m) (30 September 2021: GBPNil).
(2) Includes assets where the term has ended, and a new facility has been
provided.
(3) 'Repayments' comprises payments made on customer lending which are not
yet fully paid at the reporting date and the customer arrangement remains
live at that date. 'Repaid' refers to payments made on customer lending
which is either fully repaid or derecognised by the reporting date and
the customer arrangement is therefore closed at that date.
Despite the economic uncertainty, the Mortgage portfolio
continues to evidence strong performance and benefits from
relatively positive economic forecasts. This has combined to
increase the level of mortgage lending classed as Stage 1 to 89.8%
(30 September 2021: 86.6%), with a corresponding decrease of assets
in Stage 2 from 12.3% to 9.1%. Of the Stage 2 category, 8.6% is not
yet past due at the balance sheet date (30 September 2021: 11.8%
not yet past due) but fall into the Stage 2 classification due
predominantly to PD deterioration. The proportion of mortgages
classified as Stage 3 remains modest at 1.1% (30 September 2021:
1.1%).
These conditions have also contributed to an increase in assets
classed as 'Strong' from 88% at 30 September 2021 to 90% at 31
March 2022, with over 97% (30 September 2021: 97%) of the Mortgage
portfolio now classed as 'Good' or 'Strong'.
The sustained quality in the internal PD ratings and high
quality of collateral underpinning the book are key factors
supporting the lower level of provision coverage required.
Risk management
Credit risk
Unsecured credit performance
The table below presents key information which is important for
understanding the asset quality of the Group's Unsecured lending
portfolio and should be read in conjunction with the supplementary
data presented in the following pages of this section.
Breakdown of Unsecured credit portfolio
Gross Modelled Total
lending ECL PMA ECL Net lending Coverage
31 March 2022 GBPm GBPm GBPm GBPm GBPm %
Credit cards 5,116 163 36 199 4,917 4.22%
Personal loans 1,002 11 8 19 983 2.59%
Overdrafts 33 3 - 3 30 11.96%
Total Unsecured lending
portfolio 6,151 177 44 221 5,930 4.04%
30 September 2021
Credit cards 4,655 142 18 160 4,495 3.79%
Personal loans 1,082 14 17 31 1,051 3.57%
Overdrafts 33 3 - 3 30 11.14%
Total Unsecured lending
portfolio 5,770 159 35 194 5,576 3.80%
Unsecured gross lending balances increased to GBP6.2bn (30
September 2021: GBP5.8bn) led by above-market growth in credit card
balances.
The quality of the Unsecured portfolio remains high, with 98.0%
of the portfolio in Stage 1 or Stage 2 not past due ( 30 September
2021: 98.1%), and a modest 1.3% in Stage 3 ( 30 September 2021:
1.2%). The level of customers in forbearance remains very low at
1.14% of the portfolio at 31 March 2022 ( 30 September 2021:
1.30%).
There has been an overall increase in the modelled provision to
GBP177m (30 September 2021: GBP159m), primarily in the Cards
portfolio where a number of drivers, such as a widening of risk
appetite, an increase in early stage arrears and a return to more
normalised customer indebtedness model inputs, combine to more than
offset the positive impact of the current macroeconomics. PMAs
continue to feature in this portfolio. As with the Mortgage
portfolio, a COVID-19 related payment holiday PMA was established
at the outset of the pandemic and, similar to Mortgages, has
unwound as anticipated to GBP3m at 31 March 2022 (30 September
2021: GBP12m). Other PMAs introduced in prior periods to address
specific factors not currently incorporated in the models have
remained relatively stable at GBP18m (30 September 2021: GBP23m).
Lastly, a new affordability PMA of GBP23m (GBP22m for Cards, GBP1m
for Personal loans) has been introduced in the period to address
the short-term risk of customers suffering increased stress from
the heightened cost of living pressure in the current environment.
The overall PMAs in the unsecured portfolio have therefore
increased to GBP44m at 31 March 2022 (30 September 2021:
GBP35m).
As a result, the total ECL provision at 31 March 2022 is GBP221m
(30 September 2021: GBP194m), giving rise to an impairment charge
in the income statement in the period of GBP69m (12 months to 30
September 2021: credit of GBP32m).
The coverage ratio for the whole Unsecured portfolio has
increased to 404bps (30 September 2021: 380bps), driven mainly by
the increase in coverage for our high-quality credit card portfolio
focused on more affluent customers, which has increased from
coverage of 379bps at 30 September 2021 to 422bps at 31 March 2022
and reflects a considered shift in risk appetite.
Risk management
Credit risk
Unsecured credit performance (continued)
Forbearance
The table below summarises the level of forbearance in respect
of the Group's Unsecured lending portfolios at each balance sheet
date. All balances subject to forbearance are classed as either
Stage 2 or Stage 3 for ECL purposes.
Impairment allowance
on loans and advances
Total loans and advances subject to forbearance
subject to forbearance measures measures
Gross carrying Impairment
Number of amount % of total allowance Coverage
31 March 2022 loans GBPm portfolio GBPm %
Credit cards arrangements 14,247 58 1.22% 22.7 39.32%
Loans arrangements 836 5 0.65% 2.1 44.54%
Overdraft arrangement 73 - 0.04% - 38.52%
Total Unsecured lending
forbearance 15,156 63 1.14% 24.8 39.61%
30 September 2021
Credit cards arrangements 14,151 60 1.39% 23.9 39.88%
Loans arrangements 1,174 6 0.78% 3.3 49.61%
Overdraft arrangement 280 1 2.55% 0.4 51.89%
Total Unsecured lending
forbearance 15,605 67 1.30% 27.6 40.98%
The full credit card forbearance portfolio is now reported in
line with the EBA financial reporting guidelines and accounts are
retained in the reporting for a minimum of 2 years, previously 1
year for some heritage VM accounts, and the prior period shown has
been restated to the current methodology. All portfolios are now
reported on the EBA financial reporting requirements.
As at 31 March 2022, credit cards forbearance totalled GBP58m
(14,247 accounts), a decrease from the 30 September 2021 position
of GBP60m (14,151 accounts). This represents 1.22% of total credit
cards balances ( 30 September 2021: 1.39%). The level of impairment
coverage on forborne loans is stable at 39.3% from 39.9% at 30
September 2021. Limited forbearance is exercised in relation to
Personal loans and overdrafts, with a modest reduction to GBP5m
(0.63%) of the loans and overdrafts portfolio from GBP7m (0.85%) at
30 September 2021.
Risk management
Credit risk
Unsecured credit performance (continued)
IFRS 9 staging
The Group closely monitors the staging profile of its Unsecured
lending portfolio over time which can be indicative of general
trends in book health. Movements in the staging profile of the
portfolio in the current and prior year are presented in the tables
below:
Stage 1 Stage 2 Stage 3 (1)
Total
Gross Gross Gross gross
loans ecl loans ecl loans ecl loans Total provisions
31 March 2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening balance at 1 October 2021 5,148 41 553 118 69 35 5,770 194
Transfers from Stage 1 to Stage 2 (468) (10) 468 94 - - - 84
Transfers from Stage 2 to Stage 1 232 6 (242) (31) - - (10) (25)
Transfers to Stage 3 (9) - (57) (35) 68 42 2 7
Transfers from Stage 3 1 - 1 1 (3) (3) (1) (2)
Changes to model methodology - - - - - - - -
New assets originated or purchased(2) 994 12 11 4 6 5 1,011 21
Repayments and other movements(3) (142) 24 (66) (26) (1) (1) (209) (3)
Repaid or derecognised (325) (7) (27) (9) (6) (38) (358) (54)
Write-offs - - - - (54) (54) (54) (54)
Cash recoveries - - - - - 12 - 12
Individually assessed impairment charge - - - - - 41 - 41
Closing balance at 31 March 2022 5,431 66 641 116 79 39 6,151 221
Stage 1 Stage 2 Stage 3(1)
Total
Gross Gross Gross gross Total
loans ecl loans ecl loans ecl loans provisions
30 September 2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening balance at 1 October
2020 4,660 70 823 194 67 37 5,550 301
Transfers from Stage 1
to Stage 2 (954) (32) 951 209 - - (3) 177
Transfers from Stage 2
to Stage 1 859 21 (890) (113) - - (31) (92)
Transfers to Stage 3 (19) (1) (100) (68) 119 80 - 11
Transfers from Stage 3 2 - 3 2 (5) (5) - (3)
Changes to model methodology - - - - - - - -
New assets originated
or purchased(2) 1,319 17 38 6 1 - 1,358 23
Repayments and other movements(3) (493) (28) (217) (98) 15 (52) (695) (178)
Repaid or derecognised (226) (6) (55) (14) (29) (25) (310) (45)
Write-offs - - - - (99) (99) (99) (99)
Cash recoveries - - - - - 24 - 24
Individually assessed
impairment charge - - - - - 75 - 75
Closing balance at 30
September 2021 5,148 41 553 118 69 35 5,770 194
(1) Stage 3 includes POCI for gross loans and advances of GBP1m (30 September
2021: GBP2m), and ECL of (GBP2m) (30 September 2021: (GBP2m)).
(2) Includes assets where the term has ended, and a new facility has been
provided.
(3) 'Repayments' comprises payments made on customer lending which are not
yet fully paid at the reporting date and the customer arrangement remains
live at that date. 'Repaid' refers to payments made on customer lending
which is either fully repaid or derecognised by the reporting date and
the customer arrangement is therefore closed at that date.
The balance of unsecured lending in Stage 2 increased by 0.8% to
10.4% (30 September 2021: 9.6%), driven primarily by a conscious
widening of risk appetite, an increase in early stage arrears and a
return to more normalised customer indebtedness model inputs from
that seen from the cyclical lows during lockdown. This resulted in
a corresponding reduction in Stage 1 from 89.1% to 88.2% while
Stage 3 remains modest at 1.3% (30 September 2021: 1.2%).
The short-term risk on credit performance attributable to the
cost of living crisis has the potential to affect customers
currently in Stage 1 and may lead to increased levels of arrears
and defaults. The affordability PMA of GBP23m has been established
to mitigate this risk on the book.
Risk management
Credit risk
Business credit performance
The table below presents key information which is important for
understanding the asset quality of the Group's Business lending
portfolio and should be read in conjunction with the supplementary
data presented in the following pages of this section.
Breakdown of Business credit portfolio
Gross Total Model-led Total
lending Govern-ment(1) gross ECL PMA ECL Net lending Cover-age(2)
31 March 2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
Agriculture 1,323 72 1,395 6 5 11 1,384 0.80%
Business services 864 305 1,169 25 22 47 1,122 4.65%
Commercial Real
Estate 612 10 622 2 1 3 619 0.58%
Government, health
and education 1,032 64 1,096 8 11 19 1,077 1.75%
Hospitality 580 92 672 4 6 10 662 1.69%
Manufacturing 589 127 716 22 15 37 679 5.48%
Resources 106 8 114 2 3 5 109 4.34%
Retail and wholesale
trade 634 222 856 12 12 24 832 3.41%
Transport and storage 280 72 352 4 3 7 345 2.13%
Other 930 214 1,144 14 15 29 1,115 3.04%
Total Business
portfolio 6,950 1,186 8,136 99 93 192 7,944 2.58%
30 September 2021
Agriculture 1,361 80 1,441 7 5 12 1,429 0.89%
Business services 943 337 1,280 21 27 48 1,232 4.82%
Commercial Real
Estate 667 13 680 4 3 7 673 1.00%
Government, health
and education 1,031 73 1,104 7 10 17 1,087 1.62%
Hospitality 563 105 668 6 7 13 655 2.29%
Manufacturing 556 144 700 22 21 43 657 6.93%
Resources 95 8 103 3 4 7 96 6.85%
Retail and wholesale
trade 623 248 871 14 14 28 843 4.13%
Transport and storage 300 80 380 4 4 8 372 2.50%
Other 883 230 1,113 17 23 40 1,073 4.42%
Total Business
portfolio 7,022 1,318 8,340 105 118 223 8,117 3.06%
(1) Government includes all lending provided to business customers under
UK Government schemes including Bounce back loan scheme (BBLS), CBILS,
CLBILS and RLS. When onboarding, some new borrowers for BBLS loans
were coded as business services; a portion of these may be reclassified
over time. This excludes GBP38m (30 September 2021: GBPNil) of guarantee
claim funds received from British Business Bank (BBB).
(2) Coverage ratio excludes the guaranteed element of government-backed
loan schemes.
Risk management
Credit risk
Business credit performance (continued)
Gross Business lending reduced to GBP8.1bn (30 September 2021:
GBP8.3bn) principally driven by reductions in government-guaranteed
lending schemes as borrowers continued to repay balances following
the expiry of the 1-year interest free period. Excluding the
government lending, balances were broadly stable given generally
subdued market activity, with signs of growth in Q2 in line with
broader economic recovery and improved business confidence. Growth
is targeted to sectors and sub sectors where we have well
established expertise.
There has been no deterioration in asset quality metrics across
the portfolio and, as yet, no significant increase in specific
provision recognition. The lending book continues to be biased away
from sectors likely to experience more disruption from higher cost
of living such as hospitality and retail, and towards sectors
expected to be resilient, such as agriculture and health and social
care. However, there are many external risks which could develop in
2022 including geopolitical, general inflationary pressures,
interest rate rises, ongoing supply chain distribution and labour
market disruption, in addition to our customers' increased debt
burden and fatigue from crisis management.
The pressure on cash flow is expected to be a notable challenge
in 2022 compared to 2021 when the positive impact of government and
other support provided some breathing space. Repayments on
government support loans, together with deferred HMRC and other
creditor payments, are now due, albeit Time to Pay and Pay as You
Grow schemes can provide assistance.
The stable economic conditions experienced to date result in an
increase in the proportion of loans in Stage 1 from 68.0% at 30
September 2021 to 71.5% at 31 March 2022. Total balances in Stage 1
and Stage 2 not past due is c.GBP7.8bn representing 95.8% of the
portfolio (30 September 2021: GBP8.1bn representing 96.7% of the
portfolio). Of the Stage 2 loans, 95% were rated 'Strong' or 'Good'
(30 September 2021: 96%). Stage 3 loans remain modest at 3.7%.
Government interventions, including the ongoing loan schemes,
continue to result in a reduced requirement for granting of
forbearance; low levels were maintained with only 5.33% of the
total portfolio being forborne at 31 March 2022 (30 September 2021:
5.82%).
The refreshed macroeconomic scenarios resulted in a small
reduction of GBP6m in modelled provisions to GBP99m. At 30
September 2021, the Group recognised PMAs for Sector stress
(GBP80m) and PD neutralisation (GBP34m) together with other minor
factors (GBP4m); each of these PMAs has been reviewed in the
current period. While the removal of all practical COVID-19
restrictions is seen as a move away from the downside impact of the
pandemic and is a rationale for a reduction in some sector stress,
more recent geopolitical events in Ukraine and the widely
publicised cost of living crisis in the UK contribute to ongoing
uncertainty over the impact that these broader economic conditions
could have on UK businesses. As a result, the same sectors have
been reviewed and there is only a modest release of GBP3m to the
Sector Stress PMA which is now GBP77m at 31 March 2022. The PD
neutralisation PMA introduced in 2021 has been retained, however
the methodology has been updated to be anchored to a pre-COVID PD
of 2.01%, resulting in a provision release of GBP21m and a PMA of
GBP13m at 31 March 2022 The other small PMAs are broadly unchanged
at GBP3m. This results in an overall provision of GBP192m (30
September 2021: GBP223m) which has driven an impairment credit in
the income statement of GBP27m in the period (12 months to 30
September 2021: credit of GBP55m).
Overall, portfolio coverage remains prudent at 258bps ( 30
September 2021: 306bps), reflecting the high quality of the
portfolio and little evidence of deterioration in asset quality to
date. A cautious position has been maintained through the targeted
approach to PMAs, with coverage over those sectors most susceptible
to further economic shocks remaining elevated.
Risk management
Credit risk
Business credit performance (continued)
Forbearance
Forbearance is considered to exist where customers are
experiencing or about to experience financial difficulty and the
Group grants a concession 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 loans and advances
Total loans and advances subject to forbearance
subject to forbearance measures measures
Number Gross carrying Impairment
of amount % of total allowance Coverage
31 March 2022 loans GBPm portfolio GBPm %
Term extension 175 161 1.88 9.2 5.72
Payment holiday 79 145 1.68 24.3 16.81
Reduction in contracted
interest rate 2 1 0.01 - 1.37
Alternative forms of payment - - - - -
Debt forgiveness 1 - - - 1.60
Refinancing 11 3 0.04 0.3 8.24
Covenant breach/reset/waiver 48 148 1.72 8.5 5.74
Total Business forbearance 316 458 5.33 42.3 9.24
30 September 2021
Term extension 188 196 2.27% 10.2 5.19%
Payment holiday 86 130 1.51% 17.6 13.48%
Reduction in contracted
interest rate 1 1 0.01% - 0.02%
Alternative forms of payment 1 13 0.15% 5.6 43.14%
Debt forgiveness 2 4 0.04% - 0.67%
Refinancing 10 3 0.04% 0.2 7.21%
Covenant breach/reset/waiver 44 155 1.80% 8.2 5.27%
Total Business forbearance 332 502 5.82% 41.8 8.31%
Business portfolio forbearance has reduced from GBP502m (332
customers) at 30 September 2021 to GBP458m (316 customers) at 31
March 2022. Forbearance remains an important metric, reflecting the
volume and value of concessions granted to customers on a
non-commercial basis. Changes to forbearance levels 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 5.33% (30
September 2021: 5.82%) with impairment coverage slightly increasing
to 9.24% (30 September 2021: 8.31%). The majority of forbearance
arrangements relate to term extensions allowing customers a longer
term to repay their obligations in full than initially
contracted.
Customers within the forbearance portfolio have received GBP31m
of COVID-19 related support loans: GBP5m CLBIL, GBP16m CBIL, GBP5m
BBL and GBP5m RLS.
The table includes a portfolio of financial assets at fair
value. The gross value of fair value loans subject to forbearance
as at 31 March 2022 is GBP5.3m (30 September 2021: GBP5.3m),
representing 0.06% of the total business portfolio (30 September
2021: 0.06%). The credit risk adjustment on these amounts totalled
GBP0.1m (30 September 2021: GBP0.1m). Coverage is 2.38% (30
September 2021: 2.32%).
Risk management
Credit risk
Business credit performance (continued)
IFRS 9 staging
The Group closely monitors the staging profile of its Business
lending portfolio over time which can be indicative of general
trends in book health. Movements in the staging profile of the
portfolio in the current and prior year are presented in the tables
below.
Stage 1 Stage 2 Stage 3
Total
Gross Gross Gross gross
loans ecl loans ecl loans ecl loans Total provisions
31 March 2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening balance at 1 October 2021 5,672 66 2,433 120 235 37 8,340 223
Transfers from Stage 1 to Stage 2 (770) (6) 765 19 - - (5) 13
Transfers from Stage 2 to Stage 1 412 4 (417) (14) - - (5) (10)
Transfers to Stage 3 (15) - (127) (5) 139 5 (3) -
Transfers from Stage 3 8 - 13 1 (20) (1) 1 -
Changes to model methodology - - - - - - - -
New assets originated or purchased(1) 5,338 102 700 81 106 16 6,144 199
Repayments and other movements(2) (94) (22) (140) (16) (32) (2) (266) (40)
Repaid or derecognised (4,732) (86) (1,207) (99) (124) (16) (6,063) (201)
Write-offs - - - - (7) (7) (7) (7)
Cash recoveries - - - - - 3 - 3
Individually assessed impairment charge - - - - - 12 - 12
Closing balance at 31 March 2022 5,819 58 2,020 87 297 47 8,136 192
Stage 1 Stage 2 Stage 3
Total
Gross Gross Gross gross Total
loans ecl loans ecl loans ecl loans provisions
30 September 2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening balance at 1 October
2020 4,589 52 3,855 176 279 75 8,723 303
Transfers from Stage 1
to Stage 2 (2,005) (26) 1,985 67 - - (20) 41
Transfers from Stage 2
to Stage 1 2,059 32 (2,072) (70) - - (13) (38)
Transfers to Stage 3 (32) - (156) (14) 186 21 (2) 7
Transfers from Stage 3 7 - 106 8 (111) (16) 2 (8)
Changes to model methodology - - - - - - - -
New assets originated
or purchased(1) 8,295 187 1,507 150 129 22 9,931 359
Repayments and other movements(2) (321) (20) (311) (6) 7 (17) (625) (43)
Repaid or derecognised (6,920) (159) (2,481) (191) (229) (28) (9,630) (378)
Write-offs - - - - (26) (26) (26) (26)
Cash recoveries - - - - - 1 - 1
Individually assessed
impairment charge - - - - - 5 - 5
Closing balance at 30
September 2021 5,672 66 2,433 120 235 37 8,340 223
(1) Includes assets where the term has ended, and a new facility has been
provided.
(2) 'Repayments' comprises payments made on customer lending which are not
yet fully paid at the reporting date and the customer arrangement remains
live at that date. 'Repaid' refers to payments made on customer lending
which is either fully repaid or derecognised by the reporting date and
the customer arrangement is therefore closed at that date.
Despite the economic uncertainty, the level of Business lending
classed as Stage 1 has remained relatively stable at 71.5% (30
September 2021: 68.0%), with a reduction in Stage 2 from 29.2% at
31 March 2022 to 24.8% at 30 September 2021. The proportion of the
portfolio in Stage 2 does remain heightened, reflective of the
Group's prudent approach to early deterioration and support
measures such as forbearance. As at 31 March 2022, 58% of balances
in Stage 2 are associated with a deterioration in PD (30 September
2021: 59%). Business loans in Stage 3 remain modest at 3.7% (30
September 2021: 2.8%).
The PDs for Business lending combine both internal ratings
information and forward-looking economic forecasts. The material
drivers of the PD and stage migrations in the period are the
economic forecasts, rather than internal downgrades or the
emergence of arrears or defaults. The proportion of assets classed
as 'Strong' has increased to 69% (30 September 2021: 46%), with
assets classed as 'Good' correspondingly decreasing to 26% (30
September 2021: 50%). 95% of the business portfolio is categorised
as 'Strong' or 'Good' (30 September 2021: 96%).
Risk management
Credit risk
Macroeconomic assumptions, scenarios and weightings
The Group's ECL allowance at 31 March 2022 was GBP 479m (30
September 2021: GBP504m).
Macroeconomic assumptions
The Group engages OE to provide a wide range of future
macroeconomic assumptions which are 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 drivers as the most significant inputs
for IFRS 9 modelling purposes: UK GDP growth, inflation, house
prices, base rates, and unemployment rates. The external data
provided is assessed and reviewed on a quarterly basis to ensure
appropriateness and relevance to the ECL calculation, with more
frequent updates provided as and when the circumstances require
them. Further adjustments supplement the modelled output when it is
considered that not all the risks identified in a product segment
have been accurately reflected within the models or for other
situations where it is not possible to provide a modelled
outcome.
As the UK economy continues to recover from the impact of
COVID-19, and the effect of the Omicron variant does seem to have
been as profound as had been anticipated in Q4 2021, the outlook
continues to be more optimistic than it was at this point in 2021
especially with the ending of self-isolation restrictions. Recent
bank base rate rises, concerns over energy prices, the increase in
national insurance contributions, and the headwinds from higher
inflation will all have an impact on household incomes in 2022. The
potential impact on the UK economy of the Russian invasion of
Ukraine is uncertain at this time. Against this environment, the
Group has continued to assess the possible IFRS 9 economic
scenarios to select appropriate forecasts and weightings. The
selection of scenarios and the appropriate weighting to apply are
considered and debated by an internal review panel each quarter
with final proposed recommendations for use in the IFRS 9 models
made to the Asset and Liability Committee (ALCO) for formal
approval. The three scenarios selected, together with the
weightings applied, have been updated to reflect the current
economic environment and are:
30 Sept
31 Mar 2022 2021
Scenario (%) (%)
Upside 10 15
Base 55 50
Downside 35 35
The Group continued to select three scenarios with the largest
weighting applied to the base scenario. In the current period,
there is a 5% shift in the weightings from the Upside scenario
towards the Base scenario, reflecting greater confidence in the
Base scenario over the short term as a result of the updated
macroeconomic assumptions. The Group are comfortable with the
current weighting applied to the Downside scenario and see no
compelling reasons why this should be adjusted at this time.
Upside (10%)(1)
-- GDP increased sharply by 8.1% in the first quarter of 2022
(Q1 2022 v Q1 2021), before slowing down to a c.4.0% increase in
each of the remaining quarters in 2022. Overall year-on-year growth
in 2022 is forecast at 5.0% with a slight decrease to 4.4% in 2023
before reverting to more modest increases over the remainder of the
forecast period.
-- Inflation rises steeply and peaks at 7.8% in Q2 2022 from a
low base of 0.6% at Q1 2021. This reverts back to sub 2.0% levels
from Q1 2024 for much of the remaining forecast period.
-- BoE base rate rises are anticipated throughout 2022 and are
expected to continue through 2023 and into 2024, reaching 2.3% in
Q1 2024. Base rate continues at that level for the remainder of the
forecast period.
-- HPI rises modestly in each quarter over the entire forecast
period. Overall, HPI sees Q4 v Q4 growth of 9.7% in 2022 declining
to 1.7% in 2023 before rising again to between 2.4% and 2.9% over
the next three years.
-- Unemployment peaks in Q1 2022, at 4.1%, and drops to 3.5% in
Q4 2022. From then, there is no significant movement over the
remaining forecast period, reaching 3.7% in Q1 2025 where it
remains until the end of 2026.
Base (55%)
-- GDP increases sharply by 8.1% in the first quarter of 2022
(Q1 2022 v Q1 2021) before contracting in Q2 2022, with overall
year-on-year growth in 2022 forecast at 3.8%, and modestly falling
to 2.6% in 2023. GDP settles over the remaining forecast period at
between 1.7% and 1.9%.
-- Inflation peaks at 7.5% in Q2 2022 before scaling back and
reverting to under 2% in Q2 2023. This rises slightly and remains
at 2% from Q4 2025 for the remaining forecast period.
-- BoE base rate hits 1.2% in Q3 2022 and rise steadily over the
forecast period reaching 1.7% in Q3 2025 and remaining there
throughout 2026.
-- HPI sees steady rises between Q1 2022 to Q4 2022 before
modestly declining from then until Q2 2024 when it rebounds slowly
in each quarter after this until the end of the forecast period.
Overall, HPI sees Q4 v Q4 year-on-year growth of 5.4% in 2022 which
regresses to (14.7%) in 2023 and remains negative until 2026 where
it reverts to positive growth of 4.4%.
-- Unemployment peaks at 4. 1% in Q1 2022 and drops to 3.5% in
Q3 2022. From then, there is no significant movement with
unemployment averaging at 4% in 2022 and steadily declining and
reaching 3.7% in 2025 and remaining there for 2026.
(1) The time periods referenced in this section relate to
calendar years unless otherwise stated.
Risk management
Credit risk
Macroeconomic assumptions (continued)
Downside (35%)
-- GDP increases to 8.1% (Q1 2022 v Q1 2021) before turning
negative for the three remaining quarters in 2022 to (3.7%) by the
end of 2022 (Q4 2022 v Q4 2021) and remains sluggish over the
remaining forecast period. The overall year-on-year negative growth
of 0.3% in 2022 returns positive in 2024 at 1.2% and increases
slightly over the next two years finishing at 1.9% in 2026.
-- Inflation peaks at 6.4% in Q2 2022 before declining and
turning negative in Q2 2023 and remains negative for the remainder
of 2023. From there, inflation rises steadily each quarter reaching
2.3% in Q3 2025 before falling back again and finishing in Q4 2026
at 1.6%.
-- The BoE base rate reaches 0.8% in Q2 2022 before steadily
falling back to 0.3% in Q3 2023 where it is unchanged for the
remaining forecast period.
-- HPI falls steadily and deeply from Q1 2022 to Q1 2025 but
then experiences modest increases in each quarter until the end of
the forecast period but finishes well below the levels experienced
in 2021. Overall, HPI sees a Q4 v Q4 decline of (5.5%) in 2022
worsening to (16.52%) by 2024 and not turning positive until
2026.
-- Unemployment peaks at 6.6% in Q1 2024 and remains at over
6.0% for the remainder of the forecast period. Overall,
unemployment averages at 5.6% in 2022 rising to 6.6% by 2024 before
falling modestly to finish at 6.3% in 2026.
Five-year simple averages for the most sensitive inputs of
unemployment, GDP and HPI
Unemployment GDP HPI
31 March 2022 % % %
Upside 3.7 3.1 3.9
Base 3.8 2.4 2.0
Downside 6.3 0.8 (6.9)
30 September 2021
Upside 3.9 4.6 4.6
Base 4.3 3.8 2.1
Downside 6.5 2.1 (5.8)
Risk management
Credit risk
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
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
31 March 2022 GBPm GBPm GBPm GBPm
Mortgages 16 12 13 27
Unsecured of which: 178 174 173 187
Cards 163 161 160 170
Personal loans and overdrafts 15 13 13 17
Business 68 44 52 123
Total 262 230 238 337
(1) In addition to the probability weighted modelled provision shown
in the table, the Group holds GBP179m relative to PMAs (30 September
2021: GBP207m) and GBP39m of individually assessed provision (30
September 2021: GBP31m).
Probability
Weighted Upside Base Downside
30 September 2021 GBPm GBPm GBPm GBPm
Mortgages 24 16 19 37
Unsecured of which: 159 155 155 167
Cards 142 139 139 147
Personal loans and overdrafts 17 16 16 20
Business 83 47 61 127
Total 266 218 235 331
One of the criteria for moving exposures 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 PMAs,
further detail of which can be found on page 49.
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 and HPI
Unsecured: Unemployment
Business: Unemployment, HPI, GDP and interest rates
In addition to assessing the ECL impact of applying a 100%
weighting to each of the three chosen scenarios, the Group has also
considered what the effect of changes to a few key economic inputs
would make to the modelled ECL output.
The Group considers that the unemployment rate and HPI are the
inputs that would have the most significant and sensitive ECL
impact and has assessed how these would change the ECL across the
relevant portfolios, with the reported output assessed against the
base case. All changes have been implemented as immediate effects
seen within the first year of the base case scenario, persisting
throughout the scenario.
Risk management
Credit risk
The use of estimates (continued)
The following table discloses the ECL impact of HPI changes on
the Group's Mortgage and Business lending:
31 Mar 2022 30 Sept 2021
GBPm GBPm
Mortgages +10% (1) (2)
Business +10% (2) (2)
Mortgages -10% 1 3
Business -10% 1 3
Unemployment is a key input that affects all of the Group's
lending categories and the following table highlights the ECL
impact of a one percent change in the unemployment rate:
30 Sept
31 Mar 2022 2021
GBPm GBPm
Mortgages +1% 1 1
Unsecured +1% 5 4
Business +1% 5 6
Mortgages -1% - (1)
Unsecured -1% (5) (4)
Business -1% (3) (4)
Altering the basis of how the changes are reflected would
produce different results, with a sharper rise or decline in
unemployment having a much more material ECL impact.
While the above sensitivities provide a view of how the ECL
would be impacted based on these single changes, such changes would
not ordinarily occur in isolation and the economic inputs used are
linked within each chosen scenario.
The use of judgement
SICR
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.
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 implemented an approach with the required SICR threshold
trigger varying on a portfolio and product basis according to the
origination PD.
Risk management
Credit risk
The use of judgement (continued)
Changes to the overall SICR thresholds can also impact staging,
driving accounts into higher stages with the resultant impact on
the ECL allowance:
31 Mar 2022 30 Sept 2021
GBPm GBPm
A 10% movement in the mortgage portfolio from
Stage 1 to Stage 2 (1) +5 +6
A 10% movement in the credit card portfolio from
Stage 1 to Stage 2 (1) +76 +69
A 10% movement in the business portfolio from
Stage 1 to Stage 2 (1) +13 +13
A PD stress which increases PDs upwards by 20%
for all portfolios +91 +94
(1 ) The comparative has been restated in line with current year presentation .
Definition of default
The PD of a credit exposure is a key input to the measurement of
the ECL allowance. Default under Stage 3 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
At 31 March 2022, GBP 179m of PMAs (30 September 2021: GBP207m)
are included within the total ECL provision of GBP479m (30
September 2021: GBP504m).
These are management judgements which impact the ECL provision
by increasing the collectively assessed modelled output where not
all of the known risks identified in a particular product segment
have been accurately reflected within the models and are described
in more detail below:
Mortgages: as the impact of the wind-down in payment holidays
recedes, a reduced adjustment is held for COVID-19 reasons. The
Group continued to monitor the level of ECL held on BTL mortgages
in the year due to uncertainty of the extended impact on landlords
and that of their tenants. A new PMA is now held to reflect an
impact on debt affordability as a result of rising energy prices
and other inflationary effects.
Unsecured: as with Mortgages, reduced PMAs for the customer
group who used payment holidays are held. This is more than offset
with the new PMA for debt affordability and likely customers'
reduced disposable incomes. As a result, PMAs rose as a proportion
of ECLs for Unsecured lending.
Business: unlike Retail, the effects of the government measures
put in place for businesses throughout COVID-19 are still thought
to be a material dampening effect on the levels of insolvency and
default compared to long-term UK trends, with concerns on how
businesses will adapt once the economy fully reopens. The Group
considers that certain sectors within its Business portfolio
require additional ECL to more adequately reflect the strains
observed and expected in those sectors that are not fully captured
in the modelled output. This also includes a modest adjustment to
address technical model corrections .
Risk management
Credit risk
The use of judgement (continued)
The impact of PMAs on the Group's ECL allowance and coverage
ratios is as follows:
Mortgages Unsecured Business Total
31 March 2022 GBP42m GBP44m GBP93m GBP179m
% of total ECL 64% 20% 49% 37%
Coverage - total 0.11% 4.04% 2.58% 0.66%
Coverage - total ex
PMAs 0.04% 3.25% 1.33% 0.42%
30 September 2021 GBP54m GBP35m GBP118m GBP207m
% of total ECL 62% 18% 53% 41%
Coverage - total 0.15% 3.80% 3.06% 0.70%
Coverage - total ex
PMAs 0.06% 3.11% 1.44% 0.41%
PMAs are primarily directed towards Stages 1 and 2 and are
discussed in more detail in the divisional commentary pages.
The Group assesses and reviews the need for and quantification
of PMAs on a quarterly basis, with the CFO recommending the level
of PMAs on a divisional basis to the Board Audit Committee twice a
year at each external reporting period. The Group has strengthened
the governance around PMAs in the year with the Model Risk
Oversight and Group Credit Oversight teams reviewing the
methodology supporting material PMAs and presenting their findings
to the Board Audit Committee.
In the absence of significant events that might impact ECLs
going forward, the Group expects the current level of PMAs to
materially reduce over the next 18-24 months.
Risk management
Credit risk
Macroeconomic assumptions
Annual macroeconomic assumptions used over the five-year
forecast period in the scenarios and their weighted averages are as
follows:(1)
31 March 2022
2022 2023 2024 2025 2026
Scenario VMUK weighting Economic measure(2) % % % % %
Upside 10% Base rate 1.0 1.9 2.3 2.3 2.3
Unemployment 3.7 3.6 3.6 3.7 3.7
GDP 5.0 4.4 2.4 2.0 1.7
Inflation 6.5 3.0 1.2 1.6 2.2
HPI 9.7 1.7 2.5 2.4 2.9
Base 55% Base rate 0.9 1.3 1.4 1.6 1.7
Unemployment 4.0 3.9 3.8 3.7 3.7
GDP 3.8 2.6 1.9 1.8 1.7
Inflation 6.2 2.0 1.1 1.8 2.0
HPI 5.4 (0.9) 0.2 2.0 3.1
Downside 35% Base rate 0.6 0.3 0.3 0.3 0.3
Unemployment 5.6 6.5 6.6 6.5 6.3
GDP (0.3) (0.2) 1.2 1.6 1.9
Inflation 5.0 (0.1) 0.8 2.0 1.5
HPI (5.5) (14.7) (16.5) (2.2) 4.4
Weighted average Base rate 0.8 1.0 1.1 1.2 1.3
Unemployment 4.5 4.8 4.7 4.7 4.6
GDP 2.5 1.8 1.7 1.7 1.8
Inflation 5.8 1.3 1.0 1.9 1.9
HPI 2.0 (5.5) (5.4) 0.6 3.6
30 September 2021
2021 2022 2023 2024 2025
Scenario VMUK weighting Economic measure(2) % % % % %
Upside 15% Base rate 0.2 0.6 1.2 1.5 1.6
Unemployment 4.3 3.8 3.9 3.8 3.6
GDP 8.1 8.8 2.8 1.8 1.5
Inflation 2.4 3.7 2.5 1.6 1.8
HPI 8.2 0.8 5.2 5.2 3.6
Base 50% Base rate 0.1 0.1 0.1 0.3 0.5
Unemployment 4.8 4.6 4.3 4.0 3.9
GDP 7.3 6.7 2.1 1.5 1.5
Inflation 2.1 2.7 1.9 1.8 1.8
HPI 5.0 (1.6) 0.6 2.7 3.9
Downside 35% Base rate 0.0 (0.5) (0.5) (0.5) (0.3)
Unemployment 5.6 6.7 6.8 6.8 6.4
GDP 4.4 2.4 1.1 1.0 1.7
Inflation 1.5 0.7 0.8 2.2 1.7
HPI (2.9) (15.2) (12.1) (3.5) 4.9
Weighted average Base rate 0.1 0.0 0.1 0.2 0.4
Unemployment 5.0 5.2 5.1 4.9 4.7
GDP 6.4 5.5 1.9 1.4 1.6
Inflation 2.0 2.1 1.6 1.9 1.8
HPI 2.7 (6.0) (3.2) 0.9 4.2
(1) Economic assumptions are provided by Oxford Economics and
reported on a calendar year basis unless otherwise stated.
(2) The percentages shown for base rate, unemployment and
inflation are averages. GDP is the year-on-year movement, with HPI
the Q4 v Q4 movement.
Risk management
Financial risk
Section Page Tables Page
Financial risk summary 53
Capital risk 53
Regulatory capital developments 53
Capital resources 54 Regulatory capital 54
Regulatory capital flow of funds 55
Risk weighted assets 56 Risk weighted assets 56
RWA movements 56
IFRS 9 transitional arrangements 57 IFRS 9 transitional arrangements 57
Capital requirements 57 Capital requirements 57
Dividend 58
MREL 58 MREL 58
Leverage 59 Leverage ratio 59
Funding and liquidity risk 60
Sources of funding 60 Sources of funding 60
Liquid assets 61 Liquidity coverage ratio 61
Liquid asset portfolio 61
Analysis of debt securities in
issue by residual maturity 61
External credit ratings 62 External credit ratings 62
Net interest income 62 Net interest income 62
London Interbank Offered Rate
(LIBOR) replacement 63 Amounts yet to be transitioned 63
Risk management
Financial risk
Financial risk covers several categories of risk which impact
the way in which the Group can support its customers in a safe and
sound manner. They include capital risk, funding risk, liquidity
risk, market risk and pension risk.
Capital risk
Capital is held by the Group to cover inherent risks in a normal
and stressed operating environment, to protect unsecured creditors
and investors and to support the Group's long-term strategy of
pioneering growth. Capital risk is the risk that the Group has or
forecasts insufficient capital and other loss-absorbing debt
instruments to operate effectively, including meeting minimum
regulatory requirements, operating within Board approved risk
appetite and supporting its strategic goals.
Regulatory capital developments
The regulatory landscape for capital is subject to change, which
can lead to uncertainty on eventual outcomes. In order to mitigate
this risk, the Group actively monitors emerging regulatory change,
assesses the impact and puts plans in place to address.
Impact of COVID-19 on regulatory capital developments
Following the BoE's announcements in 2020 regarding supervisory
and prudential policy measures to address the challenges of
COVID-19, the requirements relating to compliance with updates to
definition of default, mortgage Hybrid PD and LGD were extended and
the Group no longer expects the adoption of hybrid mortgage models
in FY22.
The Group continues to apply relevant relief measures introduced
by regulatory and supervisory bodies to help address and alleviate
various COVID-19 driven financial impacts. These include amendments
to the CRR introduced by the 'Quick Fix' package in June 2020,
which introduced a number of beneficial modifications including
changes to IFRS 9 transitional arrangements for capital and the
accelerated implementation of revised small or medium-sized
enterprises (SME) supporting factors under CRR II.
UK Leverage Ratio Framework
In June 2021 the Financial Policy Committee (FPC) and PRA
published consultations (Consultation Paper 14/21) on their
proposed changes to the UK leverage ratio framework, with feedback
and final policy published in October (Policy Statement 21/21). The
changes, effective from 1 January 2022, simplify the framework with
the Group being subject to the UK leverage ratio only, rather than
the two leverage ratio definitions that currently exist. The Group
exceeds the 3.25% leverage ratio requirements.
IRB approach to UK mortgage risk weights
In July 2021, the PRA issued a policy statement in response to a
consultation process setting out proposals to introduce certain
floors in respect of the IRB approach to UK mortgage risk weights.
In response to the feedback the PRA received, including useful
quantitative data that enabled the PRA to better gauge the
distribution of risk weights across mortgage exposures, the PRA
made two changes to the draft policy: (1) it will not introduce the
proposed 7% minimum risk weight expectation on individual UK
mortgage exposures; and (2) mortgage exposures classified as in
default are excluded from the 10% minimum risk weight expectation
which took effect in January 2022.
Instead, the PRA will consider the calibration of the incoming
PD and LGD parameter floors for mortgages as part of the PRA's
Basel 3.1 implementation.
UK implementation of Basel Standards
In July 2021, the PRA published Policy Statement 17/21 which
provided feedback to Consultation Paper 5/21 with the same title:
'Implementation of Basel standards'; the subsequent publication of
Policy Statement 22/21 in October contained final rules. The policy
statements cover a range of areas including: definition of capital;
market risk; collective investment undertakings; counterparty
credit risk; operational risk; large exposures; LCR; net stable
funding ratio; reporting; and disclosure. These standards became
effective in the UK from 1 January 2022.
The Group has assessed itself as a 'Large' institution and in
accordance with the criteria set out within Article 433a of the
final PRA Rulebook Instrument introduced by PS22/21, will make
enhanced interim Pillar 3 disclosures for the first time and will
begin reporting quarterly Pillar 3 disclosures. The Pillar 3
disclosures at 31 March 2022 is expected to be published at the end
of May and will be available at
https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/
.
Policy Statement 22/21 confirms the PRA's treatment to fully
deduct software assets from CET1 capital, applicable from 1 January
2022. This is a reversal of the preferential treatment permitted
under the CRR Quick Fix which came into force from December 2020
whereby the CET1 deduction was replaced with a simple approach
based on a prudential amortisation of software assets calibrated
over a maximum period of three years. The PRA's view is that
intangible assets are not sufficiently loss absorbent on a going
concern basis to warrant recognition as CET1 capital. The Group has
applied the revised treatment required under Policy Statement 22/21
from 1 January 2022.
Risk management
Financial risk
Regulatory capital developments (continued)
Basel 3.1
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. There are a number of areas
within Basel 3.1 subject to national discretion and choice. Taking
into account the publicly announced implementation timetables in
other major jurisdictions, and the need to provide firms with
sufficient time to implement the final policies, the PRA's current
intention is to release a Consultation Paper on UK implementation
in the fourth quarter of 2022 with the proposal that these reforms
will become effective on 1 January 2025. Uncertainties therefore
remain for a number of topics and in response the Group has
undertaken an assessment across a range of scenarios for potential
outcomes to assist with planning.
Solvency Stress Test
The Group participated in the BoE UK-wide SST for the first time
during 2021. Results from the stress tests are used by the FPC to
assess the stress severity required to threaten resilience and test
the Group's ability to absorb losses and continue to lend. The BoE
concluded that "the major UK banks are resilient", including
VMUK.
Capital resources
The Group's capital position as at 31 March 2022 is summarised
below:
31 Mar 2022 30 Sep 2021
Regulatory capital(1) GBPm GBPm
Statutory total equity 5,568 5,473
CET1 capital: Regulatory adjustments(2)
Other equity instruments (697) (915)
Defined benefit pension fund assets (645) ( 551 )
Prudent valuation adjustment (4) ( 5 )
Intangible assets (329) ( 208 )
Goodwill (11) (11)
Deferred tax asset relying on future
profitability(3) (241) ( 258 )
Cash flow hedge reserve (60) (10)
AT1 coupon accrual (14) ( 19 )
Foreseeable dividend on ordinary shares (59) (14)
Excess expected losses (27) -
IFRS 9 transitional adjustments 84 134
Total regulatory adjustments to CET1 (2,003) (1, 857 )
Total CET1 capital 3,565 3, 616
AT1 capital
AT1 capital instruments 697 697
Total AT1 capital 697 697
Total Tier 1 capital 4,262 4, 313
Tier 2 capital
Subordinated debt 1,020 1,019
Total Tier 2 capital 1,020 1,019
Total regulatory capital 5,282 5,332
(1) This table shows the capital position on a CRD IV
'fully loaded'
basis and transitional IFRS 9 basis as
implemented by the PRA .
(2) A number of regulatory adjustments to CET1
capital are required under
CRD IV regulatory capital rules.
(3) Comparative includes deferred tax on losses in
relation to Virgin
Money Unit Trust Managers Limited (UTM) which is
proportionately
consolidated under prudential rules.
Risk management
Financial risk
Capital resources (continued)
31 Mar 2022
30CRD IV
2022 30 Sep 2021
Regulatory capital flow of funds(1) GBPm GBPm
CET1 capital (2)
CET1 capital at 1 October 3,616 3, 271
Share capital and share premium 3 2
Retained earnings and other reserves (including special
purpose entities) 274 449
Prudent valuation adjustment 1 1
Amendment to software asset deduction rules(3) (151) 151
Intangible assets 30 118
Deferred tax asset relying on future profitability 17 ( 107 )
Defined benefit pension fund assets (94) ( 81 )
AT1 foreseeable distribution 5 2
Foreseeable dividend on ordinary shares (59) (14)
Excess expected losses (27) -
IFRS 9 transitional adjustments (50) (176)
Total CET1 capital 3,565 3, 616
AT1 capital
AT1 capital at 1 October 697 915
Less other equity instruments not qualifying as AT1 - (218)
Total AT1 capital 697 697
Total Tier 1 capital 4,262 4, 313
Tier 2 capital
Tier 2 capital at 1 October 1,019 749
Capital instruments issued: subordinated debt - 298
Capital instruments purchased: subordinated debt - ( 30 )
Amortisation of issue costs 1 2
Tier 2 capital at 31 March 1,020 1,019
Total capital 5,282 5,332
(1) Data in the table is reported under CRD IV as implemented by the
PRA on a fully loaded basis with IFRS 9 transitional arrangements
applied .
(2) CET1 capital is comprised of shares issued and related share premium,
retained earnings and other reserves less specified regulatory adjustments.
(3) At September 2021 regulatory rules incorporated the amendments introduced
by the CRR Quick Fix in December 2020, which applied the CET1 software
asset deduction on a prudential amortisation basis over a period
of three years. This relief was removed by the PRA in January 2022.
The Group's CET1 capital reduced by GBP51m during the period,
primarily due to the removal of the software asset relief in
January 2022 which reduced capital resources by GBP151m. After this
one off movement, the main movements arose from increases in
retained earnings and other reserves of GBP274m (driven mainly by
statutory profit after tax of GBP238m), reductions in the
intangible assets balance of GBP30m and in the deferred tax
recognised on tax losses carried forward of GBP17m. Retained
earnings and other reserves movements also included an increase in
the defined benefit fund pension asset of GBP94m, which has been
deducted from capital resources. The reduction in IFRS 9 provisions
recognised in the period together with a tapering of relief reduced
the IFRS 9 transitional adjustments by GBP50m.
In November 2021, GBP218m of AT1 securities were redeemed in
full; as this had already been announced at the year end these were
already excluded from the AT1 capital so have had no impact on AT1
capital in the period.
Risk management
Financial risk
Risk weighted assets
31 March 2022 30 September 2021
Minimum Minimum
capital capital
Exposure RWA requirement Exposure RWA requirement
Minimum capital GBPm GBPm GBPm GBPm GBPm GBPm
requirements
Retail mortgages 61,605 10,023 802 61,146 10,010 801
Business lending 11,629 6,007 481 11,670 6,040 483
Other retail lending 16,934 4,602 368 16,201 4,311 345
Other lending 14,953 234 19 15,467 326 26
Other(1) 590 667 53 765 856 69
Total credit risk
RWA 105,711 21,533 1,723 105,249 21,543 1,724
Credit valuation
adjustment 61 5 103 8
Operational risk 2,481 198 2,481 198
Counterparty credit
risk 109 9 105 8
Total RWA 105,711 24,184 1,935 105,249 24,232 1,938
(1) 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.
RWA movements
6 months to 31 March 2022 6 months to 30 September 2021
IRB Other(2) Minimum IRB STD Other Minimum
RWA STD RWA RWA Total Capital RWA RWA RWA Total Capital
RWA movements GBPm GBPm GBPm GBPm Required GBPm GBPm GBPm GBPm GBPm required GBPm
Opening RWA 15,699 5,844 2,689 24,232 1,938 15,710 5,581 2,861 24,152 1,932
Asset size (61) 315 - 254 20 (455) 256 - (199) (16)
Asset quality (460) (2) - (462) (37) (133) 32 - (101) (8)
Model
updates(1) 470 - - 470 38 577 - - 577 46
Methodology
and policy - (173) (32) (205) (16) - - - - -
Other - (99) (6) (105) (8) - (25) (172) (197) (16)
Closing RWA 15,648 5,885 2,651 24,184 1,935 15,699 5,844 2,689 24,232 1,938
(1) Model updates include the mortgage quarterly PD
calibrations.
(2) 'Other' includes operational risk, credit valuation
adjustment and counterparty credit risk.
RWA stayed relatively stable in the period, reducing by GBP48m
(0.2%) to GBP24,184m.
Increases in mortgage RWAs is primarily due to quarterly PD
re-calibrations which have been largely offset by improvements in
the quality of the book following increases to HPI, due to the
continued uplift witnessed in market house prices.
In the table above, methodology and policy movement is largely
driven by the removal of the GBP151m RWA uplift in relation to the
CRR Quick Fix amendments in respect of intangible assets, which was
removed by the PRA in January 2022.
Other standardised RWA movements mainly arose from reductions in
cash balances held with other institutions in relation to issued
covered bonds, as a direct result of changes in the structure of
our covered bond programme.
The updates to IRB and other capital regulations implemented by
the PRA from 1 January 2022 have had little to no impact on the RWA
position of the group.
Risk management
Financial risk
IFRS 9 transitional arrangements
This table shows a comparison of capital resources, requirements
and ratios with and without the application of transitional
arrangements for IFRS 9:
31 March 2022 (GBPm)
----------------------------------
IFRS 9 Transitional IFRS 9 Fully
Available capital (amounts) basis loaded basis
CET1 capital 3,565 3,481
Tier 1 capital 4,262 4,178
Total capital 5,282 5,198
RWA (amounts)
Total RWA 24,184 24,111
Capital ratios
CET1 (as a percentage of risk exposure amount) 14.7% 14.4%
Tier 1 (as a percentage of risk exposure amount) 17.6% 17.3%
Total capital (as a percentage of risk exposure
amount) 21.8% 21.6%
Leverage ratio
Leverage ratio total exposure measure 83,509 83,425
UK leverage ratio 5.1% 5.0%
Transitional arrangements in CRR mean the regulatory capital
impact of ECL is being phased in over time. Following the CRR Quick
Fix amendments package, which applied from 27 June 2020, relevant
provisions raised from 1 January 2020 through to 2024 have a CET1
add-back percentage of 100% in 2021, reducing to 75% in 2022, 50%
in 2023 and 25% in 2024.
At 31 March 2022, GBP84m of IFRS 9 transitional adjustments ( 30
September 2021: GBP134m) have been applied to the Group's capital
position in accordance with CRR: GBP7m of static and GBP77m of
dynamic adjustments ( 30 September 2021: GBP10m static and GBP124m
dynamic).
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 31 March 2022
Minimum requirements CET1 Total capital
Pillar 1(1) 4.5% 8.0%
Pillar 2A 1.7% 3.1%
Total capital requirement 6.2% 11.1%
Capital conservation buffer 2.5% 2.5%
UK countercyclical capital buffer 0.0% 0.0%
Total (excluding PRA buffer) (2) 8.7% 13.6%
(1) The minimum amount of total capital under Pillar 1 of the
regulatory
framework is determined as 8% of RWA, of which at least 4.5%
of RWA
is required to be covered by CET1 capital.
(2) The 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's stress
tests.
The Group continues to maintain a significant buffer of 6.0%
(equivalent to cGBP1.5bn) over its CRD IV minimum CET1 requirement
of 8.7%.
The Group's total capital Pillar 2A requirement has reduced from
3.9% at September 2021 to 3.1% at March 2022 following revisions
made by the PRA during the year.
Risk management
Financial risk
Capital requirements (continued)
The UK countercyclical capital buffer (CCyB) is dependent upon
the BoE's view of credit conditions in the economy and will be set
between 1% and 2% in a standard risk environment. As part of a
package of measures to support the economy from the impact of
COVID-19, the FPC announced a reduction in the UK CCyB to 0%.
Subsequently in December 2021, the FPC announced the UK CCyB would
increase to 1%. The increase to the CCyB has a twelve month
implementation period, therefore will take effect at the end of
2022.
Distributable reserves are determined as required by the
Companies Act 2006 by reference to a company's individual financial
statements . At 31 March 2022, the Company had accumulated
distributable reserves of GBP1,024 m (30 September 2021:
GBP792m).
Dividend
The Board has recommended an interim dividend for the financial
year ending 30 September 2022 of 2.5p per share. The Group will
target a 30% full year dividend payout ratio and going forward the
interim dividend is expected to represent around 1/3rd of the prior
year's total dividend, beginning H1 2023. Dividends will be
supplemented by buybacks, subject to ongoing assessment of surplus
capital, market conditions and regulatory approval.
MREL
Under the Bank Recovery and Resolution Directive the Group is
required to hold additional loss-absorbing instruments to support
an effective resolution. The MREL establishes a minimum amount of
equity and eligible debt to recapitalise the Group. An analysis of
the Group's current MREL position is provided below:
As at
31 Mar 30 Sep
2022 2021
GBPm GBPm
Total capital resources(1) 5,282 5,332
Eligible senior unsecured securities issued by
Virgin
Money UK PLC(2) 2,395 2,408
Total MREL resources 7,677 7,740
Risk-weighted assets 24,184 24,232
MREL Ratio 31.7% 31.9%
(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.
During 2022, the Group is subject to an end-state MREL
requirement of 22.2% of RWA, or 24.7% of RWA when including its
combined buffer requirements.
The Group's IFRS 9 transitional MREL ratio is 31.7% as at 31
March 2022 ( 30 September 2021: 31.9%). This represents prudent
headroom of 7.0% or c.GBP1.7bn over the Group's MREL requirement
including buffers.
Risk management
Financial risk
Leverage
31 Mar 2022 30 Sep 2021
Leverage ratio GBPm GBPm
Total Tier 1 capital for the leverage ratio
Total CET1 capital 3,565 3,616
AT1 capital 697 697
Total Tier 1 4,262 4,313
Exposures for the leverage ratio
Total assets 88,609 89,100
Adjustment for off-balance sheet items 3,000 2,884
Adjustment for derivative financial instruments 227 91
Adjustment for securities financing transactions 2,893 2,235
Adjustment for qualifying central bank claims (9,180) (9,094)
Other adjustments (2,040) (1,801)
UK leverage ratio exposure (1) 83,509 83,415
CRD IV leverage ratio exposure (2) N/A 84,306
CRD IV leverage ratio (2) N/A 5.1%
UK leverage ratio (3) 5.1% 5.2%
Average UK leverage ratio exposure (4) 82,695 83,213
Average UK leverage ratio (4) 4.9% 4.7%
(1) As the UK leverage ratio is now the single
leverage ratio exposure
measure, the analysis of the CRD IV leverage
ratio exposure has been
replaced with the UK equivalent for this period
and the comparative.
(2) From 1 January 2022, the CRD IV leverage ratio is
no longer applicable
to UK banks.
(3) IFRS 9 transitional capital arrangements have been
applied to the
leverage ratio calculation.
(4) 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.
The UK leverage ratio framework is relevant to PRA regulated
banks and building societies with consolidated retail deposits
equal to or greater than GBP50bn. The Group exceeds this threshold
and accordingly the average UK leverage ratio exposure and average
UK leverage ratio are disclosed.
The PRA published its Policy Statement on the UK leverage ratio
framework on 8 October 2021. The Policy Statement confirms that UK
banks will be subject to a single UK leverage ratio exposure
measure from 1 January 2022 meaning that the CRD IV leverage ratio
is no longer applicable to UK banks.
The leverage ratio is monitored against a Board-approved RAS,
with the 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.
The Group's UK leverage ratio of 5.1% ( 30 September 2021: 5.2%)
exceeds the UK minimum ratio of 3.25%.
The Group's leverage ratio buffer currently stands at 0%.
Following the FPC's announced increase to the CCyB, the leverage
ratio buffer will increase to 0.4% from December 2022.
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 ensures future balance sheet
growth is sustainable.
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.
Sources of funding
The table below provides an overview of the Group's sources of
funding as at 31 March 2022:
31 Mar 2022 30 Sep 2021
GBPm GBPm
Total assets 88,609 89,100
Less: Other liabilities(1) (3,086) (3,060)
Funding requirement 85,523 86,040
Funded by:
Customer deposits 64,458 66,971
Debt securities in issue 7,908 7,678
Due to other banks 7,589 5,918
of which:
Secured loans 7,209 5,896
Securities sold under agreements to repurchase 350 -
Deposits with other banks 30 22
Equity 5,568 5,473
Total funding 85,523 86,040
(1) Other liabilities include derivative financial instruments, current
and deferred tax liabilities, provisions for liabilities and charges,
and other liabilities as per the balance sheet line item.
The Group's funding objective is to prudently manage the sources
and tenor of funds in order to provide a sound base from which to
support sustainable lending growth. At 31 March 2022, the Group had
a funding requirement of GBP85,523m (30 September 2021: GBP86,040m)
with the majority being used to support loans and advances to
customers.
Customer deposits
The majority of the Group's funding requirement was met by
customer deposits of GBP64,458m (30 September 2021: GBP66,971m).
Customer deposits are comprised of interest bearing deposits, term
deposits and non-interest bearing demand deposits from a range of
sources including Unsecured and Business customers. There has been
a decrease in customer deposits of GBP2,513m in the year reflecting
careful management, as the Group continued to successfully improve
its deposit mix.
Equity
Equity of GBP5,568m (30 September 2021: GBP5,473m) 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.
Risk management
Financial risk
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.
31 Mar 30 Sep
2022 2021
Liquidity coverage ratio GBPm GBPm
Eligible liquidity buffer 10,932 10,996
Net stress outflows 7,863 7,289
Surplus 3,069 3,707
Liquidity coverage ratio 139% 151%
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
defined through a series of internal stress tests across a range of
time horizons and stress conditions. The liquid asset portfolio is
primarily comprised of cash at the BoE, UK Government securities
(Gilts) and listed securities (e.g. bonds issued by supra-nationals
and AAA-rated covered bonds).
Average
Average at
30 Sep at 31 Mar 30 Sep
31 Mar 2022 2021 Change 2022 (3) 2021(3)
Liquid asset portfolio
(1) GBPm GBPm % GBPm GBPm
Level 1
Cash and balances with
central banks 6,978 7,060 (1.2) 7,323 7,232
UK Government treasury
bills and gilts 1,187 771 54.0 892 779
Other debt securities 2,840 3,239 (12.3) 3,172 3,296
Total level 1 11,005 11,070 (0.6) 11,387 11,307
Level 2 (2) 23 23 0.0 23 24
Total LCR eligible assets 11,028 11,093 (0.6) 11,410 11,331
(1) Excludes encumbered assets.
(2) Includes Level 2A and Level 2B.
(3) Represents the rolling average balance over the previous 12 months.
Analysis of debt securities in issue by residual maturity
The table below shows the residual maturity of the Group's debt
securities in issue:
3 months 3 to 12 1 to 5 Over 5 Total at Total at
or less months years years 31 Mar 2022 30 Sep 2021
GBPm GBPm GBPm GBPm GBPm GBPm
Covered bonds 27 - 2,368 - 2,395 1 ,852
Securitisation 287 1,454 440 - 2,181 2,389
Medium-term notes 19 1 2,329 - 2,349 2,422
Subordinated debt 13 1 969 - 983 1,015
Total debt securities in
issue 346 1,456 6,106 - 7,908 7,678
Of which issued by Virgin
Money UK PLC 32 2 3,298 - 3,332 3,437
Risk management
Financial risk
External credit ratings
The Group's long-term credit ratings are summarised below:
Outlook as at As at
31 Mar 2022 (1) 31 Mar 2022 30 Sep 2021
Virgin Money UK PLC
Moody's Stable Baa2 Baa2
Fitch Stable BBB+ BBB+
Standard & Poor's Stable BBB- BBB-
Clydesdale Bank PLC
Moody's(2) Stable Baa1 Baa1
Fitch Stable A- A-
Standard & Poor's Stable A- A-
(1) For detailed background on the latest opinion by Standard & Poor's,
Fitch and Moody's, please refer to the respective rating agency website.
(2) Long-term deposit rating.
In December 2021, Moody's affirmed the long-term ratings of
Virgin Money UK PLC and Clydesdale Bank PLC with an unchanged
Stable outlook, citing the Group's low stock of problem loans, good
risk-weighted capital and sound funding and liquidity.
In January 2022, Standard & Poor's affirmed the ratings of
Virgin Money UK PLC and Clydesdale Bank PLC with an unchanged
Stable outlook, citing the Group's solid market position, improving
performance and sound capitalisation.
As at 4 May 2022, there have been no other changes to the
Group's long-term credit ratings or outlooks since the report
date.
Net interest income
Earnings sensitivity measures calculate the change in NII over a
12-month period resulting from an instantaneous and parallel change
in interest rates. The +/- 25 bps shock represents the primary NII
sensitivity assessed internally, though a range of scenarios are
assessed on a monthly basis.
31 Mar 30 Sep
2022 2021
12 months NII sensitivity GBPm GBPm
+25 bps parallel shift 12 30
-25 bps parallel shift (5) (23)
The reduction in NII sensitivity since year end is primarily the
result of an increase in the size of the structural hedge from
GBP26bn to GBP32bn lowering the exposure to quantum and timing of
Bank Base Rate (BBR) changes. The sensitivity has further reduced
due to the impact of the increases in BBR on the mix, cost and pass
through of the deposit book.
Sensitivities disclosed reflect the expected mechanical response
to a movement in rates and represent a prudent outcome. The
sensitivities are indicative only and should not be viewed as a
forecast. The key assumptions and limitations are outlined
below:
- the sensitivities are calculated based on a static balance
sheet and it is assumed there is no change to margins on
reinvestment of maturing fixed rate products;
- there are no changes to basis spreads with the rate change
passed on in full to all interest rate bases;
- administered rate products receive a full rate pass on in the
rate fall scenario, subject to internal product floor assumptions.
In the rate rise scenario administered products receive a rate pass
on in line with internal scenario specific pass on assumptions;
- additional commercial pricing responses and management actions are not included; and
- while in practice hedging strategy would be reviewed in light
of changing market conditions, the sensitivities assume no changes
over the 12-month period.
Risk management
Financial risk
LIBOR replacement
The Group's LIBOR cessation programme successfully met the 2021
GBP regulatory and industry milestones. Group Treasury proactively
transitioned all external transactions across issuance, hedging and
liquid assets and over 90% of Business Lending customer
transactions also switched from LIBOR to alternative reference
rates (ARRs), with numbers continuing to reduce.
As at 31 March 2022, all market-facing derivative flows are
executed against the Sterling Overnight Index Average (SONIA). The
focus for 2022 is ongoing management of the small business lending
tough legacy and USD cohort. Processes have been implemented to
ensure continued effort to move customers off synthetic LIBOR to
ARRs throughout 2022.
Financial instruments that have yet to transition to alternative
benchmark rates are summarised below:
Amounts yet to be transitioned
Non derivative Non derivative
financial assets financial liabilities
- - Derivatives -
carrying value carrying value nominal amount
(2) (5) (3)
31 March 2022 GBPm GBPm GBPm
GBP LIBOR 251 - 130
Other(4) 149 - -
Cross currency swaps
GBP LIBOR to USD LIBOR 46
Total 400 - 176
Non derivative Non derivative
financial assets financial liabilities
- - Derivatives -
carrying value(1)(2) carrying value(5) nominal amount(1)(3)
30 September 2021 GBPm GBPm GBPm
GBP LIBOR 2,037 - 4,754
Other(4) 157 - -
Cross currency swaps
GBP LIBOR to USD LIBOR 95
Total 2,194 - 4,849
(1) Excludes exposures that are expected to expire or mature before the
Interbank Offered Rate (IBOR) ceases.
(2) Gross carrying amount excluding allowances for ECLs.
(3) The IBOR exposures for derivative nominal amounts include undrawn
loan commitments shown as GBP LIBOR. This is materially the case although
some facilities allow drawdowns in a number of different currencies.
(4) Comprises financial instruments referencing other IBOR rates yet to
transition to alternative benchmark rates (Euro, USD, AUD, CHF).
(5) In addition to the financial liabilities included in the table, at
30 September 2021 GBP742m issued Covered Bonds were fixed rate with
an option to convert to GBP LIBOR if not redeemed on the scheduled
maturity date. The option to convert was transitioned to SONIA on
22 October 2021. Also at 30 September 2021, Gosforth 2018-1 notes
in issue of GBP788m were still based on LIBOR, but following a successful
consent solicitation earlier in the year, the notes converted to SONIA
effective from 25 February 2022.
The Group maintains engagement with the BoE's Working Group on
Sterling Risk Free Reference Rates and other industry forums. The
programme ensures that the risks of being unable to offer products
with suitable reference rates will be mitigated and that full
consideration is given to the other risks, including legal,
conduct, financial and operational risks, that may arise. While no
material changes to the Group's risk management strategy are
expected, the programme will continuously monitor progress and
amend the approach accordingly.
Statement of Directors' responsibilities
The Directors confirm that to the best of their knowledge these
interim condensed consolidated financial statements have been
prepared in accordance with UK adopted International Accounting
Standard 34 'Interim Financial Reporting' (IAS 34) and that the
interim management report includes a fair review of the information
required by Disclosure Guidance and Transparency Rules (DTR) 4.2.7R
and DTR 4.2.8R, namely:
a) an indication of important events that have occurred during the six
months ended 31 March 2022 and their impact on the condensed consolidated
interim financial statements and a description of the principal risks
and uncertainties for the remaining six months of the financial year;
and
b) material related party transactions in the six months ended 31 March
2022 and any material changes in the related party transactions described
in the last Annual Report of Virgin Money UK PLC.
Signed by order of the Board
David Duffy
Chief Executive Officer
4 May 2022
Independent review report to Virgin Money UK PLC
Conclusion
We have been engaged by Virgin Money UK PLC to review the
condensed set of financial statements in the interim financial
report for the six months ended 31 March 2022 which comprises the
interim condensed consolidated income statement, interim condensed
consolidated statement of comprehensive income, interim condensed
consolidated balance sheet, interim condensed consolidated
statement of changes in equity, interim condensed consolidated
statement of cash flows and the related explanatory notes 1.1 to
5.3. We have read the other information contained in the interim
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the interim financial report for the six months ended 31 March
2022 is not prepared, in all material respects, in accordance with
UK adopted International Accounting Standard 34 and the Disclosure
Guidance and Transparency Rules of the United Kingdom's Financial
Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International
Standard on Review Engagements 2410 (UK and Ireland) "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board. A review of
interim financial information consists of making enquiries,
primarily of persons responsible for financial and accounting
matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
As disclosed in note 1, the annual financial statements of the
Group will be prepared in accordance with UK adopted international
accounting standards. The condensed set of financial statements
included in this interim financial report has been prepared in
accordance with UK adopted International Accounting Standard 34,
"Interim Financial Reporting".
Responsibilities of the Directors
The Directors are responsible for preparing the interim
financial report in accordance with the Disclosure Guidance and
Transparency Rules of the United Kingdom's Financial Conduct
Authority.
Auditor's Responsibilities for the review of the financial
information
In reviewing the interim report, we are responsible for
expressing to Virgin Money UK PLC a conclusion on the condensed set
of financial statements in the interim financial report. Our
conclusion is based on procedures that are less extensive than
audit procedures, as described in the Basis for Conclusion
paragraph of this report.
Use of our report
This report is made solely to the Company in accordance with
guidance contained in International Standard on Review Engagements
2410 (UK and Ireland) "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the
Auditing Practices Board. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
Company, for our work, for this report, or for the conclusions we
have formed.
Ernst & Young LLP
London
4 May 2022
Financial statements
Interim condensed consolidated income statement
6 months 6 months 12 months
to to to
31 Mar 2022 31 Mar 2021 30 Sep 2021
(unaudited) (unaudited) (audited)
Note GBPm GBPm GBPm
Interest income 1,013 953 1,906
Other similar interest 1 2 4
Interest expense and similar charges (237) (309) (553)
Net interest income 2.2 777 646 1,357
Gains less losses on financial instruments
at fair value (5) (15) (5)
Other operating income 72 64 137
Non-interest income 2.3 67 49 132
Total operating income 844 695 1,489
Operating and administrative expenses
before impairment losses 2.4 (508) (585) (1,203)
Operating profit before impairment losses 336 110 286
Impairment losses/(credit) on credit exposures (21) (38) 131
Profit on ordinary activities before tax 315 72 417
Tax (expense)/credit 2.5 (77) 8 57
Profit for the period 238 80 474
Attributable to:
Ordinary shareholders 198 40 395
Other equity holders 40 40 79
Profit for the period 238 80 474
Basic earnings per share (pence) 2.6 13.7 2.8 27.3
Diluted earnings per share (pence) 2.6 13.7 2.8 27.3
All material items dealt with in arriving at the profit before
tax for the periods relate to continuing activities.
The notes on pages 71 to 90 form an integral part of these
interim condensed consolidated financial statements.
Financial statements
Interim condensed consolidated statement of comprehensive
income
6 months 6 months 12 months
to to to
31 Mar 2022 31 Mar 2021 30 Sep 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Profit for the period 238 80 474
Items that may be reclassified to the income statement
Change in cash flow hedge reserve
Gains during the period 73 111 99
Transfers to the income statement (5) 22 24
Taxation thereon - deferred tax charge (17) (34) (33)
Taxation thereon - current tax charge (1) (1) -
50 98 90
Change in FVOCI reserve
Gains during the period 9 27 33
Taxation thereon - deferred tax charge (1) (7) (11)
8 20 22
Total items that may be reclassified to the
income statement 58 118 112
Items that will not be reclassified to the income statement
Change in defined benefit pension plan 126 (16) 54
Taxation thereon - deferred tax charge (49) (1) (46)
Taxation thereon - current tax credit 4 5 21
Total items that will not be reclassified
to the income statement 81 (12) 29
Other comprehensive income, net of tax 139 106 141
Total comprehensive income for the period,
net of tax 377 186 615
Attributable to:
Ordinary shareholders 337 146 536
Other equity holders 40 40 79
Total comprehensive income attributable to
equity holders 377 186 615
The notes on pages 71 to 90 form an integral part of these
interim condensed consolidated financial statements.
Financial statements
Interim condensed consolidated balance sheet
31 Mar 2022 30 Sep 2021
(unaudited) (audited)
Note GBPm GBPm
Assets
Financial assets at amortised cost
Loans and advances to customers 3.1 71,413 71,876
Cash and balances with central banks 9,527 9,711
Due from other banks 858 800
Financial assets at FVTPL
Loans and advances to customers 3.2 115 133
Derivative financial instruments 3.3 189 140
Other financial assets 3.2 5 20
Financial assets at FVOCI 4,423 4,352
Property, plant and equipment 227 250
Intangible assets and goodwill 343 373
Current tax assets - 13
Deferred tax assets 3.4 330 377
Defined benefit pension assets 3.8 992 847
Other assets 187 208
Total assets 88,609 89,100
Liabilities
Financial liabilities at amortised cost
Customer deposits 64,458 66,971
Debt securities in issue 3.5 7,908 7,678
Due to other banks 3.6 7,589 5,918
Financial liabilities at FVTPL
Derivative financial instruments 3.3 262 209
Current tax liabilities 16 -
Deferred tax liabilities 3.4 347 296
Provisions for liabilities and charges 3.7 82 104
Other liabilities 2,379 2,451
Total liabilities 83,041 83,627
Equity
Share capital and share premium 4.1 152 149
Other equity instruments 4.1 697 915
Capital reorganisation reserve 4.1 (839) (839)
Merger reserve 4.1 2,128 2,128
Other reserves 119 71
Retained earnings 3,311 3,049
Total equity 5,568 5,473
Total liabilities and equity 88,609 89,100
The notes on pages 71 to 90 form an integral part of these
interim condensed consolidated financial statements.
These interim condensed consolidated financial statements were
approved by the Board of Directors on 4 May 2022 and were signed on
its behalf by:
David Duffy Clifford Abrahams
Chief Executive Officer Chief Financial Officer
Company name: Virgin Money UK PLC, Company number: 09595911
Financial statements
Interim condensed consolidated statement of changes in
equity
Other reserves
Share
capital Equity Cash
and Capital Other Deferred based flow
share reorg' Merger equity shares comp' FVOCI hedge Retained Total
premium reserve reserve instruments reserve reserve reserve reserve earnings equity
Note 4.1.1 4.1.3 4.1.4 4.1.2 4.1.5
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
As at 1 October
2020(1) 147 (839) 2,128 915 16 10 11 (80) 2,624 4,932
Profit for the
period - - - - - - - - 80 80
Other
comprehensive
income/(losses)
net of tax - - - - - - 20 98 (12) 106
Total
comprehensive
income
for the period - - - - - - 20 98 68 186
AT1 distributions
paid - - - - - - - - (40) (40)
Ordinary shares
issued 2 - - - - - - - - 2
Transfer from
equity
based
compensation
reserve - - - - - (1) - - 1 -
Equity based
compensation
expensed - - - - - 2 - - - 2
Settlement of
Virgin
Money Holdings
(UK) PLC
share awards - - - - (2) - - - - (2)
As at 31 March
2021(1) 149 (839) 2,128 915 14 11 31 18 2,653 5,080
Profit for the
period - - - - - - - - 394 394
Other
comprehensive
income/(losses)
net of tax - - - - - - 2 (8) 41 35
Total
comprehensive
income/(losses)
for the period - - - - - - 2 (8) 435 429
AT1 distributions
paid - - - - - - - - (39) (39)
Equity based
compensation
expensed - - - - - 3 - - - 3
As at 30 September
2021(1) 149 (839) 2,128 915 14 14 33 10 3,049 5,473
Profit for the
period - - - - - - - - 238 238
Other
comprehensive
income
net of tax - - - - - - 8 50 81 139
Total
comprehensive
income
for the period - - - - - - 8 50 319 377
AT1 distributions
paid - - - - - - - - (40) (40)
Dividends paid to
ordinary
shareholders - - - - - - - - (14) (14)
Ordinary shares
issued 3 - - - - - - - - 3
Transfer from
equity
based
compensation
reserve - - - - - (9) - - 9 -
Equity based
compensation
expensed - - - - - 3 - - - 3
Settlement of
Virgin
Money Holdings
(UK) PLC
share awards - - - - (4) - - - - (4)
AT1 redemption - - - (218) - - - - (12) (230)
As at 31 March
2022(1) 152 (839) 2,128 697 10 8 41 60 3,311 5,568
(1) The balances as at 1 October 2020 and 30 September 2021 have been
audited; the movements in the individual six month periods to 31
March 2021 and 31 March 2022 are unaudited.
The notes on pages 71 to 90 form an integral part of these
interim condensed consolidated financial statements.
Financial statements
Interim condensed consolidated statement of cash flows
6 months 6 months 12 months
to to to
31 Mar 31 Mar 2021 30 Sep 2021
2022
(unaudited) (unaudited) (audited)
Note GBPm GBPm GBPm
Operating activities
Profit on ordinary activities before tax 315 72 417
Adjustments for:
Non-cash or non-operating items included
in profit before tax (673) (498) (1,225)
Changes in operating assets 469 522 832
Changes in operating liabilities (2,146) 686 (1,026)
Payments for short-term and low value leases - (1) (1)
Interest received 988 1,033 2,088
Interest paid (163) (273) (461)
Tax (paid)/received (15) 9 (27)
Net cash (used in)/provided by operating activities (1,225) 1,550 597
Cash flows from investing activities
Interest received 26 23 19
Proceeds from maturity of financial assets
at FVOCI 436 770 1,079
Proceeds from sale of financial assets at
FVOCI 60 - -
Purchase of financial assets at FVOCI (712) (369) (521)
Purchase of shares issued by UTM (4) (7) (12)
Proceeds from sale of property, plant and
equipment - 3 6
Purchase of property, plant and equipment (6) (10) (26)
Purchase and development of intangible assets (33) (22) (80)
Net cash (used in)/provided by investing
activities (233) 388 465
Cash flows from financing activities
Interest paid (72) (58) (161)
Repayment of principal portions of lease
liabilities 5.3 (13) (14) (28)
Redemption of AT1 securities (230) - -
Redemption and principal repayment on RMBS
and covered bonds 5.3 (216) (943) (1,543)
Redemption and principal repayment on medium-term
notes/subordinated debt 5.3 - (30) (30)
Issuance of RMBS and covered bonds 5.3 600 - -
Issuance of medium-term notes/subordinated
debt 5.3 - - 732
Amounts drawn under the TFSME 5.3 2,550 1,750 3,350
Amounts repaid under the TFS 5.3 (1,244) (1,500) (2,864)
Purchase of own shares (1) - -
AT1 distributions 4.1 (40) (40) (79)
Ordinary dividends paid 4.1 (14) - -
Net cash provided by/(used in) financing activities 1,320 (835) (623)
Net (decrease)/increase in cash and cash
equivalents (138) 1,103 439
Cash and cash equivalents at the beginning
of the period 10,253 9,814 9,814
Cash and cash equivalents at the end of the
period 10,115 10,917 10,253
The notes on pages 71 to 90 form an integral part of these
interim condensed consolidated financial statements.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 1: Basis of preparation and accounting policies
Overview
On 1 October 2021, the Group transitioned to preparing
consolidated financial statements under UK adopted International
Accounting Standards (IAS) which is a change in accounting
framework. This had no impact on the recognition, measurement or
disclosure of financial information presented in the period.
These interim condensed consolidated financial statements for
the six months ended 31 March 2022 have been prepared in accordance
with UK adopted IAS 34 'Interim Financial Reporting'. They have
also been prepared in accordance with the Disclosure Guidance and
Transparency Rules of the UK's Financial Conduct Authority. They do
not include all the information required by IASs in full annual
financial statements and should therefore be read in conjunction
with the Group's 2021 Annual Report and Accounts which was prepared
in accordance with International Financial Reporting Standards
(IFRSs) in conformity with the Companies Act 2006 and IFRS adopted
pursuant to regulation (EC) No 1606/2002 as it applies in the EU
and also including the early adoption of 'Amendments to IFRS 9, IAS
39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform -
Phase 2', which had been endorsed by the EU and UK in January 2021
and included in UK adopted International Accounting Standards.
Copies of the 2021 Annual Report and Accounts are available from
the Group's website at
https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/annual-reports/.
The information in these interim condensed consolidated
financial statements is unaudited and does not constitute annual
accounts within the meaning of Section 434 of the Companies Act
2006 ('the Act'). Statutory accounts for the year ended 30
September 2021 have been delivered to the Registrar of Companies
and contained an unqualified audit report under Section 495 of the
Act, which did not draw attention to any matters by way of emphasis
and did not contain any statements under Section 498 of the
Act.
1.1 Going concern
The Group's business activities, together with the factors
likely to affect its future development, performance, and position,
are set out in the business and financial review section of these
interim condensed consolidated financial statements. This should be
read in conjunction with the strategic report which can be found in
the Group's 2021 Annual Report and Accounts. The Group's
objectives, policies and processes for managing capital can be
found in the risk management section of this report.
The Directors have a reasonable expectation that the Group has
adequate resources to continue in operational existence for the
foreseeable future and that the Group is well placed to manage its
business risks successfully. Accordingly, they continue to adopt
the going concern basis in preparing these interim condensed
consolidated financial statements. In reaching this assessment, the
Directors have considered a wide range of information relating to
present and future conditions, including potential impacts from top
and emerging risks and the related impact on profitability, capital
and liquidity.
1.2 Accounting policies
The accounting policies adopted in the preparation of these
interim condensed consolidated financial statements are consistent
with those policies followed in the preparation of the Group's 2021
Annual Report and Accounts. Comparatives are presented on a basis
that conforms to the current presentation unless stated
otherwise.
1.3 Critical accounting estimates and judgements
The preparation of financial statements requires the use of
certain critical accounting estimates and judgements that affect
the reported amounts of assets, liabilities, revenues and expenses
and the disclosed amounts of contingent liabilities. Assumptions
made at each balance sheet date are based on best estimates at that
date. Although the Group has internal control systems in place to
ensure that best estimates can be reliably measured, actual amounts
may differ from those estimated. There has been no change to the
areas where the Group applies critical accounting estimates and
judgements compared to those shown in the Group's 2021 Annual
Report and Accounts.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 1: Basis of preparation and accounting policies
(continued)
1.3 Critical accounting estimates and judgements (continued)
An update on ECLs and the allowance for impairment losses on
credit exposures is provided within the credit risk section of the
Risk report, and an update on the effective interest rate (EIR) is
provided below:
EIR
EIR is determined at initial recognition based upon management's
best estimate of the future cash flows of the financial instrument.
In the event these estimates are revised at a later date, a present
value adjustment to the carrying value of the EIR asset may be
recognised in profit or loss. Such adjustments can introduce income
statement volatility and consequently the EIR method introduces a
source of estimation uncertainty. Management considers that
material risk of adjustment 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 period) and the early
repayment charge income receivable. If customer repayments,
redemptions or product transfers were to take place one month
earlier, the loans and advances to customers balance would reduce
by GBP10m with the adjustment recognised in net interest
income.
Credit cards
The Group measures credit card EIR by modelling expected cash
flows based on assumptions of future customer behaviour, which is
supported by observed experience. Key behavioural assumptions
include an estimation of utilisation of available credit,
transaction and repayment activity and the retention of the
customer balance after the end of a promotional period.
The Group has applied an average attrition rate of 1.5% per
month following the end of the promotional period. If, however, the
actual level of customer balance attrition was to increase by 0.5%
per month, the Group estimates it would result in a negative
present value adjustment of approximately GBP11m, which would be
recognised in the income statement.
The Group holds an appropriate level of model risk reserve
across both asset classes to mitigate the risk of estimation
uncertainty.
1.4 Accounting developments
In May 2020 the International Accounting Standards Board (IASB)
issued an 'amendment to IFRS 16 and COVID-19 related rent
concessions beyond June 2021', which was endorsed for use in the UK
and was effective for financial periods beginning on or after 1
June 2020. This amendment introduced the optional practical
expedient for lessees from assessing whether a rent concession
related to COVID-19 is a lease modification. The IASB subsequently
extended this in March 2021, effective for financial periods
beginning on or after 1 April 2021. These pronouncements have had
no material impact on the interim condensed consolidated financial
statements as the Group does not receive rent concessions.
During the period, there have been no further pronouncements
issued by the IASB that are considered relevant and material to the
Group.
1.5 Presentation of risk disclosures
Certain disclosures outlined in IFRS 7 'Financial Instruments:
Disclosure' concerning the nature and extent of risks relating to
financial instruments have been included within the risk management
section of this report.
Financial statements
Notes to the interim condensed consolidated finan cial
statements
Section 2: Results for the period
2.1 Segment information
The Group's operating segments are operating units engaged in
providing different products or services and whose operating
results and overall performance are regularly reviewed by the
Group's Chief Operating Decision Maker, the Executive Leadership
Team.
The Group continues to operate under three commercial lines:
Mortgages, Unsecured and Business, which are reported through the
Chief Commercial Officer. At this point in time, 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.
6 months 6 months 12 months
to to to
31 Mar 2022 31 Mar 2021 30 Sep 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Net interest income 777 646 1,357
Non-interest income 67 49 132
Total operating income 844 695 1,489
Operating and administrative expenses (508) (585) (1,203)
Impairment (losses)/credit on credit exposures (21) (38) 131
Segment profit before tax 315 72 417
Average interest earning assets 85,729 87,134 86,947
2.2 Net interest income
6 months 6 months 12 months
to to to
31 Mar 2022 31 Mar 2021 30 Sep 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Interest income
Loans and advances to customers 988 940 1,880
Loans and advances to other banks 12 4 8
Financial assets at FVOCI 13 9 18
Total interest income 1,013 953 1,906
Other similar interest
Financial assets at FVTPL 3 5 9
Derivatives economically hedging interest
bearing assets (2) (3) (5)
Total other similar interest 1 2 4
Less: interest expense and similar charges
Customer deposits (134) (208) (361)
Debt securities in issue (90) (83) (168)
Due to other banks (12) (16) (20)
Other interest expense (1) (2) (4)
Total interest expense and similar charges (237) (309) (553)
Net interest income 777 646 1,357
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 2: Results for the period (continued)
2.3 Non-interest income
6 months 6 months 12 months
to to to
31 Mar 2022 31 Mar 2021 30 Sep 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Gains less losses on financial instruments at fair
value
Held for trading derivatives (7) 3 6
Financial assets at fair
value(1) (7) (8) 4
Ineffectiveness arising from
fair value
hedges 18 (6) (10)
Amounts recycled to profit and
loss from
cash flow hedges(2) (2) (3) (5)
Ineffectiveness arising from
cash flow
hedges (7) (1) -
(5) (15) (5)
Other operating income
Net fee and commission income 67 59 124
Margin on foreign exchange
derivative brokerage 9 8 16
Share of joint venture (JV)
loss after
tax (5) (4) (5)
Other income 1 1 2
72 64 137
Total non-interest income 67 49 132
(1) Included within financial assets at fair value is a credit
risk gain
on loans and advances at fair value of GBP 1m (31 March 2021:
GBPNil,
30 September 2021: GBP1m gain) and a fair value gain on
equity investments
of GBPNil (31 March 2021: GBPNil, 30 September 2021: GBP15m
gain).
(2) In respect of terminated hedges.
The Group's unrecognised share of losses of JVs for the period
was GBP1m (31 March 2021: GBPNil, 30 September 2021: GBP1m). For
entities making losses, subsequent profits earned are not
recognised until previously unrecognised losses are extinguished.
The Group's unrecognised share of losses net of unrecognised
profits on a cumulative basis of JVs is GBP2m (31 March 2021:
GBP1m, 30 September 2021: GBP1m).
Non-interest income includes the following fee and commission
income disaggregated by product type:
6 months 6 months 12 months
to to to
31 Mar 2022 31 Mar 2021 30 Sep 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Current account and debit card
fees 49 43 90
Credit cards 23 16 38
Insurance, protection and
investments 5 6 10
Other fees(1) 15 13 29
Total fee and commission
income 92 78 167
Total fee and commission
expense (25) (19) (43)
Net fee and commission income 67 59 124
(1) Includes mortgages, invoice and asset finance and ATM fees.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 2: Results for the period (continued)
2.4 Operating and administrative expenses before impairment losses
6 months 6 months 12 months
to to to
31 Mar 2022 31 Mar 2021 30 Sep 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Staff costs 213 205 426
Property and infrastructure 22 31 89
Technology and communications 59 63 121
Corporate and professional services 62 59 160
Depreciation, amortisation and impairment 71 88 191
Other expenses 81 139 216
Total operating and administrative expenses 508 585 1,203
In the Group's 2021 Annual Report and Accounts, the methodology
for categorising operating and administrative expenses before
impairment losses was refined to provide a more accurate reflection
of what these costs represent. The March 2021 comparatives have
been amended to conform with the September 2021 and the current
period's presentation. There has been no change to the total
operating and administrative expenses in the prior period to 31
March 2021 or year to 30 September 2021.
The change took the original other expenses figure of GBP315m
for the 6 month period to March 2021 and analysed this further with
new line items created to better reflect the nature of the
expenditure. The revised 6 month period to March 2021 other
expenses is now GBP139m, with the GBP176m reallocated to: i)
GBP161m re-classified into three new line items of property and
infrastructure (GBP31m), technology and communications (GBP63m),
and corporate and professional services (GBP67m), which has been
further adjusted to GBP59m due to costs (GBP8m) which have been
reclassified from staff costs and now more appropriately classified
as corporate and professional services; ii) GBP1m of impairments to
right-of-use assets re-classified to the depreciation, amortisation
and impairment line item (previously GBP87m); and iii) GBP14m
primarily related to redundancy costs that are now reclassified to
staff costs.
Staff costs comprise the
following items:
6 months 6 months 12 months
to to to
31 Mar 2022 31 Mar 2021 30 Sep 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Salaries and wages 136 121 248
Social security costs 14 16 30
Defined contribution pension
expense 25 25 49
Defined benefit pension credit (12) (2) (8)
Compensation costs 163 160 319
Equity based compensation(1) 2 3 8
Bonus awards 21 2 22
Performance costs 23 5 30
Redundancy and restructuring 7 14 29
Temporary staff costs 6 7 13
Other 14 19 35
Other staff costs 27 40 77
Total staff costs 213 205 426
(1) Includes National Insurance on equity based compensation.
The analysis of staff costs has therefore also been impacted by
this change, with the 6 month period to March 2021 salaries, wages
and non-cash benefits and social security costs of GBP131m
increasing by GBP6m to GBP137m and now split between salaries and
wages (GBP121m) and social security costs (GBP16m). Redundancy
costs in the 6 month period to March 2021 of GBP14m is also now
separately disclosed. In addition, other personnel costs in the 6
month period to March 2021 of GBP27m have also been further
analysed to provide greater detail on the nature of the costs.
These are now disclosed as GBP19m, with the difference of GBP8m
primarily the result of the introduction of the new temporary staff
costs line item of GBP7m.
The defined benefit pension credit in the current period
includes a credit of GBP8m arising from the ongoing Pension
Increase Exchange (PIE) exercise due to complete in calendar year
2022. A PIE gives members the option to exchange future increases
on their pensions for a one-off uplift to their current
pension.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 2: Results for the period (continued)
2.5 Taxation
6 months 6 months 12 months
to to to
31 Mar 2022 31 Mar 2021 30 Sep 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Current tax
Current period 39 16 62
Adjustment in respect of prior periods 8 - -
47 16 62
Deferred tax
Current period 38 (23) (124)
Adjustment in respect of prior periods (8) (1) 5
30 (24) (119)
Tax charge/(credit) for the period 77 (8) (57)
The tax assessed for the period differs from that arising from
applying the standard rate of corporation tax in the UK of 19%. A
reconciliation from the charge implied by the standard rate to the
actual tax expense/(credit) is as follows:
6 months 6 months 12 months
to to to
31 Mar 2022 31 Mar 2021 30 Sep 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Profit on ordinary activities before tax 315 72 417
Tax expense based on the standard rate of
corporation tax in the UK of 19% (March and
September 2021: 19%) 60 14 79
Effects of:
Disallowable expenses 1 12 13
Bank levy - - 1
Conduct indemnity adjustment (12) 32 58
Deferred tax assets recognised (19) (55) (126)
Impact of rate changes 41 (7) (92)
AT1 distribution (8) (8) (15)
Banking surcharge 14 5 20
Adjustments in respect of prior periods - (1) 5
Tax expense/(credit) for the period 77 (8) (57)
In February 2022 legislation was enacted to reduce the banking
surcharge from 8% to 3%, and to increase the threshold below which
it is not chargeable to GBP100m (previously GBP25m). The changes
are effective for current tax from 1 April 2023 but, in accordance
with accounting standards, have effect for deferred tax in the
current period. The impact is a reduction in the value of deferred
tax assets, reflected in the GBP41m charge to the income statement
above, partially offset by a reduction of GBP12m in the value of
the conduct indemnity payable to the Group's former parent.
Deferred tax assets recognised represent historic losses,
previously derecognised, that are now brought onto the balance
sheet in accordance with the Group's established methodology,
reflecting their expected utilisation against future taxable
profits. Further detail on deferred tax is provided in note
3.4.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 2: Results for the period (continued)
2.6 Earnings per share
6 months 6 months 12 months
to to to
31 Mar 2022 31 Mar 2021 30 Sep 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Profit attributable to ordinary equity holders
for the purposes of basic and diluted EPS 198 40 395
31 Mar 2022 31 Mar 2021 30 Sep 2021
Number of Number of Number of
shares shares shares
Weighted-average number of ordinary shares
in issue (millions)
- Basic 1,443 1,442 1,442
- Diluted 1,446 1,444 1,443
Basic earnings per share (pence) 13.7 2.8 27.3
Diluted earnings per share (pence) 13.7 2.8 27.3
Basic earnings per share has been calculated after deducting
0.2m (31 March 2021: 0.2m, 30 September 2021: 0.1m) ordinary shares
representing the weighted average of the Group's holdings of its
own shares.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities
3.1 Loans and advances to customers
31 Mar 2022 30 Sep 2021
(unaudited) (audited)
GBPm GBPm
Gross loans and advances to customers 72,417 72,551
Impairment provisions on credit exposures(1) (472) (496)
Fair value hedge adjustment (532) (179)
71,413 71,876
(1) ECLs on off-balance sheet exposures of GBP7m (30
September 2021: GBP8m)
are presented as part of the provisions for
liabilities and charges
balance (note 3.7).
The Group has a portfolio of fair valued business loans of
GBP115m (30 September 2021: GBP133m) which are classified
separately as financial assets at FVTPL (note 3.2). Combined with
the above this is equivalent to total loans and advances of
GBP71,528m (30 September 2021: GBP72,009m).
The fair value hedge adjustment represents an offset to the fair
value movement on hedging derivatives transacted 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.
3.2 Financial assets at fair value through profit or loss
Loans and advances
Included in financial assets at FVTPL is a historical portfolio
of loans. 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 GBP115m (30 September 2021: GBP133m)
including accrued interest receivable of GBPNil (30 September 2021:
GBPNil). The cumulative loss in the fair value of the loans
attributable to changes in credit risk amounts to GBP2m (30
September 2021: GBP2m); the change for the current period is GBPNil
(30 September 2021: decrease of GBP1m).
Other financial assets
Other financial assets of GBP5m (30 September 2021: GBP20m)
consist of GBP4m (30 September 2021: GBP19m) of unlisted securities
and GBP1m (30 September 2021: GBP1m) of debt instruments. The
reduction in the period represents the disposal of an unlisted
equity investment.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.3 Derivative financial instruments
The tables below analyse derivatives between those designated as
hedging instruments and those classified as held for trading:
31 Mar 2022 30 Sep 2021
(unaudited) (audited)
GBPm GBPm
Fair value of derivative financial assets
Designated as hedging instruments 139 94
Designated as held for trading 50 46
189 140
Fair value of derivative financial liabilities
Designated as hedging instruments 183 143
Designated as held for trading 79 66
262 209
Cash collateral totalling GBP129m (30 September 2021: GBP18m)
has been pledged and GBP30m has been received (30 September 2021:
GBP76m) in respect of derivatives with other banks. These amounts
are included within due from and due to other banks respectively.
Net collateral received from clearing houses, which did not meet
offsetting criteria, totalled GBP10m (30 September 2021: collateral
placed of GBP82m) and is included within other assets and other
liabilities.
The derivative financial instruments held by the Group are
further analysed below. The notional contract amount is the amount
from which the cash flows are derived and does not represent the
principal amounts at risk relating to these contracts.
31 March 2022 (unaudited) 30 September 2021 (audited)
Notional Notional
Total derivative contract Fair value Fair value contract Fair value Fair value
contracts amount of assets of liabilities amount of assets of liabilities
GBPm GBPm GBPm GBPm GBPm GBPm
Derivatives designated as hedging instruments
Cash flow hedges
Interest rate
swaps (gross) 42,061 577 358 24,886 71 90
Less: net
settled
interest
rate swaps (1) (37,347) (501) (346) (21,500) (64) (79)
Interest rate
swaps (net)
(2) 4,714 76 12 3,386 7 11
Fair value
hedges
Interest rate
swaps (gross) 20,696 503 537 30,707 295 447
Less: net
settled
interest
rate swaps (1) (18,277) (443) (499) (25,260) (209) (390)
Interest rate
swaps (net)
(2) 2,419 60 38 5,447 86 57
Cross currency
swaps (2) 1,880 3 133 1,880 1 75
4,299 63 171 7,327 87 132
Total
derivatives
designated
as hedging
instruments 9,013 139 183 10,713 94 143
Derivatives designated as held for trading
Foreign exchange rate related contracts
Spot and forward
foreign
exchange
(2) 853 16 13 805 13 12
Cross currency
swaps (2) 441 - - 490 - 3
Options (2) 1 - - 1 - -
1,295 16 13 1,296 13 15
Interest rate related contracts
Swaps (gross) 1,132 5 36 734 14 31
Less: Net
settled swaps (468) (1) - - - -
Swaps( (2) 664 4 36 734 14 31
Swaptions (2) 10 - 1 10 - 1
Options (2) 376 2 3 495 1 2
1,050 6 40 1,239 15 34
Commodity
related
contracts 131 27 26 97 17 17
Equity related
contracts 1 1 - 1 1 -
Total
derivatives
designated
as held for
trading 2,477 50 79 2,633 46 66
(1) Presented within other assets
(2) Presented within derivative financial instruments
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.3 Derivative financial instruments (continued)
Derivatives transacted to manage the Group's interest rate
exposure on a net portfolio basis are accounted for as either cash
flow hedges or fair value hedges as appropriate. Derivatives traded
to manage interest rate, inflation and currency risk on certain
fixed rate assets held for liquidity management, including UK
Government Gilts, are accounted for as fair value hedges.
The Group hedging positions also include those designated as
foreign currency and interest rate hedges of debt issued from the
Group's securitisation and covered bond programmes. As such,
certain derivative financial assets and liabilities have been
booked in structured entities and consolidated within these
financial statements.
The Group has no remaining hedge relationships exposed to LIBOR
and as no uncertainty remains regarding benchmark reform, the Group
no longer applies the 'Interest Rate Benchmark Reform - Phase 1 and
Phase 2 amendments' to hedge accounting. Further detail on the
Group's approach to managing the risk of LIBOR replacement,
including derivatives designated as held for trading that have not
yet transitioned, is provided on page 63.
3.4 Deferred tax
The Group has recognised deferred tax in relation to the
following items:
31 Mar 2022 30 Sep 2021
(unaudited) (audited)
GBPm GBPm
Deferred tax assets
Tax losses carried forward 241 255
Capital allowances 113 124
Cash flow hedge reserve (26) (9)
Acquisition accounting adjustments (8) (10)
Transitional adjustment - IFRS 9 12 15
Employee equity based compensation 6 9
Pension spreading 2 5
Gains on financial instruments at FVOCI (16) (15)
Intangible assets (3) (3)
Other 9 6
330 377
Deferred tax liabilities
Defined benefit pension scheme surplus (347) (296)
Net deferred tax (liability)/asset (17) 81
The deferred tax assets and liabilities detailed above arise
primarily in Clydesdale Bank PLC which has a right to offset
current tax assets against current tax liabilities and is party to
a Group Payment Arrangement for payments of tax to HMRC. Therefore,
in accordance with IAS 12, deferred tax assets and deferred tax
liabilities have also been offset in this period where they relate
to payments of income tax to this tax authority. The deferred tax
liability arising in relation to the defined benefit pension scheme
surplus does not meet the accounting standard's criteria for offset
and so continues to be presented separately both on the face of the
balance sheet and detailed in this note.
In February 2022 legislation was enacted to reduce the banking
surcharge from 8% to 3%, and to increase the threshold below which
it is not chargeable to GBP100m (previously GBP25m). The changes
are effective for current tax from 1 April 2023 but, in accordance
with accounting standards, have effect for deferred tax in the
current period. The impact is a reduction in the value of deferred
tax assets, reflected in a GBP41m charge to the income statement
(note 2.5), partially offset by a reduction of GBP12m in the value
of the conduct indemnity payable to the Group's former parent.
As in prior periods, deferred tax assets are recognised on
profits forecast for 6 years from the balance sheet date. If,
instead of six years, the period were five years or seven years,
the recognised net deferred tax (liability)/asset (currently a net
liability of GBP17m) would be a net liability of GBP(68)m or a net
asset of GBP34m, respectively. All tax assets arising will be used
within the UK.
In addition, the Group had an unrecognised deferred tax asset at
31 March 2022 of GBP86m (30 September 2021: GBP112m) representing
trading losses with a gross value of GBP346m valued at 25% (30
September 2021: GBP449m valued at 25%).
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.5 Debt securities in issue
The breakdown of debt securities in issue is shown below:
31 March 2022 (unaudited) Medium-term Subordinated
notes debt Securitisation Covered bonds Total
GBPm GBPm GBPm GBPm GBPm
Amortised cost 2,387 1,020 2,179 2,404 7,990
Fair value hedge adjustments (58) (51) (1) (36) (146)
Total debt securities 2,329 969 2,178 2,368 7,844
Accrued interest payable 20 14 3 27 64
2,349 983 2,181 2,395 7,908
30 September 2021 (audited) Medium-term Subordinated
notes debt Securitisation Covered bonds Total
GBPm GBPm GBPm GBPm GBPm
Amortised cost 2,399 1,019 2,382 1,812 7,612
Fair value hedge adjustments 10 (18) 4 30 26
Total debt securities 2,409 1,001 2,386 1,842 7,638
Accrued interest payable 13 14 3 10 40
2,422 1,015 2,389 1,852 7,678
Key movements in the period 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/.
Period to 31 March 2022 Year to 30 Sept 2021
Issuances Redemptions Issuances Redemptions
Denomination GBPm Denomination GBPm Denomination GBPm Denomination GBPm
USD, EUR, USD, EUR,
Securitisation - - GBP 216 - - GBP 1,543
Covered bonds GBP 600 - - - - - -
Medium-term
notes - - - - EUR 432 - -
Subordinated
debt - - - - GBP 300 GBP 30
600 216 732 1,573
(1) Other movements relate to foreign exchange and amortisation of issue
costs and acquisition accounting adjustments.
On 22 October 2021, following a successful consent solicitation
process, the Series 2012-2 Covered Bonds transferred from the
Clydesdale Bank PLC Global Covered Bond Programme to the Clydesdale
Bank PLC (formerly Virgin Money PLC) Global Covered Bond Programme.
There was no financial impact to the Group in relation to this
transfer.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.5 Debt securities in issue (continued)
The following tables provide a breakdown of the medium-term
notes and subordinated debt by instrument:
Medium-term notes (excluding accrued interest)
31 Mar 2022 30 Sep 2021
(unaudited) (audited)
GBPm GBPm
VM UK 3.125% fixed-to-floating rate callable senior
notes due 2025 299 299
VM UK 4% fixed rate reset callable senior notes due
2026 486 509
VM UK 3.375% fixed rate reset callable senior notes
due 2025 344 359
VM UK 4% fixed rate reset callable senior notes due
2027 372 390
VM UK 2.875% fixed rate reset callable senior notes
due 2025 408 424
VM UK 0.375% fixed rate reset callable senior notes
due 2024 420 428
2,329 2,409
Subordinated debt (excluding accrued interest)
31 Mar 2022 30 Sep 2021
(unaudited) (audited)
GBPm GBPm
VM UK 7.875% fixed rate reset callable subordinated
notes due 2028 249 248
VM UK 5.175% fixed rate reset callable subordinated
notes due 2030 439 458
VM UK 2.625% fixed rate reset callable subordinated
notes due 2031 281 1 295
969 1,001
3.6 Due to other banks
31 Mar 2022 30 Sep 2021
(unaudited) (audited)
GBPm GBPm
Secured loans 7,209 5,896
Securities sold under agreements to repurchase 350 -
Deposits from other banks 30 22
7,589 5,918
Secured loans comprise amounts drawn under the TFSME schemes
(including accrued interest).
The underlying securities sold under agreements to repurchase
have a carrying value of GBP484m (30 September 2021: GBPNil).
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.7 Provisions for liabilities and charges
6 months 12 months
to to
31 Mar 2022 30 Sep 2021
(unaudited) (audited)
GBPm GBPm
PPI redress provision
Opening balance 1 107
Charge to the income statement - 59
Utilised (1) (165)
Closing balance - 1
Customer redress and other provisions
Opening balance 28 31
Charge to the income statement 6 21
Utilised (7) (24)
Closing balance 27 28
Property closure and redundancy provision
Opening balance 67 34
Charge to the income statement 7 68
Utilised (26) (35)
Closing balance 48 67
Off-balance sheet ECL provision
Opening balance 8 -
Transfer of ECL provision from loans and advances - 7
(Credit)/charge to the income statement (1) 1
Closing balance 7 8
Total provisions for liabilities and charges 82 104
PPI redress provision
The Group has now dealt with complaints received in the period
up to the time bar in August 2019, including the settlement of
claims received from the Official Receiver. The total provision
raised in respect of PPI is GBP3,114m (30 September 2021:
GBP3,114m).
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. A
number of these matters are now reaching a conclusion and the risk
that the final amount required to settle the Group's potential
liabilities in these matters being materially more than the
remaining provision is now considered to be low.
Property closure and redundancy provision
This includes costs for stores and office closures and staff
redundancy costs. During the period, provisions of GBP7m (30
September 2021: GBP68m) were raised with GBPNil (30 September 2021:
GBP33m) relating to stores and office closures and GBP7m (30
September 2021: GBP35m) relating to staff redundancy costs.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.8 Retirement benefit obligations
The Group's principal trading subsidiary, Clydesdale Bank PLC,
is the sponsoring employer of the Yorkshire and Clydesdale Bank
Pension Scheme ('the Scheme'), a defined benefit pension scheme,
which was closed to future benefit accrual for the majority of
current employees on 1 August 2017. The assets of the Scheme are
held in a trustee administered fund, with the Trustee responsible
for the operation and governance of the Scheme, including making
decisions regarding the Scheme's funding and investment
strategy.
The following table provides a summary of the fair value of plan
assets and present value of the defined benefit obligation for the
Scheme:
31 Mar 2022 30 Sep 2021
(unaudited) (audited)
GBPm GBPm
Fair value of Scheme assets 4,421 4,636
Total defined benefit obligation (3,429) (3,789)
Net defined benefit pension asset 992 847
The latest formal triennial valuation for the Scheme 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 deficit of GBP290m) and a technical provisions funding
level of 103% (previously 94%).
3.9 Fair value of financial instruments
This section should be read in conjunction with note 3.16 of the
Group's 2021 Annual Report and Accounts, which provides more detail
about accounting policies adopted and valuation methodologies used
in calculating fair value. There have been no changes in the
accounting policies adopted or the valuation methodologies
used.
(a) Fair value of financial instruments recognised on the
balance sheet at amortised cost
The tables below show a comparison of the carrying amounts of
financial assets and liabilities measured at amortised cost, as
reported on the balance sheet, and their fair values where these
are not approximately equal.
There are various limitations inherent in this fair value
disclosure, particularly where prices are derived from unobservable
inputs due to some financial instruments not being traded in an
active market. The methodologies and assumptions used in the fair
value estimates are therefore described in the notes to the tables
in note 3.16 of the Group's 2021 Annual Report and Accounts. The
difference between carrying value and fair value is relevant in a
trading environment but is not relevant to assets such as loans and
advances.
31 Mar 2022 30 Sep 2021
(unaudited) (audited)
Carrying Carrying
value Fair value value Fair value
GBPm GBPm GBPm GBPm
Financial assets
Loans and advances to
customers(1) 71,413 71,163 71,876 72,229
Financial liabilities
Customer deposits(2) 64,458 64,396 66,971 67,012
Debt securities in
issue(3) 7,908 8,169 7,678 8,050
Due to other banks(2) 7,589 7,581 5,918 5,918
(1) Loans and advances to customers are categorised as Level 3 in the
fair value hierarchy with the exception of GBP1,107m (30
September
2021: GBP1,057m) 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 GBP3,498m of listed debt (30 September 2021: GBP3,704m) which
is
categorised as level 1.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 3: Assets and liabilities (continued)
3.9 Fair value of financial instruments (continued)
(b) Fair value of financial instruments recognised on the
balance sheet at fair value
The following tables provide an analysis of financial
instruments that are measured at fair value, using the fair value
hierarchy described above:
Fair value measurement Fair value measurement
as at as at
31 Mar 2022 (unaudited) 30 Sep 2021 (audited)
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 FVOCI 4,423 - - 4,423 4,352 - - 4,352
Loans and advances at
FVTPL - 115 - 115 - 133 - 133
Other financial assets
at FVTPL - - 5 5 - 14 6 20
Derivative financial assets - 188 1 189 - 139 1 140
Total financial assets
at fair value 4,423 303 6 4,732 4,352 286 7 4,645
Financial liabilities
Derivative financial liabilities - 262 - 262 - 209 - 209
Total financial liabilities
at fair value - 262 - 262 - 209 - 209
There were no transfers between Level 1 and 2 in the current or
prior period.
Additional analysis on assets and liabilities measured at fair
value based on valuation techniques for which any significant input
is not based on observable market data (Level 3):
Level 3 movement analysis: 6 months to 12 months to
31 Mar 2022 30 Sep 2021
(unaudited) (audited)
Financial Derivative Financial Derivative
assets financial assets financial
at FVTPL assets at FVTPL assets
GBPm GBPm GBPm GBPm
Balance at the beginning of the period 6 1 5 -
Fair value gains recognised(1)
In profit or loss - unrealised - - 1 1
Settlements (1) - - -
Balance at the end of the period 5 1 6 1
(1) Net gains or losses were recorded in non-interest income.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 4: Capital
4.1 Equity
4.1.1 Share capital and share premium
31 Mar 2022 30 Sep 2021
(unaudited) (audited)
GBPm GBPm
Share capital 144 144
Share premium 8 5
Share capital and share premium 152 149
31 Mar 2022 30 Sep 2021
(unaudited) (audited) 31 Mar 2022 30 Sep 2021
Number of Number of (unaudited) (audited)
shares shares GBPm GBPm
Ordinary shares of GBP0.10 each - allotted,
called up, and fully paid
Opening ordinary share capital 1,439,993,431 1,438,574,687 144 144
Issued under employee share schemes 2,896,478 1,418,744 - -
Closing ordinary share capital 1,442,889,909 1,439,993,431 144 144
The holders of ordinary shares are entitled to dividends as
declared from time to time and are entitled to one vote per share
at meetings of the shareholders of the Company. All shares in issue
at 31 March 2022 rank equally with regard to the Company's residual
assets.
A final dividend in respect of the year ended 30 September 2021
of 1p per ordinary share in the Company amounting to GBP14m, was
paid in March 2022.
The Directors have declared an interim dividend in respect of
the year ending 30 September 2022 of 2.5p per ordinary share in the
Company, amounting to GBP36m, to be paid in June 2022.
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
statements of changes in equity, and significant movements during
the year, is provided below.
4.1.2 Other equity instruments
Other equity instruments consist of the following Perpetual
Contingent Convertible Notes:
-- Perpetual securities (fixed 8% up to the first reset date)
issued on 8 February 2016 with a nominal value of GBP450m and
optional redemption on 8 December 2022;
-- Perpetual securities (fixed 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.
On 10 November 2021, perpetual securities with a nominal value
of GBP230m were redeemed in full.
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 GBP3m (30 September
2021: GBP15m). AT1 distributions of GBP40m were paid in the period
(30 September 2021: GBP79m; 31 March 2021: GBP40m).
4.1.3 Capital reorganisation reserve
The capital reorganisation reserve of GBP839m was recognised on
the issuance of the Company's ordinary shares in February 2016 in
exchange for the acquisition of the entire share capital of the
Group's previous parent company, CYB Investments Limited (CYBI).
The reserve reflects the difference between the consideration for
the issuance of the Company's shares and CYBI's share capital and
share premium.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 4: Capital (continued)
4.1.4 Merger reserve
A merger reserve of GBP633m was recognised on the issuance of
the Company's ordinary shares in February 2016 in exchange for the
acquisition of the entire share capital of CYBI. An additional
GBP1,495m was recognised on the issuance of the Company's ordinary
shares in October 2018 in exchange for the acquisition of the
entire share capital of Virgin Money Holdings (UK) PLC. The merger
reserve reflects the difference between the consideration for the
issuance of the Company's shares and the nominal value of the
shares issued.
4.1.5 Cash flow hedge reserve
The cash flow hedge reserve represents the effective portion of
cumulative post-tax gains and losses on derivatives designated as
cash flow hedging instruments that will be recycled to the income
statement when the hedged items affect profit or loss.
6 months 12 months
to to
31 Mar 2022 30 Sep 2021
(unaudited) (audited)
GBPm GBPm
At 1 October 10 (80)
Amounts recognised in other comprehensive income:
Cash flow hedge - interest rate risk
Effective portion of changes in fair value of interest
rate swaps 73 127
Amounts transferred to the income statement (5) (5)
Taxation (18) (33)
Cash flow hedge - foreign exchange risk
Effective portion of changes in fair value of cross
currency swaps - (28)
Amounts transferred to the income statement - 29
Closing cash flow hedge reserve 60 10
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 5: Other notes
5.1 Contingent liabilities and commitments
The table below sets out the amounts of financial guarantees and
commitments which are not recorded on the balance sheet. Financial
guarantees and commitments are credit-related instruments which
include acceptances, letters of credit, guarantees and commitments
to extend credit. The amounts do not represent the amounts at risk
at the balance sheet date but the amounts that would be at risk
should the contracts be fully drawn upon and the customer 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.
31 Mar 2022 30 Sep 2021
(unaudited) (audited)
GBPm GBPm
Guarantees and assets pledged as collateral security:
Due in less than 3 months 22 20
Due between 3 months and 1 year 37 21
Due between 1 year and 3 years 12 13
Due between 3 years and 5 years 3 2
Due after 5 years 44 45
118 101
Other credit commitments
Undrawn formal standby facilities, credit lines and
other commitments to lend at call 18,208 17,020
Capital commitments
The Group committed to providing additional funding of up to
GBP5.5m over an eight-month period from June 2021 to enable the JV
UTM to support the business transformation and to meet its
regulatory capital and liquidity requirements, of which GBPNil was
the remaining commitment as at 31 March 2022 (30 September 2021:
GBP4m). Further detail on UTM can be found in the JVs and
associates section of note 5.2.
Other contingent liabilities
Conduct risk related matters
There continues to be uncertainty and thus judgement is required
in determining the quantum of conduct risk related liabilities,
with note 3.7 reflecting the Group's current position in relation
to a number of these matters where a provision can be reliably
estimated. Until all matters are closed the final amount required
to settle the Group's potential liabilities for conduct related
matters remains uncertain.
The Group will continue to reassess the adequacy of provisions
for these matters and the assumptions underlying the calculations
at each reporting date based upon experience and other relevant
factors at that time.
Legal claims
The Group is named in and is defending a number of legal claims
arising in the ordinary course of business. No material adverse
impact on the financial position of the Group is expected to arise
from the ultimate resolution of these legal actions.
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 5: Other notes (continued)
5.2 Related party transactions
The Group undertakes activity with the following entities which
are considered to be related party transactions:
Yorkshire and Clydesdale Bank Pension Scheme ('the Scheme')
The Group provides banking services to the Scheme, with customer
deposits of GBP10m (30 September 2021: GBP40m). Pension
contributions of GBP6m were made to the Scheme in the period
(period ended 31 March 2021: GBP14m; year ended 30 September 2021:
GBP61m).
The Group and the Trustee to the Scheme (note 3.8) 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 Scheme in certain trigger events. These assets are
held by Red Grey Square Funding LLP, an insolvency remote
consolidated structured entity.
JVs and associates
The Group holds investments in JVs of GBP9m (30 September 2021:
GBP10m). The total share of loss for the period was GBP5m (period
ended 31 March 2021: GBP4m; year ended 30 September 2021: GBP5m).
In addition, the Group had the following transactions with JV
entities during the period:
-- Salary Finance Loans Limited ('Salary Finance') - the Group
provides Salary Finance with a revolving credit facility funding
line, of which the current gross lending balance at 31 March 2022
was GBP276m (30 September 2021: GBP223m) and the undrawn facility
was GBP49m (30 September 2021: GBP37m). The facility is held under
Stage 1 for credit risk purposes. Board approval is in place for
this facility up until March 2023 with GBP400m being the approved
limit; and
-- UTM - the Group provides banking services to UTM which has
resulted in amounts due of GBP3m (30 September 2021: GBP3m).
Additionally, the Group received GBP4m of recharge income in the
period (period ended 31 March 2021: GBP4m; year ended 30 September
2021: GBP7m) from UTM in accordance with a Service Level Agreement
in respect of resourcing, infrastructure and marketing.
During the period, the Group provided GBP4m of additional
funding to UTM (30 September 2021: GBP12m).
Other related party transactions with Virgin Group
The Group has related party transactions with other Virgin Group
companies:
-- License fees due to Virgin Enterprises Limited for the use of
the Virgin Money brand trademark resulted in payables of GBP5m (30
September 2021: GBP4m), with expenses incurred in the period of
GBP7m (period ended 31 March 2021: GBP7m; year ended 30 September
2021: GBP14m).
-- The Group also incurs credit card commissions and air mile
charges with VAA in respect of an agreement between the two
parties. Amounts payable to VAA totalled GBP1m (30 September 2021:
GBP2m) and expenses of GBP7m were incurred in the period (period
ended 31 March 2021: GBP5m; year ended 30 September 2021:
GBP12m).
-- The Group incurs charges and receives commissions concerning
the cashback incentive scheme with Virgin Red Limited in relation
to the credit card and personal current account portfolio. During
the period this resulted in expenses of GBP0.3m (31 March 2021:
GBP0.4m, 30 September 2021: GBP0.8m) along with income of GBP0.2m
(31 March 2021: GBPnil, 30 September 2021:GBPNil)
-- The Group has an arrangement with Virgin Start Up Limited to
host a series of events, podcasts and videos and other digital
content. During the period this resulted in expenses of GBP0.3m (31
March 2021: GBPNil, 30 September 2021: GBP0.1m).
-- The Group paid GBP2m (30 September 2021: GBPNil) of ordinary
dividends to Virgin Group Holdings Limited.
Charities
The Group provides banking services to Virgin Money Foundation
which has resulted in customer deposits of GBP1m (30 September
2021: GBP1m). The Group made donations of GBP1m in the period
(period ended 31 March 2021: GBP1m; year ended 30 September 2021:
GBP1m) to the Foundation to enable it to pursue its charitable
objectives. The Group has also provided a number of support
services to the Foundation on a pro bono basis, including use of
facilities and employee time. The estimated gift in kind for
support services provided during the period was GBP0.2m (period
ended 31 March 2021: GBP0.2m; year ended 30 September 2021:
GBP0.4m).
Financial statements
Notes to the interim condensed consolidated financial
statements
Section 5: Other notes (continued)
5.3 Notes to the statement of cash flows
Term funding Debt securities
schemes(1) in issue Lease liabilities Total
GBPm GBPm GBPm GBPm
1 October 2020 5,397 8,758 175 14,330
Cash flows:
Issuances - 732 - 732
Drawdowns 3,350 - - 3,350
Redemptions - (1,573) - (1,573)
Repayment (2,864) - (28) (2,892)
Non-cash flows
Fair value adjustments and
associated unwind on acquired
TFS and debt securities in
issue 12 (124) - (112)
Additions to right-of-use
asset in exchange for increased
lease liabilities - - 4 4
Remeasurement - - 1 1
Movement in accrued interest 1 7 2 10
Unrealised foreign exchange
movements - (128) - (128)
Unamortised costs - 6 - 6
At 30 September 2021 5,896 7,678 154 13,728
Cash flows:
Issuances - 600 - 600
Drawdowns 2,550 - - 2,550
Redemptions - (216) - (216)
Repayment (1,244) - (13) (1,257)
Non-cash flows
Fair value adjustments and
associated unwind on acquired
TFS and debt securities in
issue - (171) - (171)
Additions to right-of-use asset
in exchange for increased lease
liabilities - - 4 4
Remeasurement - - 1 1
Movement in accrued interest 7 23 1 31
Unrealised foreign exchange movements - (5) - (5)
Unamortised costs - (1) - (1)
At 31 March 2022 7,209 7,908 147 15,264
(1) This includes amounts drawn under the TFS and TFSME.
Additional information
Measuring financial performance - glossary
Underlying adjustments to the statutory view of performance
Management exclude certain items from the Group's statutory
position to arrive at an underlying performance basis. Management's
approach to underlying adjustments is aligned to the European
Securities and Markets Authority (ESMA) guidelines on APMs and
recommendations are subject to review and agreement by the Board
Audit Committee. Additional detail on these items is provided below
to help understand their exclusion from underlying performance.
6 months 6 months 6 months
to to to
31 Mar 31 Mar 30 Sep
2022 2021 2021 Reason for exclusion from the Group's
Item GBPm GBPm GBPm current underlying performance
--------
Restructuring (46) (49) (97) The current period costs relate to the
charges Group's accelerated Digital First strategy.
The Group expects to incur c.GBP275m
of restructuring charges across FY22-24
with around half the total amount incurred
in FY22. FY21 costs represented the Group's
three year integration plan following
the acquisition of Virgin Money Holidays
(UK) PLC and comprised a number of one-off
expenses that were required to realise
the anticipated cost synergies.
Acquisition (14) (47) (41) This consists principally of the unwind
accounting of the IFRS 3 fair value adjustments
unwinds created on the acquisition of Virgin
Money Holdings (UK) PLC in October 2018.
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.
These costs are historical in nature
and are not indicative of the Group's
Legacy conduct (5) (71) (5) current practices.
Other:
SME transformation - (1) - These costs related to transformation
of the Group's Business banking proposition
and mainly comprised costs associated
with the RBS incentivised switching scheme.
UTM transition (8) (5) (1) These costs relate to UTM's transformation
costs costs principally for the build of a
new platform for administration and servicing.
VISA shares - - 1 A one-off gain on conversion of Visa
B Preference shares to Series A preference
shares.
Internally - - (68) These costs relate to the write-off of
developed work-in-progress balances held on the
software balance sheet as a result of a reassessment
adjustments of the Group's practices on capitalisation
against the backdrop of the new digital
first strategy and the move to an agile
project delivery.
Total other (8) (6) (68)
Additional information
Glossary
For a glossary of terms and abbreviations used within this
report refer to pages 322 to 331 of the Group's 2021 Annual Report
and Accounts.
For terms not previously included within the Glossary, or where
terms have been redefined or amounts have been quantified, refer
below:
Minimum requirement Total capital resources less ineligible AT1 and Tier
for own funds 2 instruments at the period end of GBP5,282m (30 September
and eligible liabilities 2021: GBP5,332m) plus senior unsecured securities issued
(MREL) ratio by Virgin Money UK PLC with greater than one year to
maturity at the period end of GBP2,395m (30 September
2021: GBP2,408m) divided by RWAs at the period end of
GBP24,184m (30 September 2021: GBP24,232m).
Net interest margin Underlying net interest income as a percentage of average
(NIM) interest earning assets for a given period. Underlying
net interest income of GBP782m (30 September 2021: GBP1,412m)
is annualised and divided by average interest earning
assets for a given period of GBP85,729m (30 September
2021: GBP86,947m) (which is 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 GBP14m
(30 September 2021: GBP16m).
Statutory basic Statutory profit after tax attributable to ordinary equity
earnings per share holders of GBP198m (30 September 2021: GBP395m), divided
(EPS) by the weighted average number of ordinary shares in
issue for a given period of 1,443m shares (30 September
2021: 1,442m) (which includes deferred shares and excludes
own shares held or contingently returnable shares).
Statutory return Statutory profit after tax attributable to ordinary equity
on tangible equity holders of GBP198m (30 September 2021: GBP395m), annualised,
(RoTE) as a percentage of average tangible equity of GBP4,354m
(30 September 2021: GBP3,875m) (average total equity
less intangible assets and AT1) for a given period.
Tangible net asset Tangible equity (total equity less intangible assets
value (TNAV) per and AT1) as at the period end of GBP4,528m (30 September
share 2021: GBP4,185m) divided by the number of ordinary shares
in issue at the period end of 1,446m (30 September 2021:
1,444m) (which includes deferred shares of 3m (30 September
2021: 5m) and excludes own shares held of 0.3m (30 September
2021: 0.1m)).
Underlying basic Underlying profit after tax attributable to ordinary
EPS equity holders of GBP254m (30 September 2021: GBP691m),
divided by the weighted average number of ordinary shares
in issue for a given period of 1,443m shares (30 September
2021: 1,442m) (which includes deferred shares and excludes
own shares held or contingently returnable shares).
Underlying profit Underlying profit before tax of GBP388m (30 September
after tax attributable 2021: GBP801m) less underlying tax charge of GBP94m (30
to ordinary equity September 2021: GBP31m), less AT1 distributions of GBP40m
holders (30 September 2021: GBP79m) and was equal to GBP254m
(30 September 2021: GBP691m). The underlying tax charge
(or credit) is the difference between the statutory tax
charge (or credit) and the tax attributable to underlying
adjustments.
Underlying RoTE Underlying profit after tax attributable to ordinary
equity holders of GBP254m (30 September 2021: GBP691m),
annualised, as a percentage of average tangible equity
of GBP4,354m (30 September 2021: GBP3,875m) (average
total equity less intangible assets and AT1) for a given
period.
Abbreviations
ARR Alternative reference rate
BBR Bank Base Rate
Additional information
Officers and professional advisers
Non-Executive Directors
Chairman David Bennett(1)
Senior Independent Non-Executive Director Tim Wade(2)
Independent Non-Executive Directors Paul Coby(2) (4)
Geeta Gopalan(2)
Elena Novokreshchenova (2)
Darren Pope(2)
Non-Executive Director Amy Stirling(3) (4)
Executive Directors David Duffy
Clifford Abrahams
Group Company Secretary Lorna McMillan
Group General Counsel and Purpose James Peirson
Officer
Independent auditors Ernst & Young LLP
25 Churchill Place
Canary Wharf
London
E14 5EY
(1) Member of the Remuneration Committee and Governance and
Nomination Committee
(2) All Independent Non-Executive Directors are members of the
Remuneration Committee, Audit Committee, Risk Committee and
Governance and Nomination Committee
(3) Member of the Governance and Nomination Committee
(4) Amy Stirling will step down as a Non-Executive Director on 5
May 2022 and Paul Coby will step down as an independent
Non-Executive Director on 30 June 2022.
VIRGIN MONEY UK PLC
Registered number 09595911 (England and Wales)
ARBN 609 948 281 (Australia)
Head Office: London Office: Registered Office:
30 St. Vincent Place Floor 15, The Leadenhall Jubilee House
Building
Glasgow 122 Leadenhall Street Gosforth
G1 2HL London Newcastle Upon Tyne
EC3V 4AB NE3 4PL
virginmoneyukplc.com
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END
IR SSAFULEESEEI
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May 05, 2022 02:01 ET (06:01 GMT)
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