TIDMVMUK TIDM91XR

RNS Number : 9855G

Virgin Money UK PLC

21 November 2022

Virgin Money UK PLC

Full Year 2022

Financial Results

Announcement

 
 
   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 results announcement covers the results of the Group for the year 
   ended 30 September 2022. 
   Statutory basis 
   Statutory information is set out on page 16 and within the 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 16 to 17 and rationale 
   for the adjustments is shown on page 134. 
   Alternative performance measures (APMs) 
   The KPIs and performance metrics used in monitoring the Group's performance 
   and reflected throughout this results announcement are determined on a 
   combination of bases (including statutory, regulatory and alternative 
   performance measures), as detailed at 'Measuring the Group's performance' 
   on pages 124 to 133. APMs are closely scrutinised to ensure that they 
   provide genuine insights into the Group's progress; however statutory 
   measures are the key determinant of dividend paying capability. 
   Certain figures contained in this document, including financial information, 
   may have been subject to rounding adjustments and foreign exchange conversions. 
   Accordingly, in certain instances, the sum or percentage change of the 
   numbers contained in this document may not conform exactly to the total 
   figure given. 
 

FORWARD-LOOKING STATEMENTS

The information in this document may include forward-looking statements, which are based on assumptions, expectations, valuations, targets, estimates, forecasts and projections about future events. These can be identified by the use of words such as 'expects', 'aims', 'targets', 'seeks', 'anticipates', 'plans', 'intends', 'prospects', 'outlooks', 'projects', 'forecasts', 'believes', 'estimates', 'potential', 'possible', and similar words or phrases. These forward-looking statements, as well as those included in any other material discussed at any presentation, are subject to risks, uncertainties and assumptions about the Group and its securities, investments and the environment in which it operates, including, among other things, the development of its business and strategy, any acquisitions, combinations, disposals or other corporate activity undertaken by the Group, trends in its operating industry, changes to customer behaviours and covenant, macroeconomic and/or geo-political factors, the repercussions of the outbreak of coronaviruses (including but not limited to the COVID-19 outbreak), changes to its Board and/or employee composition, exposures to terrorist activity, IT system failures, cybercrime, fraud and pension scheme liabilities, changes to law and/or the policies and practices of the Bank of England (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 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, Russia's invasion of Ukraine, any referendum on Scottish independence, and any UK or global cost of living crisis or recession.

In light of these risks, uncertainties and assumptions, the events in the forward-looking statements may not occur. Forward-looking statements involve inherent risks and uncertainties. Other events not taken into account may occur and may significantly affect the analysis of the forward-looking statements. No member of the Group or their respective directors, officers, employees, agents, advisers or affiliates gives any assurance that any such projections or estimates will be realised or that actual returns or other results will not be materially lower than those set out in this document and/or discussed at any presentation. All forward-looking statements should be viewed as hypothetical. No representation or warranty is made that any forward-looking statement will come to pass. While every effort has been made to ensure the accuracy of the information in this document, the Group and its directors, officers, employees, agents, advisers and affiliates do not take any responsibility for the information in this document 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. No representation or warranty, express or implied, as to the truth, fullness, fairness, merchantability, accuracy, sufficiency or completeness of the information in this document or the materials used in and/or discussed at, any presentation is given.

Certain industry, market and competitive position data contained in this document and the materials used in and/or discussed at, any presentation, comes from official or third-party sources. There is no guarantee of the accuracy or completeness of such data. While the Group reasonably believes that each of these publications, studies and surveys has been prepared by a reputable source, no member of the Group or their respective directors, officers, employees, agents, advisers or affiliates have independently verified the data.

In addition, certain industry, market and competitive position data contained in this document and the materials used in and/or discussed at, any presentation, 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. While the Group reasonably believes that such research and estimates are reasonable and reliable, they, and their underlying methodology and assumptions, have not been verified by any independent source for accuracy or completeness, and are subject to change. Accordingly, undue reliance should not be placed on any of the industry, market or competitive position data contained in this document and the materials used in and/or discussed at, any presentation.

The information, statements and opinions contained in this document do not constitute or form part of, and should not be construed as, any public offer under any applicable legislation or an offer to sell or solicitation of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments. The distribution of this document in certain jurisdictions may be restricted by law. Recipients are required by the Group to inform themselves about and to observe any such restrictions. No liability to any person is accepted in relation to the distribution or possession of this document in any jurisdiction. The information, statements and opinions contained in this document and the materials used in and/or discussed at, any presentation are subject to change.

Virgin Money UK PLC Full Year Results 2022

David Duffy, Chief Executive Officer:

"2022 has been a milestone year for Virgin Money. We have good momentum while delivering a strong performance and improved returns for our shareholders. We've changed the game in purpose-led flexible working to create an engaged, high-performing organisation that's cost-efficient and agile, which will underpin targeted growth through further digital innovation."

"While we have solid credit quality across our lending, we are aware that some customers will have to make difficult decisions in this environment, and we are proactively offering them help and support."

Summary financials

 
                                                                  12 months  12 months 
                                                                         to         to 
                                                                     30 Sep     30 Sep    Change 
                                                                       2022       2021 
                                                                       GBPm       GBPm         % 
 
 
Underlying net interest income (NII)                                  1,592      1,412        13 
Underlying non-interest income                                          163        160         2 
----------------------------------------------------------        ---------  ---------  -------- 
Total underlying operating income                                     1,755      1,572        12 
Underlying operating and administrative expenses                      (914)      (902)         1 
Impairment (losses)/credit on credit exposures                         (52)        131      n.m. 
----------------------------------------------------------        ---------  ---------  -------- 
Underlying profit on ordinary activities before 
 tax                                                                    789        801       (1) 
Adjusting items                                                       (194)      (384)      (49) 
----------------------------------------------------------        ---------  ---------  -------- 
Statutory profit on ordinary activities before 
 tax                                                                    595        417        43 
----------------------------------------------------------        ---------  ---------  -------- 
 
Performance measures(1) 
----------------------------------------------------------        ---------  ---------  -------- 
Total customer lending (GBPm)                                        72,565     71,996      0.8% 
Net interest margin (NIM)                                             1.85%      1.62%  0.23%pts 
Underlying cost: income ratio (CIR)                                     52%        57%   (5)%pts 
Statutory return on tangible equity (RoTE)                            10.3%      10.2%   0.1%pts 
Dividends and share buybacks announced (GBPm)                           267         14      n.m. 
Common equity tier 1 (CET1) ratio (IFRS 9 transitional)               15.0%      14.9%   0.1%pts 
----------------------------------------------------------        ---------  ---------  -------- 
(1) Refer to pages 124 to 133 for a range of metrics that are used to 
 measure and track the Group's performance. 
 
 

Strong financial performance in 2022

-- NIM expanded further to 1.85% (2021: 1.62%), supported by higher rates and further mix optimisation (Q4: 1.86%)

-- Underlying non-interest income up 2% YoY, reflecting higher activity levels offsetting fair value movements

-- Underlying costs of GBP914m were broadly stable YoY, in line with guidance, while CIR reduced 5%pts to 52%

   --      Pre-Provision Operating Profit of GBP841m, up 26% on 2021, reflecting stronger income and well-controlled costs 

-- Minor impairment charge of GBP52m (7bps cost of risk) reflecting updated macroeconomics, but with lower post model adjustments

   --      Underlying profit 1% lower YoY given GBP131m impairment release in 2021 

-- Statutory profit increased 43% YoY, reflecting higher income and lower adjusting items; statutory RoTE of 10.3% (2021: 10.2%)

-- Credit quality remains robust with low and stable arrears; provision coverage of 62bps above pre-pandemic levels

-- CET1 ratio remains strong at 15.0% (2021: 14.9%); announced further GBP50m buyback, taking 2022 buybacks to GBP125m; 7.5p final dividend (2022: 10p) means total 2022 shareholder distributions of GBP267m, equivalent to c.57% payout

Returning to net lending growth supported by continued strong relationship deposit inflows

-- Strong relationship deposits growth, increasing 13% YoY to GBP34.6bn; continue to optimise overall deposits, down 2.3% to GBP65.4bn

-- Overall lending growth (0.8%) in 2022 to GBP72.6bn; Unsecured +13.8% to GBP6.2bn driven by credit cards; Business lending (2.7%) to GBP8.2bn as lower Government lending offset 1.7% growth in BAU; Mortgages stable at GBP58.2bn but returned to growth in H2

-- AIEAs were GBP86.3bn in FY22; Sep-22 spot balances were cGBP90bn, expect higher liquidity-related AIEAs through FY23

Strong Purpose-led delivery in first year of our accelerated digital strategy

-- Launched cost of living hub to support customers with money saving suggestions, budgeting tools and links to external resources

-- Strong reception for new digital products with 7% YoY growth in current account sales; record new credit card origination of c.630k (+49% YoY); c.650k cashback users; launched new Business M-Track and Marketplace; c.40k waitlist for Slyce

-- A Life More Virgin supporting higher colleague engagement (+11%pt YoY); launched Agile change framework, increasing the speed of change at c.25% lower costs; property and branch footprint reduced c.50% YoY

-- Delivered c.GBP69m of annualised gross savings this year; further progress on digitisation with 43% of key customer journeys automated (2021: 27%); mobilising cloud migration and removing legacy applications

-- Delivering further propositions in 2023 including refreshed Wealth proposition, mortgage end-to-end digitisation and fully refreshed new digital home and travel insurance

-- Anticipating the initial launch of our digital wallet early in 2023 with additional functionality to be added through the year

Outlook upgraded

-- Expect NIM to be 185-190bps in FY23, based on current rate expectations, and including higher AIEAs; in the medium term, expect mix-driven NIM expansion and OOI to grow from digital proposition enhancements

-- Cost:income ratio expected to improve further to c.50% in FY23; continue to target less than 50% in FY24

   --      Cost of risk anticipated to normalise around through the cycle level of 30-35bps in FY23 

-- Targeting growth in Unsecured & BAU Business, moderating in 2023; maintain mortgage market share in the medium term

-- Will maintain CET1 above 14% in FY23 during period of macroeconomic uncertainty; expect to return to target 13-13.5% CET1 range by the end of FY24, after growth, distributions and RWA headwinds, including hybrid model implementation

-- In line with the Group's updated capital framework, shareholder distributions to reflect 30% full year dividend pay-out, supplemented by buybacks, subject to ongoing assessment of surplus capital, market conditions and regulatory approval

   --      Expect c.11% statutory RoTE in FY24, consistent with target of greater than 10% 

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 
 
 
 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 full year financial results starting at 08:30 GMT (19:30 AEDT) and this will be webcast live and is available at:

https://webcast.openbriefing.com/virgin-fy22/

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 09:00 GMT (20:00 AEDT) on Tuesday 22(nd) November 2022: Dial-in details: UK 0800 640 6441; All other locations: +44 20 3936 2999; Access code: 647668

Announcement authorised for release by Lorna McMillan, Group Company Secretary.

LEI: 213800ZK9VGCYYR6O495

Business and financial review

Chief Executive Officer's introduction

Delivering against our strategy

In 2022, the Group continued to deliver on its digital strategy, launching exciting new customer propositions

and laying the platform for profitable growth and sustainable returns through our digital investment.

David Duffy

Chief Executive Officer

We performed strongly in FY22, delivering higher statutory profit, positive financial momentum and increased capital returns, benefitting from higher rates in a more uncertain environment.

Dear stakeholder,

In the first year of delivering our accelerated digital strategy, I'm pleased with how the Group has performed. Virgin Money has made good strategic and financial progress as we drive towards our ambition of becoming the UK's best digital bank. I'd like to thank all our colleagues for their hard work, and customers for their loyalty, as we execute our Purpose-led strategy.

Since we set our targets a year ago, the economic backdrop has changed significantly, with a lower GDP outlook, higher unemployment expectations, and higher cost of living set to impact the economy, although higher interest rates have supported our financial performance. Despite the more difficult near-term backdrop for customers, our strategy remains the right one and I'm confident we are well placed to adapt to recent changes, while we continue to support customers and deliver for all our stakeholders.

Delivering for our stakeholders

While there remains more to deliver, FY22 saw a good start against the strategic agenda we set out a year ago. Our financial performance benefitted from stronger income and resilient asset quality given the higher interest rate trajectory and benign credit environment to date. Alongside this backdrop, the Group continued to execute against our strategic agenda, which combined with the environment, delivered robust returns as statutory RoTE remained stable at 10.3% (FY21: 10.2%). As a reflection of this performance, including high levels of capital generation, and after setting out our capital framework alongside our Interim results, the Board has announced the distribution of GBP267m of capital to shareholders through dividends and buybacks.

Our innovative propositions and rewards have been well received in our target segments of Unsecured and BAU Business lending (excluding Government scheme lending). The overall lending book returned to growth this year, with improved momentum in mortgages in H2 as we traded nimbly through a continuing competitive environment. I'm also particularly pleased with the continued growth in our low-cost relationship deposit base which is now 53% of total Group deposits, up from 33% at FY19.

Important digitisation initiatives, which will drive improvements in our customer service and complaints performance through automation of our core customer journeys, have been launched and will continue to deliver greater efficiency into FY23 and beyond. We continue to expand our loyalty and reward programmes, leveraging the unique potential of the Virgin brand and Virgin Red as we prepare to launch our new digital wallet.

We have continued to support colleagues at this more challenging time, with a GBP1,000 cost of living allowance provided to the majority of colleagues in August. Our A Life More Virgin flexible working model has also continued to be well received, attracting significant positive commentary, and supporting improved colleague engagement scores and a simplified office estate.

Our work to deliver a sustainable future took a significant step forward over the course of the year as we set net zero roadmaps and targets for Mortgages and priority Business sectors. We continue to embed climate and community considerations in everything we do, ensuring we support customers and wider society in the years ahead.

Strong financial momentum

The higher interest rate backdrop, continued benign credit conditions and the execution of our strategy, has seen statutory profit before tax for FY22 strengthen to GBP595m (FY21: GBP417m). This has benefited from increased pre-provision profit, continued low impairment charges and lower exceptional costs. Underlying income increased 12% with NIM expanding to 1.85% (FY21: 1.62%) supported by higher interest rates over the course of the year, and strategic actions to grow in higher-yielding product lines, while continuing to optimise our funding mix with higher relationship deposits. Underlying operating costs of GBP914m increased 1% on the prior year, reflecting inflationary pressures and higher investment, offset in part by efficiency savings.

While not directly exposed to Ukraine, we have seen second-order impacts on the broader UK economy from higher costs, higher interest rates and potential pressure on our customers and asset quality. At present, credit quality indicators remain benign but we remain cautious on the outlook, and stand ready to support customers further if needed. Against this backdrop, impairment charges were muted as provisions taken for COVID-19 impacts were unwound. Despite a modest reduction, we have retained above pre-COVID levels of coverage with a potentially challenging economic outlook in mind, and to reflect worsening macroeconomic forecasts.

Overall lending balances returned to growth in the year finishing up 1% at GBP72.6bn. We achieved strong growth in our target segments of Unsecured and BAU Business lending and returned the mortgage book to growth in the second half of the year. Deposit balances reduced 2% to GBP65.4bn but with relationship deposits increasing by 13%, as we continued to improve the mix of our deposit base and optimise our cost of funds.

Business and financial review

Chief Executive Officer's introduction

The capital generative financial performance of the business, and strong outcomes from our inaugural participation in the BoE's stress testing regime, allowed us to set out our capital framework alongside our Interim results in May. We committed to a sustainable 30% dividend payout level and are recommending a 10p total dividend in respect of FY22, subject to shareholder approval. We also committed to supplementing dividends with buybacks, subject to the Board's assessment of surplus capital, market conditions and regulatory approval.

It was pleasing therefore to commence our inaugural share buyback programme during the year, with a GBP75m buyback announced in June, which we are delighted to be adding to today, with a GBP50m extension. Our transitional CET1 ratio at FY22 remains robust at 15.0%, leaving the Group well placed as we enter FY23.

Delivering against our strategic pillars

At FY21 we announced plans to accelerate our digital strategy and have made a good start against this during FY22.

Pioneering Growth

Throughout FY22 we have launched important new propositions that will support our future growth ambitions. These include M-Track and Marketplace in Business, Slyce, new digital travel insurance, and improved cashback and reward offerings for personal customers.

As we continue to focus on digital-led growth in key target segments, we've reported growth in current accounts, underpinned by strong new account sales, record credit card sales and strong customer usage of cashback offers.

Digitally-enabled personal current account (PCA) sales were 131k (FY21: 134k) benefiting from a strong value proposition, with attractive interest rates on offer. Competitive switching propositions from peers impacted on our ability to attract switchers at the levels we had hoped, but we were still able to deliver book growth during the year. Business current account (BCA) sales reported a record year at 33k (FY21: 19k) benefitting from a new fee-free proposition and improved digital onboarding and servicing, along with the roll-out of our innovative M-Track and Marketplace propositions. These strong performances underpinned our 13% growth in relationship deposits.

Unsecured balances recorded strong growth of 14% as we maintained our existing competitive proposition, albeit with tighter underwriting to reflect potential customer affordability challenges from the higher cost of living. We also broadened our customer offerings, developing Slyce to challenge and innovate, with a responsible BNPL proposition aimed at Gen-Z customers. In Business, while we continued to see government scheme lending being repaid as expected, with very limited fraud, we also began to grow lending in our BAU franchise (up 2% year-on-year), without relaxing our rigorous underwriting standards.

Mortgage balances were broadly stable during the year, as competition has remained intense. Against this backdrop, we have continued with our strategy to optimise for long-term value, and maintain credit quality. We were pleased to increase our participation in the second half of the year, at improved margins, prior to the pricing volatility that took place towards the end of the financial year.

Delighting our customers and colleagues

For customers, we have seen expectations around service rise rapidly through the pandemic. During the last year, external factors have had an impact on our service levels, such as the changing rate environment, which has driven higher demand, with more customers requiring support. As a consequence, we recognise that there have been challenges impacting customer service this year, and our metrics for complaints and Smile scores aren't where we want them to be. In the second half of the year, the Group has taken action to address this, adding resources despite a tight labour market. We have a significant opportunity to improve service and we remain convinced that our strategy to invest in our digital model is the right one to deliver a lasting improvement for customers.

During the year the Group has continued to make progress in the end-to-end digitisation of customer journeys, including improved digital on-boarding and servicing experience across Personal and Business, to support better customer outcomes. Following delivery of a suite of chatbots earlier in the year, the Group has now surpassed 1m chatbot conversations with retail customers, with the year to date resolution rate within the chatbot at around two-thirds. As a result, the percentage of customer interactions through calls has reduced from c.70% at FY21 to c.50% as at the end of FY22.

We will further improve our service proposition in FY23, and seek to mitigate the impacts of digitisation on customers who prefer traditional banking channels. Significant investment is underway to enhance, modernise and digitise our customer service offering, which will support an improvement in customer experience and ultimately Smile scores. Furthermore, we have a comprehensive plan to deliver better outcomes for customers as we adopt the FCA's consumer duty.

For colleagues, the launch of our A Life More Virgin colleague proposition and our flexible working model has been very positively received, with colleague engagement scores improving to 79% at FY22 from 68% a year ago. The model has also removed geographical constraints on recruitment, enabling us to recruit more diverse talent. We have also repurposed some of our stores and offices during the year to create Collaboration Hubs which support the transition to a truly flexible approach to work.

Across the organisation we continue to focus on building an inclusive workforce and culture. The initiatives launched during the year are already having an impact as we focus on engaging with communities where we're currently under-represented to developing more diverse talent within Virgin Money. We have delivered improved diversity metrics but have ambitious targets to go further in the coming years.

Business and financial review

Chief Executive Officer's introduction

Targeting Super Straightforward Efficiency

Our investment continues to focus on driving our three-year transformation programme to deliver a scalable, more efficient digital growth platform. This features the deployment of Agile methodology and tools to increase the pace and delivery of change, at lower cost (see more on this on p.24). Our migration to Cloud-based infrastructure in partnership with Microsoft is set to commence in FY23, enabling us to begin exiting physical data centres. We are now starting to de-commission legacy applications, while building the new applications required to support the Cloud infrastructure. We are deploying Microsoft tools, such as AI and robotics, and rolling out Agile methodology across our new change programmes, launching new Agile tribes and training colleagues. This is delivering new functionality for customers at greater speed, and at an average of c.25% lower unit costs. As we continue to embed A Life More Virgin ways of working, we have continued to rationalise our property footprint, reducing it by 50% to c450k sq ft to align with the simpler needs of a digital bank.

Delivering Discipline and Sustainability

During the year, we have remained resolutely focused on asset quality and supporting our customers. Across key portfolios, there are currently limited signs of credit concerns and overall arrears remained low during the period.

However, the Group recognises the potential affordability issues that higher living costs will cause for households and is ready to continue to support customers, as was the case throughout the pandemic. The Group has tightened its affordability and underwriting criteria for new customers across all lending categories to account for higher levels of inflation.

Sustainability remained high on our agenda throughout FY22 and we've developed net-zero targets and roadmaps for our priority business sectors. We've continued to support our customers' decarbonisation journeys by providing information through the Sustainable Business Coach and supporting Carbon Audits, as well as providing greener finance through Sustainability-Linked Loans, Greener Mortgages and our new Agri E-Fund. We've received upgrades in ratings from both Sustainalytics and MSCI and have updated our TCFD disclosure in line with regulatory requirements. Our Community strategy has also continued to drive positive outcomes, including on the Poverty Premium where we've promoted the Turn2Us Benefits Calculator, our cost of living hub, and set up our Customer Care team who will proactively support our most vulnerable customers. Our partnership with the Macmillan cancer charity has also continued to provide practical support for customers in financial difficulty.

Developing our leadership for a digital world

I have continued to evolve and simplify the Group's Executive Leadership Team this year, ensuring we have the digital skills to deliver our strategy.

Syreeta Brown joined the Group from Citi in November 2021 as Group Chief People and Communications Officer and brings a wealth of experience in cultural transformation, talent development and in building a workforce that is fit for the future. Susan Poot joined the Group from ING bank in January 2022 as Group Chief Risk Officer. Susan has significant experience across a range of risk disciplines covering both retail and wholesale banking.

Finally, Sarah Wilkinson will join the Group in early 2023 from Thomson Reuters, where she is currently Chief Information Officer, and has recently held roles as Chief Executive Officer of NHS Digital and Chief Information Officer of the Home Office. Sarah brings global leadership experience and extensive expertise of delivering change, innovation and digital customer experience, with a strong track record of digital transformation and a prior background in financial services. I would like to take this opportunity to thank Kate Guthrie, Mark Thundercliffe, Helen Page, Fraser Ingram and Fergus Murphy 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.

Outlook

Virgin Money is well positioned to deliver a digital-led future of profitable growth, greater cost-efficiency, improved customer service and sustainable shareholder returns as we target our ambition of becoming the UK's best digital bank. It is encouraging to see our strategy, and an improving rate environment, combining to drive stronger financial performance as we now target a c.11% statutory RoTE in FY24. Having set out our capital framework earlier in the year, we look forward to continuing deliver robust shareholder returns.

Looking forward, we will continue to focus our efforts on improving customer experience and driving digitisation through the Bank, as we embed an Agile approach. We are excited about the upcoming launch of our digital wallet, bringing together many of the elements we've worked on, which over time will also enable us to deliver a single, unified app. We have a unique brand, and access to a complementary set of partner companies in the Virgin Group. The potential to deepen the relationship with Virgin Red offers exciting possibilities for our customers to earn and spend Virgin points.

We will continue to develop our digital wallet during FY23, combining many of these unique features with instalment credit, loyalty and payment capabilities.

The macroeconomic outlook has become more uncertain over the course of the year. Following a positive recovery in expectations post-COVID, recent events have seen forecasts deteriorate. As we enter a more volatile environment, with higher inflation and rates, we are carefully monitoring for any impacts. We enter this phase with a prudently underwritten loan book, robust coverage, and a defensive asset mix. We are ready and able to continue supporting the customers, colleagues and communities we serve.

Overall, we 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 of Making you happier about money.

David Duffy

Chief Executive Officer

20 November 2022

Business and financial review

Chief Financial Officer's review

Building momentum in strategic and financial delivery

I'm pleased to report a positive operating performance in FY22 and ongoing strategic delivery, leaving us well placed to target profitable growth in an uncertain economic environment.

Clifford Abrahams

Chief Financial Officer

2022 has been an important year as we returned to balance sheet growth and delivered improved momentum in financial performance, aided by the higher interest rate environment.

Review of the year

The Group has made good progress during FY22 as we've launched new and innovative digital propositions and continued to digitise the Bank. A stronger rate environment and benign credit backdrop, combined with our strategic delivery has driven good financial momentum, enabling a statutory RoTE of 10.3%, in line with FY21.

The combination of our resilient balance sheet, digital transformation and customer propositions leave us well placed to drive profitable growth, despite the uncertain economic outlook.

Pre-provision profit was significantly stronger at GBP841m (2021: GBP670m), with a strong improvement in income and broadly stable costs. NIM improved to 1.85% (2021: 1.62%), supported by rising base rates and a strong deposit performance, while non-interest income improved 2% to GBP163m as improving underlying momentum offset adverse one-off and fair value movements. Taken together, total income improved 12% compared to a year ago. Underlying operating costs were 1% higher compared to FY21 reflecting ongoing cost reduction offset by digital development costs, inflation, as well as the one-off cost of living allowance paid during the year.

The Group recognised an impairment charge of GBP52m (2021: GBP131m credit) or 7bps for FY22, below through the cycle levels, driven by prudent IFRS 9 scenario weightings that incorporate a conservative economic outlook and updated PMAs. There are currently limited signs of credit concerns across our key portfolios and our arrears performance remains low and stable. We continue to monitor our customers closely for signs of financial difficulty and remain on hand to support customers.

During the second half of the year, we tightened affordability and underwriting criteria to account for the more uncertain economic outlook and rising living costs. Provision coverage levels remain robust at 62bps (2021: 70bps), above pre-pandemic levels.

Given the more normalised impairment charge during the year, underlying RoTE was down relative to last year at 13.5% (2021: 17.8%), while statutory RoTE was stable at 10.3% (2021: 10.2%) after adjusting for items including restructuring spend, relating to the Group's digital investment, and intangible asset write-offs.

We were pleased to deliver lending growth during the year, as overall customer lending finished c.1% higher relative to FY21 at GBP72.6bn. Unsecured balances performed strongly throughout the year growing 14% as the combination of the resilience of our book and strong digital propositions allowed us to continue to take market share. Mortgage balances were broadly stable during the period at GBP58.2bn as we continued to prioritise margin over volume. Business lending balances reduced c.3% overall, as growth in BAU balances was offset by expected reductions in government-backed lending.

Business and financial review

Chief Financial Officer's review

 
Financial highlights 
--------------------------------------------------------------------------- 
Statutory profit before    Underlying profit before    Statutory RoTE 
 tax                        tax 
GBP595m                    GBP789m                     10.3% 
2021: GBP417m              2021: GBP801m               2021: 10.2% 
-----------------------    ------------------------    -------------------- 
NIM                        Underlying CIR              Cost of risk 
1.85%                      52%                         7bps 
2021: 1.62%                2021: 57%                   2021: (18)bps 
-----------------------    ------------------------    -------------------- 
CET1 ratio                 Loan growth                 Relationship deposit 
                                                        growth 
15.0%                      0.8%                        +13.2% 
2021: 14.9%                2021: (0.6)%                2021: +19.2% 
 

Deposit balances reduced c.2% to GBP65.4bn as we continued to focus on improving the mix of our deposit base. Over the course of FY22, there was a 13% increase in lower-cost relationship deposits, now comprising 53% of overall deposits (2021: 46%), helping to underpin the Group's NIM performance.

Capital remained strong in the period, with the transitional CET1 ratio of 15.0% (2021: 14.9%), with significant tangible net asset value (TNAV) accretion over the year, to 383p (2021: 290p). We were pleased to outline our capital framework alongside our Interim results following our strong performance in the SST.

In line with our capital framework, the Board has declared a 10p dividend for the year and has announced a GBP50m share buyback, adding to the GBP75m share buyback that commenced in June.

I am confident that we will continue to demonstrate strategic and financial momentum during FY23, following a strong performance this year. We recognise the economic environment is uncertain and the potential affordability issues that will cause for households and we will continue to prioritise our customers as we did during the pandemic.

Underlying income

 
                                      2022    2021 
                                      GBPm    GBPm  Change 
----------------------------------  ------  ------  ------ 
Underlying net interest income       1,592   1,412     13% 
Underlying non-interest income         163     160      2% 
----------------------------------  ------  ------  ------ 
Total underlying operating income    1,755   1,572     12% 
----------------------------------  ------  ------  ------ 
NIM                                  1.85%   1.62%   23bps 
Average interest-earning assets     86,275  86,947    (1)% 
----------------------------------  ------  ------  ------ 
 

Business and financial review

Chief Financial Officer's review

NII and NIM

Net interest income (NII) increased by GBP180m or 13% relative to FY21, driven by an expansion of the Group's NIM as it continued to benefit from higher rates and optimisation of the deposit base. Asset yields increased 34bps compared to FY21 with higher swap income the primary contributor, reflecting the rising base rate environment through the year. Given the ongoing competitive pressure on new and retained mortgage spreads, average balances reduced over the course of the year, as the Group remained selective in terms of its participation, while the average yield also declined c.9bps; together, this contributed to lower mortgage interest income. In Business, interest income increased by GBP33m in the year, despite lower average balances, as the yield of the book improved, given the lower mix of lower-yielding government-backed lending. In Unsecured, interest income increased by GBP24m in the year, driven by significant growth in average balances, owing mainly to growth in the credit card book. Elsewhere, the average yield on the Group's liquid assets increased 70bps reflecting the higher rate environment across the financial year.

The balance of the Group's structural hedge was maintained at c.GBP32bn throughout the year. This represents an increase from c.GBP26bn at the end of FY21, following a review of deposit behaviour.

During the year, the Group generated GBP286m of total gross income from the structural hedge, benefitting from ongoing hedge re-investment at higher prevailing interest rates.

Liability rates increased at a slower rate than asset yields, increasing 14bps relative to FY21. During the year, the Group continued to optimise its mix of deposits, reducing traditionally more expensive term deposits and increasing current account balances. This growth was driven by a strong performance in new PCA sales through the Brighter Money Bundles campaign, the relaunch of our BCA, and further supported by higher average balances as customers saved more during the period of COVID-19 restrictions. Wholesale funding costs increased in the year, driven by an increase in average balances following issuance throughout the year.

Non-interest income

Non-interest income increased by GBP3m or 2% relative to FY21, to GBP163m, as growth in other operating income offset fair value and one-off movements. The key drivers of the improvement in other operating income included increased Unsecured and Business fee income from higher customer transaction levels following the removal of COVID-19 restrictions during the year. Mortgage fee income was broadly stable during the period. One-off movements in the year were driven by the non-repeat of equity valuation gains in the debt restructuring unit recognised in FY21 (GBP16m) and fair value volatility due to hedge ineffectiveness movements.

 
                                                            2022                                  2021 
------------------------------------------  ------------------------------------  ------------------------------------ 
                                                         Interest                              Interest 
                                              Average     income/        Average    Average     income/        Average 
                                              balance   (expense)   yield/(rate)    balance   (expense)   yield/(rate) 
 Average balance sheet                           GBPm        GBPm              %       GBPm        GBPm              % 
------------------------------------------  ---------  ----------  -------------  ---------  ----------  ------------- 
Interest earning assets 
Mortgages                                      57,996       1,272           2.19     58,426       1,332           2.28 
Unsecured lending                               6,100         407           6.67      5,407         383           7.09 
Business lending(1)                             8,263         331           4.00      8,801         298           3.38 
Liquid assets                                  13,059         117           0.90     12,827          26           0.20 
Due from other banks                              853           2           0.22      1,482           -         (0.02) 
Swap income/other                                   -         104            n/a          -        (87)            n/a 
Other interest earning assets                       4           -            n/a          4           -            n/a 
------------------------------------------  ---------  ----------  -------------  ---------  ----------  ------------- 
Total average interest earning assets          86,275       2,233           2.59     86,947       1,952           2.25 
------------------------------------------  ---------  ----------  -------------  ---------  ----------  ------------- 
Total average non-interest earning assets       3,229                                 3,590 
------------------------------------------  ---------  ----------  -------------  ---------  ----------  ------------- 
Total average assets                           89,504                                90,537 
------------------------------------------  ---------  ----------  -------------  ---------  ----------  ------------- 
 
Interest bearing liabilities 
Current accounts                               15,829        (46)         (0.29)     14,516        (14)         (0.09) 
Savings accounts                               30,895       (147)         (0.48)     30,242       (123)         (0.41) 
Term deposits                                  12,894       (149)         (1.16)     18,259       (223)         (1.22) 
Wholesale funding                              16,169       (296)         (1.83)     13,591       (176)         (1.30) 
Other interest bearing liabilities                145         (3)            n/a        164         (4)            n/a 
------------------------------------------  ---------  ----------  -------------  ---------  ----------  ------------- 
Total average interest bearing liabilities     75,932       (641)         (0.84)     76,772       (540)         (0.70) 
Total average non-interest bearing 
 liabilities                                    7,903                                 8,414 
------------------------------------------  ---------  ----------  -------------  ---------  ----------  ------------- 
Total average liabilities                      83,835                                85,186 
Total average equity                            5,669                                 5,351 
------------------------------------------  ---------  ----------  -------------  ---------  ----------  ------------- 
Total average liabilities and average 
 equity                                        89,504                                90,537 
------------------------------------------  ---------  ----------  -------------  ---------  ----------  ------------- 
Net interest income                                         1,592           1.85                  1,412           1.62 
------------------------------------------  ---------  ----------  -------------  ---------  ----------  ------------- 
 
   (1)   Includes loans designated at fair value through profit or loss (FVTPL). 

Business and financial review

Chief Financial Officer's review

Underlying costs

 
                                                          2022   2021 
For the year ended 30 September                           GBPm   GBPm   Change 
-------------------------------------------------------  -----  -----  ------- 
Staff costs                                                375    348       8% 
Property and infrastructure                                 42     43     (2)% 
Technology and communications                              116    113       3% 
Corporate and professional services                        114    101      13% 
Depreciation, amortisation and impairment                  116    155    (25)% 
Other expenses                                             151    142       6% 
-------------------------------------------------------  -----  -----  ------- 
Total underlying operating and administrative expenses     914    902       1% 
Underlying CIR                                             52%    57%  (5)%pts 
-------------------------------------------------------  -----  -----  ------- 
 

Underlying operating expenses increased 1% relative to FY21 to GBP914m, while the underlying CIR improved 5%pts to 52%. This performance was driven by the continued delivery of savings from the Group's digitisation programme, which were more than offset by additional costs from higher inflation and targeted growth, ongoing digital development spend, and one-off costs relating to our colleague cost of living allowance, which was paid during the year.

Staff costs increased during the period by 8%, as the impact of wage increases, bonuses, the employee cost of living allowance and higher resources working on digital initiatives offset savings from a lower average headcount and a pension credit. Depreciation and amortisation reduced by 25% in the year, primarily as a result of changes to D&A practices made at the end of the last financial year, reflecting costs that are no longer capitalised and additional changes made in FY22 as the Group adopts Agile methodology. The increase in Corporate and professional services spend reflects the impact of higher change investment, while the increase in Other expenses primarily reflects higher digital development and growth related spend.

Impairments

 
                                                                                         % of    % of 
                                                                                  Net   loans   loans 
                                                 Credit     Gross  Coverage      cost      in      in 
                                             provisions   lending     ratio   of risk   Stage   Stage 
As at 30 September 2022                            GBPm     GBPbn       bps       bps       2       3 
------------------------------------------  -----------  --------  --------  --------  ------  ------ 
Mortgages                                            56      58.5         9       (5)     5.3     1.0 
Unsecured:                                          284       6.5       466       322    17.3     1.2 
------------------------------------------  -----------  --------  --------  --------  ------  ------ 
   of which credit cards                            246       5.5       481       347    13.9     1.3 
   of which personal loans and overdrafts            38       1.0       388       161    34.9     0.9 
------------------------------------------  -----------  --------  --------  --------  ------  ------ 
Business                                            117       8.1    159(1)     (112)    18.7     4.6 
------------------------------------------  -----------  --------  --------  --------  ------  ------ 
Total                                               457      73.1        62         7     7.8     1.4 
------------------------------------------  -----------  --------  --------  --------  ------  ------ 
   of which stage 2                                 268       5.7       472 
   of which stage 3                                 104       1.0     1,124 
------------------------------------------  -----------  --------  --------  --------  ------  ------ 
 

(1) Government-guaranteed element of loan balances excluded for the purpose of calculating the Business and total coverage ratio.

 
                                                                                         % of    % of 
                                                                                  Net   loans   loans 
                                                 Credit     Gross  Coverage      cost      in      in 
                                             provisions   lending     ratio   of risk   Stage   Stage 
As at 30 September 2021                            GBPm     GBPbn       bps       bps       2       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 purpose of calculating the Business and total coverage ratio.

During the year, the Group maintained robust credit quality across its portfolios, with very few significant provisions given low volume of borrowers flowing into default. Following an ECL credit in the income statement in 2021, there was a charge of GBP52m during the year, equivalent to a cost of risk of 7bps. Overall credit provisions remain robust at GBP457m (2021: GBP504m) with the aggregate coverage level at 62bps (2021: 70bps).

Business and financial review

Chief Financial Officer's review

During the fourth quarter of the financial year, the Group refreshed the macroeconomic scenarios used for IFRS 9 modelling, provided by Oxford Economics in early September, incorporating a weaker UK economic outlook. The weighted economic scenarios used at Q4 were prudently selected and incorporated a 10% weighting to the upside scenario, 55% to the base scenario and 35% to the downside scenario. The weighted economic scenario includes a contraction in GDP in 2023 of 1.5%, peak average unemployment of 5.3% in 2024 and a 7.4%/5.9% annual HPI contraction in 2023/2024, followed by a recovery in the outer years.

The Group applied expert credit risk judgement through PMAs to supplement the modelled provision to account for factors that the models cannot incorporate. The overall size of the PMAs at FY22 was GBP85m, reflecting a significant reduction from FY21 (GBP207m). The movement in PMAs during the year was primarily driven by the release of COVID-19 related judgemental PMAs across the portfolios, offset slightly by the introduction of a c.GBP27m cost of living PMA for Mortgage and Unsecured customers and a GBP30m economic resilience PMA for Business customers, recognising that the Business portfolio continues to face into an uncertain economic environment.

Credit quality has remained robust with loans classified as stage 2 reducing from 14% of the portfolio at FY21 to 8% at FY22, primarily as the removal of COVID-19-linked PMAs in the retail portfolio saw customers return to stage 1. In line with the overall reduction in provisions outlined above, the provision coverage level has reduced but remains appropriate for the underlying level of risk.

In Mortgages, the coverage ratio of 9bps (2021: 15bps) is deemed appropriate for the conservative loan book and remains ahead of pre-pandemic levels. Our Unsecured lending book coverage ratio of 466bps (2021: 380bps) includes 481bps of coverage for our high -- quality credit card portfolio and 388bps of coverage for our smaller personal loans and overdrafts book. Arrears levels remain modest across the portfolio, with c.99% in each of the personal loans and cards portfolios in either stage 1 or stage 2 not past due. The increase in the percentage of balances in stage 2 to 17.3% (2021: 9.7%) is primarily due to the movement of all personal loans made via the Salary Finance JV into Stage 2, following an increased number of customers entering into financial difficulty during the year.

In Business, the coverage ratio of 159bps (2021: 306bps) reflects a 147bps reduction in the year. There has been little evidence of deterioration in asset quality to date, with the level of specific provisions continuing to be low. Total balances in either stage 1 or stage 2 not past due represents c.95% of the portfolio. The reduction in the percentage of balances in stage 2 to 18.7% (2021: 29.2%) is primarily as a result of changes applied to the significant increase in credit risk (SICR) criteria, which resulted in these customers migrating back to stage 1.

Adjusting items and statutory profit

 
                                                        2022    2021 
                                                        GBPm    GBPm 
----------------------------------------------------  ------  ------ 
Underlying profit on ordinary activities before tax      789     801 
Adjusting items 
- Restructuring charges                                 (82)   (146) 
- Acquisition accounting unwinds                        (35)    (88) 
- Legacy conduct costs                                   (8)    (76) 
- Other items                                           (69)    (74) 
----------------------------------------------------  ------  ------ 
Statutory profit on ordinary activities before tax       595     417 
Tax (expense)/credit                                    (58)      57 
----------------------------------------------------  ------  ------ 
Statutory profit for the year                            537     474 
----------------------------------------------------  ------  ------ 
Underlying RoTE                                        13.5%   17.8% 
----------------------------------------------------  ------  ------ 
Statutory RoTE                                         10.3%   10.2% 
----------------------------------------------------  ------  ------ 
TNAV per share                                        383.0p  289.8p 
----------------------------------------------------  ------  ------ 
 

Overview

The Group made a statutory profit before tax of GBP595m after deducting GBP194m of adjusting items (2021: GBP384m).

TNAV per share increased 93.2p in FY22 to 383.0p. The key drivers of the increase were +38.3p of earnings and +47.7p of positive cash flow hedge reserve movements, given the rate environment.

Restructuring charges

Restructuring charges totalled GBP82m in the year, driven by charges related to the Group's digital investment. This included c.GBP60m related to the delivery of IT changes and c.GBP17m related to closure of stores, changes to the operating model and property footprint. The Group continues to expect to incur a total of c.GBP275m of restructuring costs to implement its digital strategy across FY22-24, with the majority now expected to be incurred in FY23.

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. GBP35m was reflected in FY22 and the Group expects a further c.GBP30m of total acquisition accounting unwind charges over the next three years.

Legacy conduct

Charges of GBP8m were incurred in FY22 relating to legal proceedings and legacy claims arising in the ordinary course of the Group's business.

Other items

Other items include a c.GBP60m charge recognised in the year following a reassessment of the Group's capitalisation practices, against the backdrop of the move to Agile project delivery and following the completion of the annual impairment review of intangible assets.

Business and financial review

Chief Financial Officer's review

Taxation

On a statutory basis, there was a GBP58m tax charge during the year. This included an overall deferred tax credit reflecting additional historical losses recognised in the year, which offset a deferred tax charge reflecting the impact of the enactment of the reduction in the banking surcharge from 8% to 3%, and the increase in the threshold below which it is not chargeable, to GBP100m (previously GBP25m).

Balance sheet

 
As at 30 September                  2022    2021    Change 
-------------------------------  -------  ------  -------- 
Mortgages                         58,155  58,104      0.1% 
Unsecured                          6,163   5,415     13.8% 
Business(1)                        8,247   8,477    (2.7)% 
-------------------------------  -------  ------  -------- 
Total customer lending            72,565  71,996      0.8% 
-------------------------------  -------  ------  -------- 
 
Relationship deposits(2)          34,649  30,596     13.2% 
Non-linked savings                17,048  21,285   (19.9)% 
Term deposits                     13,663  14,989    (8.8)% 
-------------------------------  -------  ------  -------- 
Total customer deposits           65,360  66,870    (2.3)% 
-------------------------------  -------  ------  -------- 
 
Wholesale funding                 17,012  13,596     25.1% 
-------------------------------  -------  ------  -------- 
   of which TFS                        -   1,244    (100)% 
   of which TFSME                  7,200   4,650     54.8% 
-------------------------------  -------  ------  -------- 
Loan to deposit ratio (LDR)         111%    108%     3%pts 
Liquidity coverage ratio (LCR)      138%    151%  (13)%pts 
-------------------------------  -------  ------  -------- 
 
   (1)   Of which, GBP963m government lending (2021: GBP1,318m). 
   (2)   Current account and linked savings balances. 

Customer lending and deposits

At an aggregate level, Group lending increased by 0.8% to GBP72.6bn. The increase was primarily driven by growth in Unsecured and non -- government guaranteed Business lending, while Mortgage balances remained stable. Total customer deposits reduced by 2.3% to GBP65.4bn reflecting changes to the overall mix of customer and wholesale funding balances, with growth in PCA and Relationship deposits offset by lower non-linked term deposits and non-linked savings.

Mortgage balances were broadly stable at GBP58.2bn as the Group prioritised margin over volume growth in a competitive environment, in line with the longer-term strategy. Overall housing demand remained strong throughout the year, while pricing remained competitive. During the final quarter of the year, mortgage spreads had begun to recover as increases in customer rates outpaced changes in swap rates, however heightened volatility towards the end of the financial year resulted in further pressure on mortgage margins.

Business lending reduced overall by 2.7% during the year to GBP8.2bn. This was mainly driven by government-guaranteed lending, which reduced by c.27% to GBP1.0bn following the closure of the schemes last year and as businesses made repayments. Non-government business lending increased by c.2% in the year to GBP7.3bn, supported by a growing pipeline of new business through the year.

Unsecured balances grew by 13.8% in the year to GBP6.2bn, driven by a strong performance in the credit cards where balances increased by c.21% in the year to GBP5.2bn. This performance was supported by strong new credit card sales and a recovery in consumer spending, as the Group increased its market share of balances during the year by 0.9% to 8.3%. During the year, the Group observed customer behavioural activity outperforming assumptions, resulting in the card EIR asset performing as expected.

Personal loans and overdraft balances reduced c.14% during the year to GBP1.0bn in line with the Group's strategy to reduce its participation in this market.

The Group's strategy to optimise its overall funding mix drove a 2% reduction in customer deposits during the year to GBP65.4bn. The Group also continued to improve its mix of customer deposits, as relationship balances grew 13%, supported by strong customer propositions, while non-linked savings and non-linked term deposits reduced by 20% and 9% respectively.

Wholesale funding and liquidity

The Group maintains a robust funding and liquidity position. The Group's LDR increased 3%pts in the year to 111% (2021: 108%), primarily as a result of the continued reduction in more expensive term deposits. The Group's LCR of 138% (2021: 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.

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) early in the year ahead of its closure, taking the total outstanding amount to GBP7.2bn, while at the same time repaying its remaining GBP1.2bn of TFS drawings. The incremental TFSME drawings, along with successful residential mortgage-backed securities (RMBS) and Covered Bond transactions during the year, meant wholesale funding increased to GBP17.0bn (FY21: GBP13.6bn), offsetting the reduction in term deposits.

Business and financial review

Chief Financial Officer's review

Capital

 
                                     2022    2021     Change 
---------------------------------  ------  ------  --------- 
CET1 ratio (IFRS 9 transitional)    15.0%   14.9%    0.1%pts 
CET1 ratio (IFRS 9 fully loaded)    14.6%   14.4%    0.2%pts 
Total capital ratio                 22.0%   22.0%      -%pts 
MREL ratio                          32.1%   31.9%    0.2%pts 
UK leverage ratio                    5.1%    5.2%  (0.1)%pts 
RWAs (GBPm)                        24,148  24,232     (0.3)% 
---------------------------------  ------  ------  --------- 
   of which Mortgages (GBPm)        9,155  10,010     (8.5)% 
   of which Unsecured (GBPm)        4,817   4,311      11.7% 
   of which Business (GBPm)         6,196   6,040       2.6% 
---------------------------------  ------  ------  --------- 
 

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.

Overview

During 2022, the Group maintained a strong capital position with a CET1 ratio (IFRS 9 transitional basis) of 15.0% (2021: 14.9%) and a total capital ratio of 22.0% (2021: 22.0%). During the year, the Group announced its updated capital framework including a 30% full year dividend payout level, supplemented with buybacks subject to ongoing assessment of surplus capital, market conditions and regulatory approval. In line with the updated capital framework, the movement in the CET1 ratio during the year included a 58bps impact from the proposed full year dividend of 10p in line with the dividend policy and 31bps impact from the initial GBP75m share buyback. Excluding shareholder distributions, capital generation was underpinned by ongoing profitability and lower RWAs.

Capital requirements

As at 30 September 2022, the Group's Pillar 2A requirement had a CET1 element of 1.7%. Overall, the Group's CRD IV minimum CET1 capital requirement (or maximum distributable amount threshold) as at the end of FY22 was 8.7%. The Group's capital framework assumes the Countercyclical buffer returns to 2%.

CET1 capital

The Group's transitional CET1 ratio increased by 12bps over the year. Total underlying capital generation of 195bps was driven by 226bps of underlying profit, offset by 4bps from higher RWAs (excluding the impact to RWAs from intangible asset relief changes) and 27bps of AT1 distributions and related costs. Adjusting items consumed c.40bps while there was 58bps of accrual for expected dividends and 31bps from the GBP75m share buyback. The removal of the CRR II software benefit consumed a further 53bps. The announcement of an additional GBP50m share buyback will reduce CET1 resources in Q1 2023.

RWAs

Overall, RWAs reduced by 0.3% during FY22 to GBP24.1bn. To date, RWA pro-cyclicality has remained low, although the risk still remains, with the timing of any increase uncertain. In Mortgages, RWAs reduced by GBP0.9bn as probability of default (PD) recalibrations and stronger HPI more than offset growth in balances and other movements. In Business, RWAs increased by GBP0.2bn mainly as a result of higher customer balances, excluding government-backed balances that carry a 0% risk weight. In Unsecured, RWAs increased by GBP0.5bn in line with the increase in customer lending during the financial year. Non-credit RWAs were GBP3.1bn as at FY22 (2021: GBP2.7bn). In H1 2023, the Group expects a c.GBP1bn-GBP1.5bn increase from the implementation of hybrid model changes.

Robust capital position in the face of economic uncertainty

While credit provisions have reduced to GBP457m (2021: GBP504m) reflecting the robust credit performance and removal of COVID-19-related PMAs, the Group maintains a strong level of coverage to manage the impact of a weaker economy, and subsequent increase in credit losses. In addition, the Group also retained a significant CET1 management buffer of GBP1.5bn in excess of its CRD IV regulatory requirement as at FY22, providing further potential loss-absorbing capacity.

Business and financial review

Chief Financial Officer's review

MREL

The Group's Minimum Requirements for Own Funds and Eligible Liabilities (MREL) ratio increased from 31.9% to 32.1% during the year, comfortably exceeding its 2022 end-state MREL requirement of 24.9% of RWAs.

 
CET1 capital movements(1)                    2022 
------------------------------------------  ----- 
Opening CET1 ratio                          14.9% 
Capital generated (bps)                       226 
RWA growth (bps)                              (4) 
AT1 distributions (bps)                      (27) 
------------------------------------------  ----- 
Underlying capital generated (bps)            195 
------------------------------------------  ----- 
Restructuring charges (bps)                  (25) 
Acquisition accounting unwind (bps)          (10) 
Conduct (bps)                                 (3) 
Foreseeable ordinary dividends (bps)         (58) 
Share buyback (bps)                          (31) 
Other (bps)                                   (3) 
Reversal of intangible asset relief (bps)    (53) 
------------------------------------------  ----- 
Net capital generated (bps)                    12 
------------------------------------------  ----- 
Closing CET1 ratio                          15.0% 
------------------------------------------  ----- 
 

(1) This table shows the capital position on a CRD IV 'fully loaded' basis with IFRS 9 transitional adjustments applied.

FY23 outlook

In FY23, we anticipate full year NIM to be c.185-190bps, reflecting the benefit of the current rate environment, structural hedge reinvestment and deposit pricing, offset by ongoing competitive pricing pressures, particularly in Mortgages, higher wholesale funding costs and higher liquidity requirements, as a consequence of increased market volatility.

The Group now expects to deliver a CIR of around 50% in FY23. The Group continues to expect to incur c.GBP275m of restructuring charges between FY22-24, reflecting its ongoing digitisation programme, with the majority of the remaining c.GBP190m expected to be incurred in FY23.

The Group now expects its cost of risk for FY23 to normalise around its through the cycle average of c.30-35bps.

Consistent with our strategy to diversify the balance sheet, we anticipate growth in overall lending in FY23, with more moderate growth in Unsecured and Business (non-government) relative to FY22, and modest growth in Mortgages.

The Group expects to issue GBP1.5bn-GBP2.5bn of secured issuance in FY23 subject to deposit flows and relative cost, while MREL issuance is expected to be broadly limited to maintaining the current surplus to regulatory requirements.

During H122, the Group announced its long -- term CET1 target range of 13-13.5%. During FY23, the Group expects to operate above 14%, given the level of macroeconomic uncertainty. This includes the anticipated impact of implementing mortgage hybrid models, which is currently anticipated to increase RWAs by c.GBP1bn-GBP1.5bn in H123.

In line with the Company's capital framework and dividend policy, which was outlined alongside H122 results, the Board is today announcing a GBP50m extension of the Group's existing buyback programme. Given the timing of this year's stress test results, the Group does not expect to announce further buybacks until Q423.

Business and financial review

Chief Financial Officer's review

 
  Guidance 
  FY23 outlook                            Medium-term outlook 
  --------------------------------        ------------------------------- 
  NIM                                     Statutory RoTE 
  185-190bps                              c.11% in FY24, consistent 
                                           with target of >10% 
  --------------------------------        ------------------------------- 
  Underlying costs                        Growth 
  c.50% CIR                               Targeting growth in Unsecured 
                                           and Business (non-government), 
                                           maintaining Mortgage 
                                           market share 
  --------------------------------        ------------------------------- 
  Cost of risk                            Income 
  Normalise around the                    Mix-driven NIM expansion 
   through-the-cycle level 
   of c.30-35bps 
  --------------------------------        ------------------------------- 
  Restructuring costs                     Gross savings 
  c.GBP275m across FY22-FY24,             Gross cost savings of 
   with the majority in                    c.GBP175m by FY24 generate 
   FY23                                    headroom to absorb inflation 
                                           and re-investment 
  --------------------------------        ------------------------------- 
  Dividend                                Underlying costs 
  30% dividend payout supplemented        Underlying CIR to be 
   with buybacks                           <50% 
 

Business and financial review

Chief Financial Officer's review

Medium-term outlook

In the medium term the Group's digital acceleration will support the delivery of valuable and differentiated propositions to drive profitable growth. The Group will continue to target diversification on both sides of the balance sheet, delivering growth in Unsecured and Business lending, while maintaining our mortgage market share. We continue to target strong growth in new PCA and BCA customer numbers, improving the overall cost of funds.

We continue to expect our strategy to digitise the Bank to deliver around GBP175m of gross cost savings over the period FY22-24, generating headroom to absorb inflation and reinvestment. We have made good progress to date with savings driven by reductions in headcount and property, third party spend and savings from digitisation. Given the uncertain economic environment that has resulted in persistent high levels of inflation, alongside our strategy to grow the balance sheet, the Group continues to target a CIR rather than a nominal cost target and expects to achieve an underlying CIR of <50% by FY24.

Following the full recognition of historical losses, the Group expects its effective tax rate to be maintained in the mid 20%s from FY23 based on enacted legislation.

Overall, the Group now expects to deliver a c.11% statutory RoTE by FY24 and is well placed to deliver strong, profitable growth through the acceleration of our digital strategy.

In order to support its FY24 RoTE target, the Group anticipates returning to its 13-13.5% CET1 target range by FY24, assuming no material change in the economic outlook. The Group will target a 30% full year dividend payout level and will supplement dividends with buybacks, subject to an ongoing assessment of surplus capital, market conditions and regulatory approval.

Clifford Abrahams

Chief Financial Officer

20 November 2022

Business and financial review

Chief Financial Officer's review

Summary income statement - statutory basis

 
                                                        2022     2021 
For the year ended 30 September                         GBPm     GBPm 
---------------------------------------------------  -------  ------- 
Net interest income                                    1,576    1,357 
Non-interest income                                      140      132 
---------------------------------------------------  -------  ------- 
Total operating income                                 1,716    1,489 
Operating and administrative expenses                (1,069)  (1,203) 
---------------------------------------------------  -------  ------- 
Operating profit before impairment losses                647      286 
Impairment (losses)/credit on credit exposures          (52)      131 
---------------------------------------------------  -------  ------- 
Statutory profit on ordinary activities before tax       595      417 
Tax (expense)/credit                                    (58)       57 
---------------------------------------------------  -------  ------- 
Statutory profit after tax                               537      474 
---------------------------------------------------  -------  ------- 
 

The Group has recognised a statutory profit before tax of GBP595m (2021: GBP417m). The increase in statutory profit is driven by higher income and lower statutory costs, offset slightly by our impairment performance, given the scale of the writeback recognised last year. The Group continues to expect that the difference between underlying and statutory profit will reduce over time as we deliver our strategy and the exceptional charges reduce.

Performance measures(1)

 
                                  2022   2021    Change 
-------------------------------  -----  -----  -------- 
Profitability 
RoTE                             10.3%  10.2%   0.1%pts 
CIR                                62%    81%    19%pts 
Return on assets                 0.60%  0.52%  0.08%pts 
Basic earnings per share (EPS)   32.4p  27.3p      5.1p 
-------------------------------  -----  -----  -------- 
 

(1) For a definition of each of the performance measures, refer to 'Measuring the Group's performance' on pages 124 to 133.

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 as presented to the CEO, Executive Leadership Team and Board and excludes 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 134.

 
                                                                  Acquisition 
                                        Statutory  Restructuring   accounting    Legacy          Underlying 
                                          results        charges      unwinds   conduct   Other       basis 
2022 income statement                        GBPm           GBPm         GBPm      GBPm    GBPm        GBPm 
--------------------------------------             -------------  -----------  --------  ------ 
Net interest income                         1,576              -           16         -       -       1,592 
Non-interest income                           140              -           16         -       7         163 
--------------------------------------  ---------  -------------  -----------  --------  ------  ---------- 
Total operating income                      1,716              -           32         -       7       1,755 
Total operating and administrative 
 expenses before impairment losses        (1,069)             82            3         8      62       (914) 
--------------------------------------  ---------  -------------  -----------  --------  ------  ---------- 
Operating profit before impairment 
 losses                                       647             82           35         8      69         841 
Impairment losses on credit exposures        (52)              -            -         -       -        (52) 
--------------------------------------  ---------  -------------  -----------  --------  ------  ---------- 
Profit on ordinary activities 
 before tax                                   595             82           35         8      69         789 
--------------------------------------  ---------  -------------  -----------  --------  ------  ---------- 
Financial performance measures 
RoTE                                        10.3%           1.4%         0.6%      0.1%    1.1%       13.5% 
CIR                                         62.3%         (4.4)%       (1.8)%    (0.4)%  (3.6)%       52.1% 
Basic EPS                                   32.4p           4.2p         1.8p      0.4p    3.6p       42.4p 
--------------------------------------  ---------  -------------  -----------  --------  ------  ---------- 
 

Business and financial review

Chief Financial Officer's review

 
                                                                  Acquisition 
                                        Statutory  Restructuring   accounting    Legacy          Underlying 
                                          results        charges      unwinds   conduct   Other       basis 
2021 income statement                        GBPm           GBPm         GBPm      GBPm    GBPm        GBPm 
--------------------------------------             -------------  -----------  --------  ------ 
Net interest income                         1,357              -           55         -       -       1,412 
Non-interest income                           132              -           23         -       5         160 
--------------------------------------  ---------  -------------  -----------  --------  ------  ---------- 
Total operating income                      1,489              -           78         -       5       1,572 
Total operating and administrative 
 expenses before impairment losses        (1,203)            146           10        76      69       (902) 
--------------------------------------  ---------  -------------  -----------  --------  ------  ---------- 
Operating profit before impairment 
 losses                                       286            146           88        76      74         670 
Impairment credit on credit exposures         131              -            -         -       -         131 
--------------------------------------  ---------  -------------  -----------  --------  ------  ---------- 
Profit on ordinary activities 
 before tax                                   417            146           88        76      74         801 
--------------------------------------  ---------  -------------  -----------  --------  ------  ---------- 
Financial performance measures 
RoTE                                        10.2%           2.9%         1.7%      1.5%    1.5%       17.8% 
CIR                                         80.8%         (8.9)%       (5.4)%    (4.6)%  (4.5)%       57.4% 
Basic EPS                                   27.3p           7.8p         4.7p      4.1p    4.0p       47.9p 
--------------------------------------  ---------  -------------  -----------  --------  ------  ---------- 
 

Risk Management

Credit risk

At a time of ongoing challenge for the UK economy, our lending portfolios remain well positioned.

A disciplined approach to credit risk management supports the Group's operations and has underpinned its resilience in recently challenging times.

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. The emergence of the significant inflationary headwinds and cost of living pressures have the potential to affect customer resilience and debt affordability. The Group has taken a number of steps to support customers through this period of heightened affordability pressure, and ensure that its 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 approach 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 credit strategies, regular asset quality reviews and the independent oversight of credit decisions and portfolios.

The Group maintained a controlled approach to portfolio management and appetite for new lending origination as it continued to recognise some of the delayed impacts of COVID 19, with updates to underwriting criteria to reflect the uncertain economic environment and emerging inflationary headwinds. The FY23 RAS continues to consider the impact of those inflationary headwinds and cost of living pressures, and is focussed on supporting customers through this challenging period. Climate risk is an increasingly important component of the broader RMF and we have recognised this risk through the inclusion of climate-related risk factors within the FY22 RAS. The framework has been updated to embed climate risk considerations across various aspects of customer lending and credit risk management practices.

Measurement

The Group uses a range of statistical models, supported by both internal and external data, to measure credit risk exposures. These models underpin the IRB capital calculation for the Mortgage and Business portfolios, and account management activity for all portfolios. Further information on the measurement and calculation of ECL and the Group's approach to the impairment of financial assets can be found on page 20.

Political and economic risk is an emerging risk for the Group and includes the future impact on 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 39 to 41.

Mitigation

The Group maintains a dynamic approach to credit management and takes appropriate 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 automated credit strategies, individual transactions, asset quality, analysis of the performance of the various credit portfolios, and oversight of credit portfolios across the Group. Portfolio monitoring techniques include product, industry, geographic concentrations and delinquency trends, as well as considering layered risks where customers may have more than one higher risk characteristic.

There is regular analysis of borrower ability to meet interest and capital repayment obligations, with early support and mitigating steps taken where required. The Group has taken additional steps to update affordability assessments in response to the inflationary and cost of living pressures facing customers. Credit risk mitigation is also supported, in part, by obtaining collateral, and corporate and personal guarantees where appropriate.

The key mitigating measures are described below.

Credit assessment and mitigation

Credit risk is managed in accordance with lending policies, the Group's risk appetite and the RMF. Lending policies and performance against risk appetite are reviewed regularly.

The Group uses a variety of lending criteria when assessing applications for Mortgage and Unsecured customers. The approval process uses credit scorecards, credit strategies and affordability assessments, and involves a review of an applicant's previous credit history using information held by credit reference agencies. Manual underwriting assessments are also used as and when required. The Group also utilises quantitative thresholds, for example debt to income ratios, as well as the ratio of borrowing to collateral. Some of these limits relate to internal approval levels and others are hard limits above which the Group will reject the application.

For residential mortgages, the Group's policy is to accept only standard applications within Board approved risk appetite limits. Included within these is the maximum percentage LTV limit that is offered subject to loan size and customer income. Product availability may be altered depending on market conditions and outlook. Product types such as BTL and residential interest-only mortgages are controlled by transactional limits covering both LTV and value.

Risk Management

Credit risk

For business customers, credit risk is further mitigated by focusing on business sectors where the Group has specific expertise, and through limiting exposures on higher value loans and to certain sectors. When making credit decisions for business customers the Group will routinely assess the primary source of repayment, most typically the cash generated by the customer through its normal trading cycle. Secondary sources of repayment are also considered and while not the focus of the lending decision, collateral will be taken when appropriate. The Group seeks to obtain security cover and, where relevant, guarantees from borrowers.

Specialist expertise

Credit quality is managed and monitored by skilled teams including, where required, specialists that provide dedicated support for vulnerable customers experiencing financial or other types of difficulties. These specialists act within agreed delegated authority levels set in accordance with experience and capabilities.

Credit strategy and policy

Credit risks associated with lending are managed through the application of detailed lending policies and standards that outline the approach to lending, underwriting criteria, credit mandates, concentration limits and product terms.

Significant credit risk strategies and policies are reviewed and approved annually by the Credit Risk Committee. For complex credit products and services, the Chief Credit Officer and Credit Risk Committee provide a policy framework that identifies, quantifies and mitigates risks. These policies and frameworks are delegated to, and disseminated under, the guidance and control of the Board and senior management, with appropriate oversight through governance committees.

Specialist credit teams provide oversight of credit portfolio performance as well as adherence to credit risk policies and standards. Activities include targeted risk-based reviews, providing an assessment of the effectiveness of internal controls and risk management practices. Bespoke assignments are also undertaken in response to emerging risks and regulatory requirements. Independent assurance reviews are regularly undertaken by Internal Audit.

Portfolio oversight

The Group's credit portfolios, and the key benchmarks, behaviours and characteristics that are used to manage portfolios, are regularly monitored, with portfolio monitoring reports provided for review by senior management.

Controls over rating systems

The Group has a Model Risk Oversight team that sets common minimum standards for risk models and associated rating systems to ensure these are developed and monitored consistently, and are of sufficient quality to support business decisions and meet regulatory requirements. The Group performs an annual self-assessment of its rating systems to ensure ongoing CRR compliance.

The Group also utilises other instruments and techniques across its wider balance sheet. These are summarised below:

Derivatives

The Group maintains control limits on net open derivative positions. At any one time, the amount subject to credit risk is limited to the current fair value of instruments that are favourable to the Group (i.e. assets where the fair value is positive) and in relation to derivatives, may only be a small fraction of the contract, or notional values associated with instruments outstanding. This credit risk is managed as part of the customer's overall exposure together with potential exposures from market movements.

Master netting agreements

The Group further restricts its exposure to credit losses by entering into master netting arrangements with counterparties whom it undertakes a significant volume of transactions. Master netting arrangements do not generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross basis. However, credit risk associated with the favourable contracts is reduced by a master netting arrangement to the extent that, if any counterparty failed to meet its obligations in accordance with the agreed terms, all amounts with the counterparty are terminated and settled on a net basis. Derivative financial instrument contracts are typically subject to the International Swaps and Derivatives Association (ISDA) master netting agreements, as well as Credit Support Annexes, where relevant, around collateral arrangements attached to those ISDA agreements. Derivative exchange or clearing counterparty agreements exist where contracts are settled via an exchange or clearing house.

Collateral

The Group evaluates each customer's creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Group upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held as security, and other credit enhancements includes the following:

Residential mortgages

Residential property is the Group's main source of collateral on mortgage lending, and means of mitigating loss in the event of the default risk inherent in its residential mortgage portfolios. All lending activities are supported by an appropriate form of valuation. This valuation is applied using either a physical valuation, or another method that is not reliant on a physical inspection, but utilises data and modelled information, such as desktop, automated valuation model or indexed valuations (subject to policy rules and confidence levels).

It is the Group's policy to dispose of repossessed properties, with the proceeds used to reduce or repay the outstanding balance. The Group does not occupy repossessed properties for its own business use.

Commercial property

Commercial property is a source of collateral on business lending, and means of mitigating loss in the event of default (within the Stage 3 Business balance of GBP376m, GBP106m is collateralised on property), (2021: Stage 3 Business balance of GBP235m, with GBP117m collateralised on property). For commercial loans, collateral comprises first legal charges over freehold, or long leasehold property (including formal Companies House registration where appropriate). All commercial property collateral is subject to an independent, professional valuation when taken and thereafter subject to periodic review in accordance with policy requirements.

Risk Management

Credit risk

Non-property related collateral

In addition to residential and commercial property based security, the Group also takes other forms of collateral when lending. This collateral can involve obtaining security against the underlying loan through the use of cash collateral and/or netting agreements, both of which reduce the original exposure by the amount of collateral held, subject to volatility and maturity adjustments where applicable. It can also include specific or interlocking guarantees, and loan agreements, which include affirmative and negative covenants and, in some instances, guarantees of counterparty obligations.

The Group also provides asset-backed lending in the form of asset and invoice finance. Security for these exposures is held in the form of direct recourse to the underlying asset financed.

Generally, the Group does not take possession of collateral it holds as security, or call on other credit enhancements, that would result in recognition of an asset on its balance sheet.

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 for changes in market conditions.

-- RAS measures: Measures are reported monthly to ensure adherence to appetite. A 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, as well as considering layered risks where customers may have more than one higher risk characteristic.

-- Single large exposure excesses: Excesses on exposures under the delegated commitment authority of the Transactional Credit Committee are reported to the committee when above defined limits. 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 EBA for financial reporting. Forbearance concessions include the granting of more favourable terms and conditions than those provided at drawdown of the facility, or conditions that 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 any assessment adequately captures and reflects the most recent customer behaviours and market conditions.

Measuring credit risk within asset portfolios

At each reporting date, the Group assesses financial assets measured at amortised cost, as well as loan commitments and financial guarantees, 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 Group adopts two approaches in the measurement of credit risk under IFRS 9:

Individually assessed

A charge is taken to the income statement when an individually assessed provision (IA) has been recognised, or a direct write-off has been applied to an asset balance. These 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 approach is supplemented by management judgement in the form of PMAs where necessary.

ECL methodology

ECL methodology is based upon the combination of probability of default (PD), loss given default (LGD) and exposure at default (EAD) estimates that consider a range of factors that impact on credit risk and the level of impairment loss provisioning. The Group uses reasonable and supportable forecasts of future economic conditions in estimating the ECL allowance. The methodology and assumptions used in the ECL calculation are reviewed regularly and updated as necessary.

Risk Management

Credit risk

The calculated model ECL is determined using the following classifications:

 
                ECL calculation 
Classification   period          Description 
--------------  ---------------  --------------------------------------- 
Stage           12 months        An exposure that is not credit-impaired 
 1                                on initial recognition and has 
                                  not experienced a SICR since initial 
                                  recognition. 
--------------  ---------------  --------------------------------------- 
Stage           Lifetime         An exposure that has experienced 
 2                                a SICR since initial recognition, 
                                  but is not yet deemed to be credit 
                                  impaired. 
--------------  ---------------  --------------------------------------- 
Stage           Lifetime         An exposure that is credit-impaired. 
 3 
--------------  ---------------  --------------------------------------- 
 

In addition, purchased or originated credit-impaired (POCI) financial assets are those that are assessed as being credit-impaired upon initial recognition. Once a financial asset is classified as POCI, it remains there until derecognition irrespective of any changes to its credit quality. POCI financial assets are included in Stage 3 with corresponding values disclosed by way of footnote to the relevant tables. The Group regards the date of acquisition as the origination date for purchased portfolios.

A Stage 2 ECL is required where a SICR has been identified, such as a deterioration in the PD since origination. Absent any specific SICR factors, the Group operates a 30 DPD backstop for classification as Stage 2, and 90 DPD for Stage 3. Forborne exposures can be classed as either Stage 2 or Stage 3 depending on the type of forbearance programme that has been applied to the customer.

The SICR criteria and triggers are parameters within the ECL calculation process and, as such, are considered under the same governance pathway as the Group's IFRS 9 models. This approach means that any changes to the triggers are initially submitted to and endorsed by the Credit Model Technical Forum, with formal approval provided by the MGC.

During the year, refinements were made to the SICR criteria within the Group's Business portfolio to more closely reflect the level of credit risk. On adoption of IFRS 9 from 1 October 2018, the Group had selected eCRS based SICR triggers as one of the tools for monitoring the credit risk on Business customers. The effectiveness of all triggers were reviewed during the year, including overlaps with other causes of stage migration, and the Group concluded that its hard triggers based on internal credit risk rating were ineffective when used in conjunction with the PD deterioration threshold. In addition, the threshold definition has been simplified and is now set at a 50% increase in the annualised PD since origination, subject to a 100bps floor in the movement. The overall impact of this refinement has resulted in more of the Business portfolio remaining in Stage 1 in the current year. As this change represents a revision to model parameters rather than a change of policy, comparatives have not been restated.

The Credit Risk Committee provides oversight on the adequacy of ECL provisioning with reviews and robust challenge of the calculation and management judgement recommendations. This includes the rationale behind the inclusion of PMAs, the basis on which these are calculated and the proposed timeline for their release.

The Boards' Audit Committee provides oversight to the ECL calculation and measurement of ECL, with reviews and robust challenge of all calculated outcomes and management judgements.

Further detail on the accounting policy applied to ECLs can be found in note 3.2 to the financial statements.

Accounting and regulatory credit loss frameworks

The approach to calculating credit losses differs between the accounting and regulatory frameworks applicable to the Group, with the most significant difference being that the concept of SICR, which moves exposures from a 12-month to a lifetime ECL calculation in the accounting framework, does not exist under the regulatory framework. The approach to staging under IFRS 9 is also not applicable under regulatory credit loss reporting.

Both frameworks calculate credit losses under a PD x LGD x EAD approach, with the regulatory IRB approach assessing these in the next 12 months, whereas the accounting framework under IFRS 9 requires these losses assessed on a forward-looking view, with a lifetime loss calculated where appropriate. Credit losses are supplemented by management judgements in the form of PMAs, where required, under the accounting framework.

Both the accounting and regulatory definitions of default are materially aligned, with default being triggered at 90 DPD, with the exception of the heritage Virgin Money mortgage models, that 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 the hybrid model adoption, which is anticipated in 2023.

Cure periods

The Group aligns the regulatory cure periods for forborne exposures in its IFRS 9 staging criteria at a minimum period of either 24, or 36 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, and holds GBP12.2bn (2021: GBP9.7bn) of cash and balances with central banks and GBP0.7bn (2021: GBP0.8bn) due from other banks at amortised cost, with a further GBP5.1bn (2021: GBP4.4bn) of financial assets at fair value through other comprehensive income (FVOCI). Additionally GBP11.0bn of cash is held with the BoE (2021: GBP8.3bn), 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 and credit-related commitments

The following tables show the levels of concentration of the Group's financial assets and credit-related commitments:

 
                                                  2022                                 2021 
--------------------------------  ------------------------------------  ----------------------------------- 
                                       Gross                                 Gross 
                                       loans                                 loans 
                                         and                                   and 
                                    advances                              advances 
                                          to  Credit-related                    to  Credit-related 
                                   customers     commitments     Total   customers     commitments    Total 
                                        GBPm            GBPm      GBPm        GBPm            GBPm     GBPm 
--------------------------------  ----------  --------------  --------  ----------  --------------  ------- 
Mortgages                             58,464           4,200    62,664      58,441           2,845   61,286 
Unsecured                              6,513          11,057    17,570       5,770          10,507   16,277 
Business                               8,169           4,102    12,271       8,340           3,769   12,109 
--------------------------------  ----------  --------------  --------  ----------  --------------  ------- 
Total                                 73,146          19,359    92,505      72,551          17,121   89,672 
Impairment provisions on credit 
 exposures(1)                          (454)             (3)     (457)       (496)             (8)    (504) 
Fair value hedge adjustment            (941)               -     (941)       (179)               -    (179) 
--------------------------------  ----------  --------------  --------  ----------  --------------  ------- 
Maximum credit risk exposure 
 on lending assets                    71,751          19,356    91,107      71,876          17,113   88,989 
Cash and balances with central 
 banks                                                          12,221                                9,711 
Financial instruments at FVOCI                                   5,064                                4,352 
Due from other banks                                               656                                  800 
Other financial assets at 
 fair value                                                         78                                  153 
Derivative financial assets                                        342                                  140 
--------------------------------  ----------  --------------  --------  ----------  --------------  ------- 
Maximum credit risk exposure 
 on all financial assets(2)                                    109,468                              104,145 
--------------------------------  ----------  --------------  --------  ----------  --------------  ------- 
 

(1) The total ECL provision covers both on and off-balance sheet exposures, which are reflected in notes 3.2 and 3.13 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.

Group credit highlights

In addition to the balance sheet position above, key metrics of relevance are as follows:

 
                                                                 2022     2021 
Group credit highlights                                          GBPm     GBPm 
-------------------------------------------------------------  ------  ------- 
Impairment charge/(credit) on credit exposures 
Mortgage lending                                                 (30)     (44) 
Unsecured lending                                                 178     (32) 
Business lending                                                 (96)     (55) 
-------------------------------------------------------------  ------  ------- 
Total Group impairment (credit)/charge                             52    (131) 
-------------------------------------------------------------  ------  ------- 
Underlying impairment (credit)/charge(1) to average customer 
 loans (cost of risk)                                           0.07%  (0.18%) 
-------------------------------------------------------------  ------  ------- 
 
Key asset quality ratios 
% Loans in Stage 2                                              7.76%   14.09% 
Loans in Stage 3                                                1.41%    1.32% 
Total book coverage(2)                                          0.62%    0.70% 
Stage 2 coverage(2)                                             4.72%    3.02% 
Stage 3 coverage(2)                                            11.24%    9.59% 
-------------------------------------------------------------  ------  ------- 
 
   (1)   Inclusive of gains/losses on assets held at fair value and elements of fraud loss. 
   (2)   Excludes the guaranteed element of government-backed loan schemes. 

Risk Management

Credit risk

The Group has continued to maintain a stable lending book, with gross lending to customers of GBP73.1bn at 30 September 2022 (2021: GBP72.6bn). While the Mortgage book remained relatively stable, a small 1.2% reduction in Business lending was more than offset by 12.9% growth in the Unsecured lending book, mainly driven by credit card growth of GBP0.9bn in FY22 despite having tightened underwriting criteria in the second half of the year in response to rising living costs.

Asset quality was robust in the period and most of the key asset quality ratios remained broadly stable. 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 cost of living pressures. The Group continues to support customers through this challenging period, with a controlled risk appetite and focus on responsible lending decisions.

The selection of appropriate PMAs is a major component in determining the Group's ECL, with the following considered to be key factors for the Group's portfolio at that date:

-- All PMAs relating to the COVID-19 pandemic, including the move of balances to Stage 2 for customers taking a payment holiday, have been fully released from Stages 1 and 2 as the risk of potential default within the portfolio is no longer considered to be directly attributable to specifically pandemic effects.

-- Application of a GBP27m adjustment for the cost of living crisis and the impact it may have on customers' ability to absorb higher day-to-day costs within available finances. This adjustment impacts both the Mortgage (GBP6m) and Unsecured (GBP21m) portfolios and is held in Stage 1.

-- Recognising that the Business portfolio continues to face an uncertain economic environment, with an economic resilience PMA of GBP30m being recognised and is primarily held in Stage 2.

As such, the Group has recorded a total impairment provision of GBP457m at 30 September 2022, reflecting a 9% reduction from GBP504m at 30 September 2021, and a corresponding reduction in coverage from 70bps to 62bps. Within this, the modelled and IA provision has increased to GBP372m (2021: GBP297m) driven by the updated macroeconomic inputs and growth in Unsecured lending. PMAs have reduced in the period to GBP85m (2021: GBP207m).

The net reduction in provision has been offset by the individually assessed impairment charge of GBP106m in the year (2021: GBP79m), resulting in a net charge to the income statement of GBP52m (2021: net credit of GBP131m), and an associated cost of risk of 7bps (2021: (18)bps).

Gross loans and advances(1) ECL and coverage

 
2022                                               Unsecured 
----------------  ------                                                       -----          ------ 
                                                   Loans and 
                    Mortgages         Cards        Overdrafts     Combined      Business(2)      Total(4) 
----------------  --------------  -------------  -------------  -------------  -------------  -------------- 
                    GBPm       %   GBPm       %   GBPm       %   GBPm       %   GBPm       %    GBPm       % 
----------------  ------  ------  -----  ------  -----  ------  -----  ------  -----  ------  ------  ------ 
Stage 1           54,791   93.7%  4,712   84.8%    612   64.1%  5,324   81.8%  6,270   76.7%  66,385   90.8% 
Stage 2 - total    3,090    5.3%    774   13.9%    335   35.1%  1,109   17.0%  1,526   18.7%   5,725    7.8% 
----------------  ------  ------  -----  ------  -----  ------  -----  ------  -----  ------  ------  ------ 
 Stage 2: 0 
  DPD              2,763    4.7%    723   13.0%    327   34.3%  1,050   16.1%  1,499   18.4%   5,312    7.2% 
 Stage 2: < 
  30 DPD             158    0.3%     27    0.5%      3    0.3%     30    0.5%      9    0.1%     197    0.3% 
 Stage 2: > 
  30 DPD             169    0.3%     24    0.4%      5    0.5%     29    0.4%     18    0.2%     216    0.3% 
----------------  ------  ------  -----  ------  -----  ------  -----  ------  -----  ------  ------  ------ 
Stage 3(3)           583    1.0%     72    1.3%      8    0.8%     80    1.2%    373    4.6%   1,036    1.4% 
----------------  ------  ------  -----  ------  -----  ------  -----  ------  -----  ------  ------  ------ 
                  58,464  100.0%  5,558  100.0%    955  100.0%  6,513  100.0%  8,169  100.0%  73,146  100.0% 
----------------  ------  ------  -----  ------  -----  ------  -----  ------  -----  ------  ------  ------ 
ECLs 
Stage 1               10   17.9%     57   23.2%      6   15.8%     63   22.2%     12   10.3%      85   18.6% 
Stage 2 - total       32   57.1%    156   63.4%     25   65.8%    181   63.7%     55   47.0%     268   58.6% 
----------------  ------  ------  -----  ------  -----  ------  -----  ------  -----  ------  ------  ------ 
 Stage 2: 0 
  DPD                 28   49.9%    129   52.4%     22   57.9%    151   53.1%     55   47.0%     234   51.2% 
 Stage 2: < 
  30 DPD               2    3.6%     14    5.7%      1    2.6%     15    5.3%      -    0.0%      17    3.7% 
 Stage 2: > 
  30 DPD               2    3.6%     13    5.3%      2    5.3%     15    5.3%      -    0.0%      17    3.7% 
----------------  ------  ------  -----  ------  -----  ------  -----  ------  -----  ------  ------  ------ 
Stage 3(3)            14   25.0%     33   13.4%      7   18.4%     40   14.1%     50   42.7%     104   22.8% 
----------------  ------  ------  -----  ------  -----  ------  -----  ------  -----  ------  ------  ------ 
                      56  100.0%    246  100.0%     38  100.0%    284  100.0%    117  100.0%     457  100.0% 
----------------  ------  ------  -----  ------  -----  ------  -----  ------  -----  ------  ------  ------ 
Coverage 
Stage 1                    0.02%          1.29%          1.06%          1.26%          0.22%           0.13% 
Stage 2 - total            1.02%         21.94%          7.29%         17.22%          3.75%           4.72% 
----------------  ------  ------  -----  ------  -----  ------  -----  ------  -----  ------  ------  ------ 
 Stage 2: 0 
  DPD                      1.02%         19.41%          6.41%         15.09%          3.76%           4.43% 
 Stage 2: < 
  30 DPD                   0.81%         57.37%         33.67%         54.48%          3.57%           8.53% 
 Stage 2: > 
  30 DPD                   1.25%         59.03%         52.92%         58.01%          1.47%           8.57% 
----------------  ------  ------  -----  ------  -----  ------  -----  ------  -----  ------  ------  ------ 
Stage 3(3)                 2.28%         50.96%         73.14%         53.51%         19.96%          11.24% 
----------------  ------  ------  -----  ------  -----  ------  -----  ------  -----  ------  ------  ------ 
                           0.09%          4.81%          3.88%          4.66%          1.59%           0.62% 
----------------  ------  ------  -----  ------  -----  ------  -----  ------  -----  ------  ------  ------ 
 

(1) Excludes loans designated at 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 GBP56m for Mortgages and GBP1m for Unsecured (2021: GBP67m and GBP2m respectively); and ECL of (GBP1m) for Mortgages and (GBP2m) for Unsecured (2021: GBPNil and (GBP2m) respectively).

(4) The COVID related PMAs held in 2021 were allocated across Stages 1 and 2 and have now been fully released. The cost of living PMAs are held in Stage 1 and the economic resilience PMA is primarily held in Stage 2.

Risk Management

Credit risk

 
                                             Unsecured 
----------  ------                                                       -----          ------ 
                                             Loans and 
              Mortgages         Cards        Overdrafts     Combined      Business(2)      Total(4) 
            --------------  -------------  -------------  -------------  -------------  -------------- 
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 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 GBP56m for Mortgages and GBP1m for Unsecured (2021: GBP67m and GBP2m respectively); and ECL of (GBP1m) for Mortgages and (GBP2m) for Unsecured (2021: GBPNil and (GBP2m) respectively).

(4) The COVID related PMAs held in 2021 were allocated across Stages 1 and 2 and have now been fully released. The cost of living PMAs are held in Stage 1 and the economic resilience PMA is primarily held in Stage 2.

Risk Management

Credit risk

Stage 2 balances

There can be a number of reasons that require a financial asset to be subject to a Stage 2 lifetime ECL calculation other than reaching the 30 DPD backstop. The following table highlights the relevant trigger point leading to a financial asset being classed as Stage 2:

 
                                               Personal 
----------------  ------                                                 ------        ------ 
                                              Loans and 
                   Mortgages      Cards       Overdrafts     Combined      Business     Total (3) 
                  ------------  ----------  -------------  ------------  ------------  ------------ 
2022                GBPm%       GBPm     %    GBPm%          GBPm     %    GBPm%         GBPm     % 
----------------  ------        ----  ----  ------   ----  ------  ----  ------   ---  ------  ---- 
PD deterioration   2,084   69%   401   52%     329    99%     730   66%     826   55%   3,640   64% 
Forbearance          106    3%     9    1%       1     0%      10    1%     235   15%     351    6% 
AFD or Watch 
 List(1)               6    0%     -    0%       -     0%       -    0%     447   29%     453    8% 
> 30 DPD             169    5%    24    3%       5     1%      29    3%      18    1%     216    4% 
Other(2)             725   23%   340   44%       -     0%     340   30%       -    0%   1,065   18% 
----------------  ------  ----  ----  ----  ------  -----  ------  ----  ------  ----  ------  ---- 
                   3,090  100%   774  100%     335   100%   1,109  100%   1,526  100%   5,725  100% 
----------------  ------  ----  ----  ----  ------  -----  ------  ----  ------  ----  ------  ---- 
ECLs 
PD deterioration      18   55%    73   47%      23    92%      96   53%      26   47%     140   53% 
Forbearance            5   16%     3    2%       -     0%       3    2%      12   22%      20    7% 
AFD or Watch 
 List(1)               -    0%     -    0%       -     0%       -    0%      17   31%      17    6% 
> 30 DPD               2    6%    13    8%       2     8%      15    8%       -    0%      17    6% 
Other(2)               7   23%    67   43%       -     0%      67   37%       -    0%      74   28% 
----------------  ------  ----  ----  ----  ------  -----  ------  ----  ------  ----  ------  ---- 
                      32  100%   156  100%      25   100%     181  100%      55  100%     268  100% 
----------------  ------  ----  ----  ----  ------  -----  ------  ----  ------  ----  ------  ---- 
 
 
                                             Personal 
----------------  -----                                               -----        ------ 
                                             Loans and 
                   Mortgages     Cards       Overdrafts    Combined    Business     Total (3) 
                  -----------  ----------  -------------  ----------  -----------  ------------ 
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 judgments and previous arrears, as well as a number of smaller value drivers.

(3) The COVID related PMAs held in 2021 were allocated to Stage 2 have now been fully released. The economic resilience PMA is primarily held in Stage 2.

Risk Management

Credit risk

Credit risk exposure and ECL, by internal PD rating, by IFRS 9 stage allocation

The distribution of the Group's credit exposures and ECL by internal PD rating is analysed below:

 
                            Stage 1         Stage 2        Stage 3(1)       Total(2) 
-------------            --------------  --------------  --------------  -------------- 
                         Lending    ECL  Lending    ECL  Lending    ECL  Lending    ECL 
2022                        GBPm   GBPm     GBPm   GBPm     GBPm   GBPm     GBPm   GBPm 
-----------------------  -------  -----  -------  -----  -------  -----  -------  ----- 
Mortgages      PD range 
Strong         0 - 0.74   52,184      6    1,864     10        -      -   54,048     16 
               0.75 - 
Good            2.49       2,302      2      641      5        -      -    2,943      7 
               2.50 - 
Satisfactory    99.99        305      2      585     17        -      -      890     19 
Default        100             -      -        -      -      583     14      583     14 
-------------  --------  -------  -----  -------  -----  -------  -----  -------  ----- 
Total                     54,791     10    3,090     32      583     14   58,464     56 
-------------  --------  -------  -----  -------  -----  -------  -----  -------  ----- 
Unsecured 
Strong         0 - 2.49    4,795     42      413     26        -      -    5,208     68 
               2.50 - 
Good            9.99         524     20      459     72        -      -      983     92 
               10.00 
Satisfactory    - 99.99        5      1      237     83        -      -      242     84 
Default        100             -      -        -      -       80     40       80     40 
-------------  --------  -------  -----  -------  -----  -------  -----  -------  ----- 
Total                      5,324     63    1,109    181       80     40    6,513    284 
-------------  --------  -------  -----  -------  -----  -------  -----  -------  ----- 
Business 
Strong         0 - 0.74    4,808      5      719     17        -      -    5,527     22 
               0.75 - 
Good            9.99       1,455      7      751     31        -      -    2,206     38 
               10.00 
Satisfactory    - 99.99        7      -       56      7        -      -       63      7 
Default        100             -      -        -      -      373     50      373     50 
-------------  --------  -------  -----  -------  -----  -------  -----  -------  ----- 
Total                      6,270     12    1,526     55      373     50    8,169    117 
-------------  --------  -------  -----  -------  -----  -------  -----  -------  ----- 
 
 
                            Stage 1         Stage 2        Stage 3(1)       Total(2) 
-------------            --------------  --------------  --------------  -------------- 
                         Lending    ECL  Lending    ECL  Lending    ECL  Lending    ECL 
2021                        GBPm   GBPm     GBPm   GBPm     GBPm   GBPm     GBPm   GBPm 
-----------------------  -------  -----  -------  -----  -------  -----  -------  ----- 
Mortgages      PD range 
Strong         0 - 0.74   46,984      3    4,555     19        -      -   51,539     22 
               0.75 
Good            - 2.49     3,313      1    1,888     21        -      -    5,201     22 
               2.50 
Satisfactory    - 99.99      299      -      749     24        -      -    1,048     24 
Default        100             -      -        -      -      653     19      653     19 
-------------  --------  -------  -----  -------  -----  -------  -----  -------  ----- 
Total                     50,596      4    7,192     64      653     19   58,441     87 
-------------  --------  -------  -----  -------  -----  -------  -----  -------  ----- 
Unsecured 
Strong         0 - 2.49    4,730     28       85      9        -      -    4,815     37 
               2.50 
Good            - 9.99       411     12      325     54        -      -      736     66 
               10.00 
Satisfactory    - 99.99        7      1      143     55        -      -      150     56 
Default        100             -      -        -      -       69     35       69     35 
-------------  --------  -------  -----  -------  -----  -------  -----  -------  ----- 
Total                      5,148     41      553    118       69     35    5,770    194 
Business 
Strong         0 - 0.74    3,298     13      505     53        -      -    3,803     66 
               0.75 
Good            - 9.99     2,374     53    1,823     40        -      -    4,197     93 
               10.00 
Satisfactory    - 99.99        -      -      105     27        -      -      105     27 
Default        100             -      -        -      -      235     37      235     37 
-------------  --------  -------  -----  -------  -----  -------  -----  -------  ----- 
Total                      5,672     66    2,433    120      235     37    8,340    223 
-------------  --------  -------  -----  -------  -----  -------  -----  -------  ----- 
 

(1) Stage 3 includes POCI for gross loans and advances of GBP56m for Mortgages and GBP1m for Unsecured (2021: GBP67m and GBP2m respectively); and ECL of (GBP1m) for Mortgages and (GBP2m) for Unsecured (2021: GBPNil and (GBP2m) respectively).

(2) The COVID related PMAs held in 2021 were allocated across Stages 1 and 2 and have now been fully released. The cost of living PMAs are held in Stage 1 and the economic resilience PMA is primarily held in Stage 2.

Risk Management

Credit risk

In terms of credit quality, 97% (2021: 97%) of the loan commitments and financial guarantee contracts were classed as either 'Good' or 'Strong' under the Group's internal PD rating scale.

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) 
--------------------------------------  ---------------  ---------------  -------------  --------  -------------- 
                                           Gross    ECL     Gross    ECL   Gross    ECL     Total 
                                           loans   GBPm     loans   GBPm   loans   GBPm     gross           Total 
                                            GBPm             GBPm           GBPm            loans   provisions(4) 
2022                                                                                         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                                       (8,287)   (45)     8,227    294       -      -      (60)             249 
Transfers from Stage 2 to Stage 
 1                                        10,218     27  (10,282)  (145)       -      -      (64)           (118) 
Transfers to Stage 3                        (91)      -     (562)   (84)     650    101       (3)              17 
Transfers from Stage 3                        42      -       137      8   (187)   (12)       (8)             (4) 
--------------------------------------  --------  -----  --------  -----  ------  -----  --------  -------------- 
Changes to model methodology                 443      1     (442)    (8)       -      -         1             (7) 
New assets originated or purchased(2)     22,162    187     2,055    159     187     32    24,404             378 
Repayments and other movements(3)        (3,434)   (42)     (155)   (65)      56   (15)   (3,533)           (122) 
Repaid or derecognised(3)               (16,084)  (154)   (3,431)  (193)   (498)  (101)  (20,013)           (448) 
--------------------------------------  --------  -----  --------  -----  ------  -----  --------  -------------- 
Write-offs                                     -      -         -      -   (129)  (129)     (129)           (129) 
Recoveries                                     -      -         -      -       -     30         -              30 
Individually assessed impairment 
 charge                                        -      -         -      -       -    107         -             107 
--------------------------------------  --------  -----  --------  -----  ------  -----  --------  -------------- 
Closing balance at 30 September 
 2022                                     66,385     85     5,725    268   1,036    104    73,146             457 
--------------------------------------  --------  -----  --------  -----  ------  -----  --------  -------------- 
 
 
                                            Stage 1          Stage 2       Stage 3(1) 
--------------------------------------  ---------------  ---------------  -------------  --------  -------------- 
                                           Gross    ECL     Gross    ECL   Gross    ECL     Total 
                                           loans   GBPm     loans   GBPm   loans   GBPm     gross           Total 
                                            GBPm             GBPm           GBPm            loans   provisions(4) 
2021                                                                                         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(3)               (13,308)  (167)   (3,540)  (218)   (376)   (55)  (17,224)           (440) 
--------------------------------------  --------  -----  --------  -----  ------  -----  --------  -------------- 
Write-offs                                     -      -         -      -   (126)  (126)     (126)           (126) 
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 GBP56m for Mortgages and GBP1m for Unsecured (2021: GBP67m and GBP2m respectively), and ECL of (GBP1m) for Mortgages and (GBP2m) for Unsecured (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.

(4) The COVID related PMAs held in 2021 were allocated across Stages 1 and 2 and have now been fully released. The cost of living PMAs are held in Stage 1 and the economic resilience PMA is primarily held in Stage 2.

In addition to the above on-balance sheet position, the Group also has GBP19,359m of loan commitments and financial guarantee contracts (2021: GBP17,121m) of which GBP18,454m (95.3%) are held under Stage 1, GBP865m in Stage 2 and GBP40m in Stage 3 (2021: GBP16,001m (93.5%) held under Stage 1, GBP1,090m in Stage 2 and GBP30m in Stage 3). ECLs of GBP3m (2021: GBP8m) are included in the table above, of which GBP1m (2021: GBP2m) is held under Stage 1 and GBP2m (2021: GBP6m) under Stage 2.

Risk Management

Credit risk

Against the backdrop of a deteriorating UK economy, credit quality has remained solid throughout the year, with the overall portfolio performing well and no significant individually assessed provisions raised.

During the second half of 2022, refinements to the staging criteria in the Business portfolio were implemented to further enhance the calculation and align it more closely to the underlying level of credit risk inherent within the Business portfolio. The impact moved c. GBP443m of loans from Stage 2 to Stage 1, leading to a modelled ECL release of c. GBP7m, and an approx. 22% reduction in the balance of business loans in Stage 2.

The contractual amount outstanding on loans and advances that were written off during the reporting period, or still subject to enforcement activity was GBP4.3m (2021: GBP2.6m). The Group has not purchased any lending assets in the year (2021: none). Further information on staging profile is provided at a portfolio level in the respective portfolio performance section on the following pages.

Mortgage credit performance

The table below presents key information on 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   & IA ECL    PMA    ECL  Net lending  Coverage      LTV 
2022                          GBPm       GBPm   GBPm   GBPm         GBPm         %        % 
------------------------  --------  ---------  -----  -----  -----------  --------  ------- 
Residential - capital 
 repayment                  36,417         13      5     18       36,399     0.05%    54.2% 
Residential - interest 
 only                        7,041          3      1      4        7,037     0.05%    45.4% 
BTL                         15,006          6     28     34       14,972     0.22%    52.4% 
------------------------  --------  ---------  -----  -----  -----------  --------  ------- 
Total Mortgage portfolio    58,464         22     34     56       58,408     0.09%    52.7% 
------------------------  --------  ---------  -----  -----  -----------  --------  ------- 
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 has remained flat on a net basis at GBP58.5bn (2021: GBP58.4bn) as the Group continued to prioritise margin in an increasingly competitive environment.

The portfolio continues to evidence solid underlying credit performance, with the majority (98%) of lending not yet past due at the balance sheet date (2021: 98%), and 94% of loans held in Stage 1 (2021: 87%). The successful return to normal payment patterns of customers taking advantage of COVID-19 payment holiday arrangements last year, drove the migration in balances from Stage 2 to Stage 1. A significant proportion of the portfolio is rated Strong at the balance sheet date (92% compared to 88% at 30 September 2021), and the volume and value of loans in forbearance has reduced to 4,636/GBP640m from 6,743/GBP830m, primarily due to customers successfully completing the forbearance reporting probation period and returning to fully performing status.

Stage 3 balances have remained low at 1.0% (2021: 1.1%) and 93% of the portfolio has an LTV of less than 75% (2021: 87%), with the weighted average LTV further reducing in the year to 52.7% (2021: 55.3%). All of these key metrics evidence a high quality mortgage portfolio, with relatively low risk of default, driven by sound lending decisions and underwriting criteria. 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 economic assumptions, such as house prices, have contributed to a release of GBP9m in the modelled ECL, taking the total modelled and IA ECL provision to GBP22m (2021: GBP33m). Total PMAs have similarly reduced in the period, as detailed below, from GBP54m to GBP34m. The total Mortgage portfolio impairment provision is GBP56m (2021: GBP87m).

The Group had previously introduced a PMA for payment holidays in 2020 at the outset of the COVID-19 pandemic; this PMA, which was GBP22m at 30 September 2021, has now been fully released as customers have successfully exited payment holiday arrangements and returned to normal repayment patterns. Due to the uncertain macroeconomic environment, however, a new PMA of GBP6m has been introduced in response to the cost of living crisis, to reflect the potential impact on debt affordability from rising base rates and other inflationary impacts. The PMA reflects the potential impact on ECL in the event of a monthly payment shock to household finances, applied to customers in Stage 1 that are not currently, or otherwise showing signs of financial difficulty.

Asset quality metrics for the BTL mortgage book remain robust, but the Group continues to hold a prudent level of provisioning for this customer cohort, with the related PMA held broadly stable at GBP25m (2021: GBP28m). Other small PMAs totalling GBP4m (2021: GBP4m) have been retained, taking total PMA's held to GBP34m, down from GBP54m at 30 September 2021.

The release of modelled provisions and PMAs has resulted in an impairment credit of GBP30m in the income statement (2021: credit of GBP44m) and associated cost of risk of (4)bps (2021: (7)bps). While the total book coverage has reduced in the year to 9bps, it remains higher than the pre-pandemic level of 7bps.

Risk Management

Credit risk

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

 
               Stage 1               Stage 2            Stage 3(2)            Total(3) 
------- 
2022       Loans          ECL   Loans          ECL  Loans          ECL    Loans          ECL 
 LTV(1)     GBPm     %   GBPm    GBPm     %   GBPm   GBPm     %   GBPm     GBPm     %   GBPm 
-------  -------  ----         ------  ----  -----  -----  ----  -----  -------  ----  ----- 
Less 
 than 
 50%      23,069   43%      2   1,659   54%      3    288   49%      2   25,016   43%      7 
50% to 
 75%      27,452   50%      5   1,270   41%     19    242   42%      2   28,964   50%     26 
76% to 
 80%       2,412    4%      1     103    3%      3     17    3%      1    2,532    4%      5 
81% to 
 85%       1,108    2%      1      26    1%      1     11    2%      1    1,145    2%      3 
86% to 
 90%         547    1%      1      25    1%      1      6    1%      -      578    1%      2 
91% to 
 95%         154     -      -       4     -      1      8    1%      1      166     -      2 
96% to 
 100%         16     -      -       -     -      -      3    1%      -       19     -      - 
Greater 
 than 
 100%         33     -      -       3     -      4      8    1%      7       44     -     11 
-------  -------  ----  -----  ------  ----  -----  -----  ----  -----  -------  ----  ----- 
          54,791  100%     10   3,090  100%     32    583  100%     14   58,464  100%     56 
-------  -------  ----  -----  ------  ----  -----  -----  ----  -----  -------  ----  ----- 
 
 
2021           Stage 1             Stage 2            Stage 3(2)           Total(3) 
 LTV(1) 
------- 
          Loans     %    ECL  Loans     %    ECL  Loans     %    ECL   Loans     %    ECL 
           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) LTV of the Mortgage portfolio is defined as Mortgage portfolio weighted by balance. The portfolio is indexed using the MIAC Acadametrics indices at a given date.

(2) Stage 3 includes GBP56m (2021: GBP67m) of POCI gross loans and advances and (GBP1m) ECL (2021: GBPNil).

(3) The payment holiday PMA held in 2021 was allocated to Stage 2 and has now been fully released. The cost of living PMA is held in Stage 1.

The Mortgage portfolio remains highly secured with 92.3% of mortgages, by loan value, having an indexed LTV of less than 75% (2021: 86.8%), and an average portfolio LTV of 52.7% (2021: 55.3%). New lending has increased the value of loans in Stage 1 with an LTV between 91% to 95%.

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 there has been a SICR, or if 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.

Risk Management

Credit risk

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 
                                Total loans and advances        on loans and advances 
                                         subject                subject to forbearance 
                                 to forbearance measures               measures 
--------------------------  --------------------------------  ------------------------- 
                                           Gross 
                                        carrying                 Impairment 
                               Number     amount  % of total      allowance    Coverage 
2022                         of loans       GBPm   portfolio           GBPm           % 
--------------------------  ---------  ---------  ----------  -------------  ---------- 
Formal arrangements             1,145        137       0.23%            8.6       6.23% 
Temporary arrangements            518         82       0.14%            4.4       5.38% 
Payment arrangement             1,211        133       0.23%            0.6       0.49% 
Payment holiday                   381         47       0.08%            0.1       0.27% 
Interest only conversion        1,193        225       0.39%            0.8       0.35% 
Term extension                     66          5       0.01%              -       0.45% 
Other                              14          1           -              -       0.92% 
Legal                             108         10       0.02%            0.3       2.42% 
--------------------------  ---------  ---------  ----------  -------------  ---------- 
Total mortgage forbearance      4,636        640       1.10%           14.8       2.31% 
--------------------------  ---------  ---------  ----------  -------------  ---------- 
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 30 September 2022, forbearance totalled GBP640m (4,636 customers), a decrease from the 30 September 2021 position of GBP830m (6,743 customers). This level represents 1.10% of total mortgage balances (2021: 1.43%), with the decrease primarily driven by customers successfully completing the forbearance reporting probation period and returning to fully performing status.

When all other avenues of resolution, including forbearance, have been explored, the Group will take steps to repossess and sell underlying collateral. In 2022, there were 73 repossessions of which 7 were voluntary (2021: 33 including 13 voluntary). The number of repossessions has increased as court proceedings resume following the suspension during the COVID-19 pandemic. The Group remains committed to supporting the customer, and places the right outcome for them at the centre of this strategy.

Risk Management

Credit risk

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 are presented in the tables below.

 
                                       Stage 1         Stage 2       Stage 3(1) 
----------------------------------  --------------  --------------  -------------  -------  -------------- 
                                      Gross    ECL    Gross    ECL   Gross    ECL    Total 
                                      loans   GBPm    loans   GBPm   loans   GBPm    gross           Total 
                                       GBPm            GBPm           GBPm           loans   provisions(4) 
2022                                                                                  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                         (5,854)    (1)    5,821     55       -      -     (33)              54 
Transfers from Stage 2 
 to Stage 1                           8,820      3  (8,851)   (55)       -      -     (31)            (52) 
Transfers to Stage 3                   (49)      -    (191)    (5)     238      4      (2)             (1) 
Transfers from Stage 3                   29      -      108      5   (140)    (3)      (3)               2 
----------------------------------  -------  -----  -------  -----  ------  -----  -------  -------------- 
Changes to model methodology              -      -        -      -       -      -        -               - 
New assets originated 
 or purchased(2)                      9,971      1        7      -       1      -    9,979               1 
Repayments and other movements(3)   (2,484)      4    (154)   (23)    (26)    (3)  (2,664)            (22) 
Repaid or derecognised(3)           (6,238)    (1)    (842)    (9)   (142)    (2)  (7,222)            (12) 
----------------------------------  -------  -----  -------  -----  ------  -----  -------  -------------- 
Write-offs                                -      -        -      -     (1)    (1)      (1)             (1) 
Recoveries                                -      -        -      -       -      -        -               - 
Individually assessed                     -      -        -      -       -      -        -               - 
 impairment charge 
----------------------------------  -------  -----  -------  -----  ------  -----  -------  -------------- 
Closing balance at 30 
 September 2022                      54,791     10    3,090     32     583     14   58,464              56 
----------------------------------  -------  -----  -------  -----  ------  -----  -------  -------------- 
 
 
                                       Stage 1         Stage 2       Stage 3(1) 
----------------------------------  --------------  --------------  -------------  -------  -------------- 
                                                                                     Total 
                                      Gross           Gross          Gross           gross           Total 
                                      loans    ECL    loans    ECL   loans    ECL    loans   provisions(4) 
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(3)           (6,162)    (2)  (1,004)   (13)   (118)    (2)  (7,284)            (17) 
----------------------------------  -------  -----  -------  -----  ------  -----  -------  -------------- 
Write-offs                                -      -        -      -     (1)    (1)      (1)             (1) 
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 GBP56m (2021: GBP67m) and ECL of (GBP1m) (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 that 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.

(4) The payment holiday PMA held in 2021 was allocated to Stage 2 and has now been fully released. The cost of living PMA is held in Stage 1.

Despite economic uncertainty, the Mortgage portfolio continues to evidence strong performance and has benefited from positive house price movements. Coupled with the successful exit from payment holiday arrangements for those customers that took advantage of those measures during the pandemic, there has been a shift in balances from Stage 2 to Stage 1. The level of mortgage lending classed as Stage 1 increased from 86.6% in 2021 to 93.7%, with a corresponding decrease of assets in Stage 2 from 12.3% to 5.3%. Within the Stage 2 category, 4.7% of balances are not yet past due at the balance sheet date (2021: 11.9%), but falls within the Stage 2 classification predominantly due to PD deterioration. The proportion of mortgages classified as Stage 3 remains modest at 1.0% (2021: 1.1%).

These conditions have also contributed to an increase in assets classed as 'Strong' from 88% at 30 September 2021 to 92.4% at 30 September 2022, with over 97% (2021: 97%) of the Mortgage portfolio 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.

Risk Management

Credit risk

Unsecured credit performance

The table below presents key information 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       Net 
                                    lending       ECL    PMA    ECL   lending  Coverage 
2022                                   GBPm      GBPm   GBPm   GBPm      GBPm         % 
---------------------------------  --------  --------  -----  -----  --------  -------- 
Credit cards                          5,558       216     30    246     5,312     4.81% 
Personal loans                          925        32      2     34       891     3.57% 
Overdrafts                               30         4      -      4        26    12.57% 
---------------------------------  --------  --------  -----  -----  --------  -------- 
Total Unsecured lending portfolio     6,513       252     32    284     6,229     4.66% 
---------------------------------  --------  --------  -----  -----  --------  -------- 
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 GBP6.5bn (2021: GBP5.8bn) predominantly due to growth in credit card portfolio, while the personal loan portfolio continued to contract. The credit quality of the Unsecured portfolio remains high overall, with 97.9% of the portfolio in Stage 1 or Stage 2 not past due (2021: 98.1%) and a 1.2% in Stage 3 (2021: 1.2%). The level of customers in forbearance similarly remains low at 1.12% of the portfolio (2021: 1.30%).

Credit cards

Growth in the number of credit card accounts in the year of 20% has driven an increase in the lending balance of GBP0.9bn (21%). Average balances have remained fairly static throughout the year, as has the average level of facility utilisation. The credit quality of the cards portfolio remains high with 97.8% (2021: 98.2%) in stage 1 and stage 2 not past due, and a modest 1.3% in Stage 3 (2021: 1.2%).

While there has been minimal evidence of a deterioration in credit quality across the portfolio, as evidenced by these key metrics, the downturn in the broader UK economy has been reflected through the economic scenarios, resulting in an increase of GBP74m in the modelled ECL. Coverage of 481bps is consequently up 102bps from FY21, and is 139bps higher than pre-pandemic levels of 342bps.

The payment holiday PMAs introduced in response to COVID-19, which amounted to GBP4m for the cards book at 30 September 2021, have now been fully released. A new PMA has been established for cost-of-living shocks that are not yet fully observed and incorporated in the modelled ECL. This has been applied to a cohort of credit card customers who are susceptible to a payment shock, and has resulted in a GBP20m PMA. This has been allocated to Stage 1. A small number of previously held PMAs totalling GBP10m (2021: GBP14m) have also been retained.

Personal loans

While the personal loan portfolio represents only a small portion of our Unsecured and total Group portfolio, staging has shifted during the year with a reduction in Stage 1 balances from 94.0% to 64.1%, and a corresponding increase in Stage 2 not past due balances from 5.0% to 35.1%. This movement has had an impact on the staging profile for the whole Unsecured portfolio. This movement relates to personal lending made via the Group's JV arrangement with Salary Finance which has a cohort of customers who can be more susceptible to being impacted earlier, and harder, by cost of living shocks. During the year, the JV experienced an increased number of customers not maintaining scheduled loan repayments. Consequently, the Group has assessed the credit risk for this specific cohort of customers, and has now classified all lending with the JV (GBP318m) in Stage 2 (2021: GBP223m within Stage 1), together with an associated ECL of GBP19m (2021: GBPNil).

Loan payment holiday PMAs, which were GBP8m at 30 September 2021, were fully released in the year. A new PMA of GBP1m has been established for cost-of-living shocks. Other PMAs have fallen from GBP9m in the prior year to GBP1m at the balance sheet date.

Taking the modelled provisions and PMAs together for the full Unsecured portfolio, the total ECL provision increased to GBP284m at 30 September 2022 (2021: GBP194m), resulting in a charge to the income statement in the year of GBP178m (2021: credit of GBP32m) and an increase in coverage ratio of 86bps to 466bps (2021: 380bps).

Risk Management

Credit risk

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                 subject to 
                                             advances subject               forbearance 
                                          to forbearance measures             measures 
-----------------------------------  --------------------------------  --------------------- 
                                                    Gross 
                                                 carrying               Impairment 
                                        Number     amount  % of total    allowance  Coverage 
2022                                  of loans       GBPm   portfolio         GBPm         % 
-----------------------------------  ---------  ---------  ----------  -----------  -------- 
Credit card arrangements                15,872         62       1.19%         24.3    39.47% 
Personal loan arrangements                 638          3       0.56%          1.4    40.33% 
Overdraft arrangements                      56          -       0.04%            -    30.76% 
-----------------------------------  ---------  ---------  ----------  -----------  -------- 
Total Unsecured lending forbearance     16,566         65       1.12%         25.7    39.51% 
-----------------------------------  ---------  ---------  ----------  -----------  -------- 
2021 
Credit card arrangements                14,151         60       1.39%         23.9    39.88% 
Personal loan arrangements               1,174          6       0.78%          3.3    49.61% 
Overdraft arrangements                     280          1       2.55%          0.4    51.89% 
-----------------------------------  ---------  ---------  ----------  -----------  -------- 
Total Unsecured lending forbearance     15,605         67       1.30%         27.6    40.98% 
-----------------------------------  ---------  ---------  ----------  -----------  -------- 
 

At 30 September 2022, credit cards forbearance totalled GBP62m (15,872 accounts), an increase from the 30 September 2021 position of GBP60m (14,151 accounts). This represents 1.19% of total credit cards balances (2021: 1.39%). The level of impairment coverage on forborne credit cards is stable at 39.5% (2021: 39.9%). Limited forbearance is exercised in relation to personal loans and overdrafts, with a reduction to GBP3m (0.54%) in the personal loans and overdrafts portfolio from GBP7m (0.85%) at 30 September 2021.

Risk Management

Credit risk

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 are presented in the tables below.

 
                                             Stage 1         Stage 2      Stage 3(1) 
----------------------------------------  --------------  -------------  -------------  ------  -------------- 
                                                                                         Total 
                                            Gross          Gross          Gross          gross           Total 
                                            loans    ECL   loans    ECL   loans    ECL   loans   provisions(4) 
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         (1,051)   (31)   1,059    210       -      -       8             179 
Transfers from Stage 2 to Stage 1             504     16   (523)   (62)       -      -    (19)            (46) 
Transfers to Stage 3                         (19)      -   (116)   (69)     139     83       4              14 
Transfers from Stage 3                          1      -       2      1     (8)    (7)     (5)             (6) 
----------------------------------------  -------  -----  ------  -----  ------  -----  ------  -------------- 
Changes to model methodology                    -      -       -      -       -      -       -               - 
New assets originated or purchased(2)       1,708     20      11      4       7      5   1,726              29 
Repayments and other movements(3)           (508)     26     166    (8)     104    (4)   (238)              14 
Repaid or derecognised(3)                   (459)    (9)    (43)   (13)   (117)   (72)   (619)            (94) 
----------------------------------------  -------  -----  ------  -----  ------  -----  ------  -------------- 
Write-offs                                      -      -       -      -   (114)  (114)   (114)           (114) 
Recoveries                                      -      -       -      -       -     26       -              26 
Individually assessed impairment charge         -      -       -      -       -     88       -              88 
----------------------------------------  -------  -----  ------  -----  ------  -----  ------  -------------- 
Closing balance at 30 September 2022        5,324     63   1,109    181      80     40   6,513             284 
----------------------------------------  -------  -----  ------  -----  ------  -----  ------  -------------- 
 
 
                                             Stage 1        Stage 2      Stage 3(1) 
----------------------------------------  -------------  -------------  -------------  ------  -------------- 
                                                                                        Total 
                                           Gross          Gross          Gross          gross           Total 
                                           loans    ECL   loans    ECL   loans    ECL   loans   provisions(4) 
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(3)                  (226)    (6)    (55)   (14)    (29)   (25)   (310)            (45) 
----------------------------------------  ------  -----  ------  -----  ------  -----  ------  -------------- 
Write-offs                                     -      -       -      -    (99)   (99)    (99)            (99) 
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 (2021: GBP2m) and ECL of (GBP2m) (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.

(4) The payment holiday PMA held in 2021 was allocated to Stage 2 and has now been fully released. The cost of living PMA is held in Stage 1.

The balance of unsecured lending in Stage 2 increased by 7.4% to 17.0% (2021: 9.6%), driven primarily by the observed deterioration of the Salary Finance lending. Of the Stage 2 category, 16.1% is not yet past due at the balance sheet date, but falls into the Stage 2 classification predominantly due to PD deterioration.

There has been a corresponding reduction in Stage 1 from 89.1% to 81.7%, while Stage 3 remains stable at 1.2% (2021: 1.2%).

Risk Management

Credit risk

Business credit performance

The table below presents key information on 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

 
                                                                   Modelled 
                                     Gross                  Total      & IA         Total       Net 
                                   lending  Government(1)   gross       ECL    PMA    ECL   lending  Coverage(2) 
 2022                                 GBPm           GBPm    GBPm      GBPm   GBPm   GBPm      GBPm            % 
--------------------------------  --------  -------------  ------  --------  -----  -----  --------  ----------- 
Agriculture                          1,392             66   1,458         5      1      6     1,452        0.45% 
Business services                      980            286   1,266        22      4     26     1,240        2.53% 
Commercial Real Estate                 597             10     607         3      -      3       604        0.54% 
Government, health and education     1,008             54   1,062         8      2     10     1,052        0.95% 
Hospitality                            652             78     730         4      1      5       725        0.80% 
Manufacturing                          640            109     749        23      3     26       723        3.96% 
Resources                              133              8     141         3      1      4       137        2.37% 
Retail and wholesale trade             330            128     458         7      1      8       450        2.51% 
Transport and storage                  291             56     347         4      1      5       342        1.44% 
Other                                1,089            262   1,351        20      4     24     1,327        2.11% 
--------------------------------  --------  -------------  ------  --------  -----  -----  --------  ----------- 
Total Business portfolio             7,112          1,057   8,169        99     18    117     8,052        1.59% 
--------------------------------  --------  -------------  ------  --------  -----  -----  --------  ----------- 
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, Coronavirus business interruption loan scheme, Coronavirus large business interruption loan scheme and Recovery loan scheme (RLS). This excludes GBP66m (2021: GBPNil) of guarantee claim funds received from British Business Bank.

   (2)   Coverage ratio excludes the guaranteed element of government-backed loan schemes. 

Gross Business lending reduced to GBP8.1bn (2021: GBP8.3bn) driven by reductions in government-guaranteed lending schemes as borrowers continued to repay balances, which more than offset underlying portfolio growth in the year. Excluding the government lending, core lending balances grew slightly as business activity, which had been generally subdued during the pandemic, grew in line with broader economic activity and improved business confidence. Growth is targeted to sectors and sub sectors where the Group has a well established expertise. Book mix remained fairly constant year on year as sector focused strategy was maintained, with lending to the agriculture, business services and government, health and education sectors continuing to account for almost half of the total book, at 46% in both years.

Business lending credit performance remained resilient, with balances in Stage 1 and Stage 2 not past due representing 95.1% of the portfolio (2021: 96.7%). The percentage of loans in Stage 1 increased to 76.8% (2021: 68.0%) largely due to changes applied to the SICR criteria (outlined on page 21) which, resulted in these customers migrating back to Stage 1. Across the portfolio 95% of lending was rated 'Strong' or 'Good' (2021: 96%). The previous Government interventions, including the ongoing loan schemes, continue to result in fewer customers entering forbearance; low levels were maintained with only 5.16% of the total portfolio being forborne at 30 September 2022 (2021: 5.82%).

Notwithstanding the strength of the portfolio, ongoing economic and political upheaval creates uncertainty over the potential for default occurring in the future. Key asset quality metrics continue to be monitored closely and a cautious approach to provisioning is being maintained. Stage 3 loans have increased to 4.6% driven primarily by bounce back loans (2021: 2.8%).

Despite these uncertainties, the refreshed macroeconomic scenarios have resulted in a small reduction of GBP6m in the modelled and IA 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 year. While the removal of all 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 cost of living crisis in the UK contribute to ongoing uncertainty over the impact that these broader economic conditions could have on UK businesses.

Risk Management

Credit risk

The models used to estimate ECL have been built and tested on the past two recessions, neither of which included the combination of historically high price inflation nor the significant shock to primary commodities and energy which are leading to economic stagnation at a time of modest interest rates and unemployment. Therefore, a new economic resilience PMA of GBP30m has been introduced. A small negative PMA of GBP12m is also held pending introduction of the Business LGD model which will be implemented in the coming year and other technical adjustments.

The above results in an overall provision of GBP117m (2021: GBP223m) and an impairment credit in the income statement of GBP96m for the year (2021: credit of GBP55m). Portfolio coverage has reduced to 159bps (2021: 306bps), reflecting the quality of the portfolio and little evidence of deterioration in asset quality to date.

Forbearance

Forbearance is considered to exist where customers are experiencing, or are 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, based on 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                 subject to 
                                               advances subject               forbearance 
                                            to forbearance measures             measures 
-------------------------------------  --------------------------------  --------------------- 
                                                      Gross 
                                                   carrying               Impairment 
                                          Number     amount  % of total    allowance  Coverage 
2022                                    of loans       GBPm   portfolio         GBPm         % 
-------------------------------------  ---------  ---------  ----------  -----------  -------- 
Term extension                               154        118       1.36%          4.9     4.18% 
Payment holiday(1)                            81        193       2.23%         32.6    16.86% 
Reduction in contracted interest rate          2          1       0.01%          0.0     1.33% 
Alternative forms of payment                   0          0       0.00%          0.0     0.00% 
Debt forgiveness                               2          1       0.01%          0.5    97.05% 
Refinancing                                    9          2       0.02%          0.1     5.14% 
Covenant breach/reset/waiver                  41        133       1.53%          5.4     4.03% 
-------------------------------------  ---------  ---------  ----------  -----------  -------- 
Total Business forbearance                   289        448       5.16%         43.5     9.71% 
-------------------------------------  ---------  ---------  ----------  -----------  -------- 
2021 
Term extension                               188        196       2.27%         10.2     5.19% 
Payment holiday(1)                            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% 
-------------------------------------  ---------  ---------  ----------  -----------  -------- 
 

(1) In the prior year, payment holidays granted in line with regulation were not classified as forbearance due to the extenuating circumstances arising from COVID-19. The standard approach of classifying payment holidays as forbearance resumed in August 2021.

Business portfolio forbearance has reduced from GBP502m (332 customers) at 30 September 2021 to GBP448m (289 customers) at 30 September 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 5.16% (2021: 5.82%) with impairment coverage slightly increasing to 9.71% (2021: 8.31%). Most forbearance arrangements relate to term extensions allowing customers a longer term to repay obligations in full than initially contracted.

Customers within the forbearance portfolio have received GBP26m of COVID-19 related support loans: GBP13m CBIL, GBP4m BBL and GBP9m RLS.

The table includes a portfolio of financial assets at fair value. The gross value of fair value loans subject to forbearance as at 30 September 2022 is GBP4.7m (2021: GBP5.3m), representing 0.05% of the total business portfolio (2021: 0.06%). The credit risk adjustment on these amounts totalled GBP0.1m (2021: GBP0.1m). Coverage is 2.99% (2021: 2.32%).

Risk Management

Credit risk

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(3) 
----------------------------------------  --------------  --------------  -------------  --------  -------------- 
                                                                                            Total 
                                            Gross           Gross          Gross            gross           Total 
                                            loans    ECL    loans    ECL   loans    ECL     loans   provisions(4) 
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         (1,382)   (13)    1,347     29       -      -      (35)              16 
Transfers from Stage 2 to Stage 1             894      8    (908)   (28)       -      -      (14)            (20) 
Transfers to Stage 3                         (23)      -    (255)   (10)     273     14       (5)               4 
Transfers from Stage 3                         12      -       28      2    (39)    (2)         1               - 
----------------------------------------  -------  -----  -------  -----  ------  -----  --------  -------------- 
Changes to model methodology                  443      1    (443)    (8)       -      -         -             (7) 
New assets originated or purchased(1)      10,483    166    2,037    155     179     27    12,699             348 
Repayments and other movements(2)           (442)   (72)    (167)   (34)    (22)    (8)     (631)           (114) 
Repaid or derecognised(2)                 (9,387)  (144)  (2,546)  (171)   (239)   (27)  (12,172)           (342) 
----------------------------------------  -------  -----  -------  -----  ------  -----  --------  -------------- 
Write-offs                                      -      -        -      -    (14)   (14)      (14)            (14) 
Recoveries                                      -      -        -      -       -      4         -               4 
Individually assessed impairment charge         -      -        -      -       -     19         -              19 
----------------------------------------  -------  -----  -------  -----  ------  -----  --------  -------------- 
Closing balance at 30 September 2022        6,270     12    1,526     55     373     50     8,169             117 
----------------------------------------  -------  -----  -------  -----  ------  -----  --------  -------------- 
 
 
                                             Stage 1         Stage 2         Stage 3 
----------------------------------------  --------------  --------------  -------------  -------  -------------- 
                                                                                           Total 
                                            Gross           Gross          Gross           gross           Total 
                                            loans    ECL    loans    ECL   loans    ECL    loans   provisions(4) 
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(2)                 (6,920)  (159)  (2,481)  (191)   (229)   (28)  (9,630)           (378) 
----------------------------------------  -------  -----  -------  -----  ------  -----  -------  -------------- 
Write-offs                                      -      -        -      -    (26)   (26)     (26)            (26) 
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.

(3) This excludes GBP66m (2021: GBPNil) of guarantee claim funds received from British Business Bank.

(4) The COVID related PMAs held in 2021 were allocated across Stages 1 and 2 and have now been fully released, the remaining Business PMAs are predominantly held in Stage 2.

The level of Business lending classed as Stage 1 has increased to 76.8% (2021: 68.0%), with a corresponding decrease of 10.5% in Stage 2 to 18.7% (2021: 29.2%), primarily driven by the revisions to the SICR triggers.

The majority (98%) of the portfolio in Stage 2 is not past due and is primarily in Stage 2 due to PD deterioration, in addition to proactive management measures such as early intervention, heightened monitoring and forbearance concessions. Stage 3 loans have increased to 4.6% driven primarily by bounce back loans (2021: 2.8%).

The proportion of assets classed as 'Strong' has increased to 68% (2021: 46%), with assets classed as 'Strong' or 'Good' now 95% (2021: 96%).

Risk Management

Credit risk

Other credit risks

Non-property related collateral

The following table shows the total non-property collateral held at 30 September 2022 in terms of cash, guarantees (guarantees are predominantly in relation to government-backed COVID-19 loans) and netting. The exposure amount shown below is the total gross exposure (net of credit provisions) for arrangements that have some form of associated collateral and is not the total exposure for each asset class, as this balance is disclosed elsewhere in this section.

 
                                                                                  Other 
                                                                               physical 
                                 Cash  Guarantee  Netting  Debt securities   collateral  Receivables   Total  Exposure 
2022                             GBPm       GBPm     GBPm             GBPm         GBPm         GBPm    GBPm      GBPm 
------------------------------  -----  ---------  -------  ---------------  -----------  -----------  ------  -------- 
Financial assets at amortised 
cost 
Loans and advances to 
customers 
   Business                         7        970      237                -          464          501   2,179     2,397 
Cash and balances with central 
banks                               -          -        -                -            -            -       -         - 
Due from other banks                -          -        -                -            -            -       -         - 
------------------------------  -----  ---------  -------  ---------------  -----------  -----------  ------  -------- 
Total                               7        970      237                -          464          501   2,179     2,397 
------------------------------  -----  ---------  -------  ---------------  -----------  -----------  ------  -------- 
Of which: Stage 3 
Loans and advances to 
customers 
   Business                         -        127        -                -            1           11     139       140 
------------------------------  -----  ---------  -------  ---------------  -----------  -----------  ------  -------- 
 
 
                                                                                   Other 
                                                                                physical 
                                  Cash  Guarantee  Netting  Debt securities   collateral  Receivables  Total  Exposure 
2021                              GBPm       GBPm     GBPm             GBPm         GBPm         GBPm   GBPm      GBPm 
-------------------------------  -----  ---------  -------  ---------------  -----------  -----------  -----  -------- 
Financial assets at amortised 
cost 
Loans and advances to customers 
   Business                          9      1,235      202                -          442          507  2,395     2,621 
Cash and balances with central 
 banks                           5,894          -        -                -            -            -  5,894     8,093 
Due from other banks                 -          -        -              287            -            -    287       331 
-------------------------------  -----  ---------  -------  ---------------  -----------  -----------  -----  -------- 
Total                            5,903      1,235      202              287          442          507  8,576    11,045 
-------------------------------  -----  ---------  -------  ---------------  -----------  -----------  -----  -------- 
Of which: Stage 3 
Loans and advances to customers 
   Business                          -         34        -                -            4            9     47        46 
-------------------------------  -----  ---------  -------  ---------------  -----------  -----------  -----  -------- 
 

The removal of cash collateral reflected within central governments or central banks is due to a change in reporting following CRR II implementation, where the Term Funding Scheme is now reported under CCR rules. The debt securities collateral previously reported within due from other banks was in relation to a sale and repurchase agreement (repo) which is no longer held by the Group.

Lending backed by government guarantees in response to COVID-19 are detailed within the Guarantee column.

Following PRA approval in 2020, the Group moved to recognise asset finance and invoice finance collateral, being other physical collateral and receivables respectively, as eligible collateral from a credit risk mitigation perspective in relation to the foundation internal ratings based (FIRB) approach.

Corporates is the largest sector utilising other risk mitigation techniques, with all five methods utilised dependent on credit quality. The extent to which these will be used is dependent on the specific circumstances of the customer.

The Group is exposed to credit risk on its other banking and Treasury-related activities, which are subject to mitigation and monitoring. No material ECL provisions are held for these exposures.

Risk Management

Credit risk

Offsetting of financial assets and liabilities

The Group reduces exposure to credit risk through central clearing for eligible derivatives, and daily posting of cash collateral on such transactions as detailed in note 3.6 to the financial statements. The amounts offset on the balance sheet, as shown below, represent derivatives and variation margin collateral with central clearing houses, which meet the criteria for offsetting under IAS 32. The table excludes financial instruments not subject to offset and that are formally subject to collateral arrangements (e.g. loans and advances).

The Group enters into derivatives and repurchase agreements with various counterparties, which are governed by industry-standard master netting agreements. The Group holds and provides collateral in respect of transactions covered by these agreements. The right to offset balances under these master netting agreements only arises in the event of non-payment or default and, as a result, these arrangements do not qualify for offsetting under IAS 32.

The net amounts presented in the table are not intended to represent the Group's exposure to credit risk, as the Group will use a wide range of strategies to mitigate credit risk in addition to netting and collateral.

 
                                                                                    Net amounts 
                                                                                     not offset 
                                                                                     on balance 
                                                                                       sheet 
-------------------------------------  --------  ---------  -----------  ---------------------------------  ---------- 
                                                     Gross 
                                                   amounts  Net amounts      Subject 
                                                    offset    presented           to 
                                                        on           on       master 
                                          Gross    balance      balance      netting       Cash collateral  Net amount 
                                        amounts   sheet(1)        sheet   agreements   pledged/received(2)         (3) 
2022                                       GBPm       GBPm         GBPm         GBPm                  GBPm        GBPm 
-------------------------------------  --------  ---------  -----------  -----------  --------------------  ---------- 
Assets 
Derivative financial instruments(4)       3,340    (2,998)          342         (46)                 (182)         114 
Liabilities 
Derivative financial instruments(4)       1,797    (1,469)          328         (46)                  (32)         250 
Securities sold under repurchase 
agreement                                   703          -          703        (703)                     -           - 
-------------------------------------  --------  ---------  -----------  -----------  --------------------  ---------- 
2021 
-------------------------------------  --------  ---------  -----------  -----------  --------------------  ---------- 
Assets 
Derivative financial instruments(4)         413      (273)          140         (76)                   (1)          63 
Liabilities 
Derivative financial instruments(4)         678      (469)          209         (76)                  (50)          83 
-------------------------------------  --------  ---------  -----------  -----------  --------------------  ---------- 
 

(1) The net balance of GBP1,529m (2021: GBP196m) relates to variation margin offset under IAS 32 and reflected on other balance sheet lines.

(2) Cash collateral amounts not offset under IAS 32 in respect of derivatives with other banks are included within due from and due to other banks. Cash collateral amounts not offset under IAS 32 in respect of derivative with central clearing houses is included within other assets and other liabilities.

(3) Cash collateral amounts are limited to the net balance sheet exposure in order to exclude any over collateralisation. In addition to cash collateral, the Group has pledged securities collateral in respect of derivative transactions subject to master netting agreements of GBP594m (2021: GBP274m). This is not offset under IAS 32 or presented as collateral on the balance sheet.

(4) Derivative financial instruments comprise both trading and hedging derivative assets and liabilities.

Macroeconomic assumptions, scenarios, and weightings

The Group's ECL allowance at 30 September 2022 was GBP457m (2021: GBP504m).

Macroeconomic assumptions

The Group engages Oxford Economics 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 outcome. The macroeconomic assumptions were provided by Oxford Economics on 1 September 2022 and changes in macroeconomic assumptions between 1 September 2022 and 30 September 2022 have been considered as part of the PMAs. 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 gradually recovered from the impact of COVID-19, the outlook continues to be as uncertain than it was at this point in 2021. Recent (and further anticipated) bank base rate rises, concerns over rising energy prices (despite recent UK Government announcements on the assistance it will provide customers), the increase in national insurance contributions, and the headwinds from higher inflation have all had an impact on household incomes in 2022. The potential impact on the UK economy of the Russian invasion of Ukraine remains uncertain, but as the Group has no direct lending in that region, it is hoped that any impact will be modest and short term. Against this fast moving and evolving 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 quarterly with final proposed recommendations for use in the IFRS 9 models made to 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  30 Sept 
               2022     2021 
 Scenario       (%)      (%) 
----------  -------  ------- 
Upside           10       15 
Base             55       50 
Downside         35       35 
----------  -------  ------- 
 

Risk Management

Credit risk

The Group continue to select three scenarios, with the largest weighting applied to the base scenario. In the current year, there is a 5% shift in the weightings from the Upside scenario towards the Base scenario, reflecting a lesser degree of confidence in the Upside scenario over the short to medium term as a result of the updated macroeconomic assumptions. The Group's current weighting applied to the Downside scenario is appropriate when considered in the context of the overall scenario weightings applied and remains unchanged from the previous year.

Upside (10%)(1)

-- GDP increased sharply by 8.7% in the first quarter of 2022 (Q1 2022 v Q1 2021), before slowing down to a c.2.0%-3.0% increase in each of the remaining quarters in 2022 against the 2021 positions. Overall year-on-year growth in 2022 is forecast at 3.9%, with a slight decrease to 2.8% in 2023, before rising slightly in 2024 and 2025 and reverting to a more modest increase in 2026.

-- Inflation rises steeply and peaks at 12.9% in Q4 2022 (and lasting into Q1 2023) from a low base of 0.6% at Q1 2021. Inflation reverts back but remains high for the remainder of 2023, falling to 2.0% in Q2 2024 and sub 2.0% from the following quarter for the remaining forecast period.

-- BoE base rate rises are anticipated throughout 2022 and are expected to continue into 2023, peaking at 3.0% in Q2 2023 and remaining there for the rest of 2023. Slight declines are expected throughout 2024, reaching 2.3% in Q4 2024 and continue at that rate for the remainder of the forecast period.

-- HPI Q4 annual growth of 8.3% in 2022, declining to (2.3%) in 2023, before rising again over the next three years finishing in 2026 with a year on year growth of 6.5%.

-- Unemployment peaks in Q3 2023, at 4.3%, and drops gradually to 3.8% by Q4 2024. From then, there is no significant movement over the remaining forecast period, reaching 3.6% in Q1 2026 where it remains until the end of 2026.

(1) The time periods referenced in this section relate to calendar years unless otherwise stated.

Base (55%)

-- GDP increased sharply by 8.7% 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 3.6%, and falling to 0.3% in 2023. GDP recovers over the remaining forecast period at between 2.1% and 2.7%.

-- Inflation peaks at 12.7% in Q4 2022 before recovering and reverting to under 1% by Q1 2024. Inflation rises slightly but remains under 2% from Q1 2026 for the remaining forecast period.

-- BoE base rate hits a high of 2.5% in Q1 2023 and steadily declines over the forecast period reaching 1.8% in Q4 2023 and remaining there until the end of 2025. A further reduction to 1.7% is anticipated in Q1 2026 and remains at that level for the remainder of the year.

-- HPI steadily rises to Q4 2022 before modestly reverting from then until Q4 2024 when it rebounds slowly each quarter thereafter until the end of the forecast period. Overall, HPI Q4 2022 annual growth of 6.8%, which regresses to (4.6%) in 2023 and remains negative into 2024, before reverting to positive growth in 2025 and finishing 2026 back up at 6.7%.

-- Unemployment peaks at 4.7% in Q3 2023 and drops to 4.1% by Q4 2024. From then, there is no significant movement with unemployment averaging just under 4% in 2025, and steadily declining and reaching 3.7% for the final two quarters of 2026.

Downside (35%)

-- GDP increased sharply to 8.7% (Q1 2022 v Q1 2021) before turning negative for the final quarter of 2022 to (2.8%) (Q4 2022 v Q4 2021), and remains sluggish over the remaining forecast period. The overall year-on-year growth is 2.6% in 2022, falling to (8.9%) in 2023, before reverting to sluggish growth of 0.8% in 2024, rising to 2.1% for the remaining forecast period.

-- Inflation hits 11.9% in Q4 2022 before declining and turning negative by Q4 2023, and remains negative for the first three quarters of 2024. From there, inflation rises steadily each quarter reaching 1.7% in Q3 2026 and remains at this level for Q4 2026.

-- The BoE base rate reaches 2.3% in Q4 2022 before steadily falling back to 0.5% by Q3 2024 where it stays for the remaining forecast period.

-- HPI falls steadily and deeply from Q4 2022 to Q3 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 in Q4 2023 is forecast decline annually (13.3%), with a slight improvement to (11.6%) in 2024, and not turning positive until 2026.

-- Unemployment rises steadily and peaks at 7.4% in Q3 2025 and improves slightly over remainder of the forecast period. Overall, unemployment averages at 4.0% in 2022, rising to 7.3% by 2025, before improving modestly to finish at 7.1% in 2026.

Base case-2022 v 2021(1)

The following table shows how the Group's base case assumptions in the current year have changed from those used at 30 September 2021:

 
                              2021   2022   2023   2024  2025  2026 
Year           Assumption        %      %      %      %     %     % 
-------------  -------------  ----  -----  -----  -----  ----  ---- 
30 September 
 2022          Base rate              1.4    2.2    1.8   1.8   1.7 
------------- 
 Unemployment                         3.9    4.6    4.4   3.8   3.8 
 
 GDP                                  3.6    0.3    2.1   2.7   2.1 
 Inflation                            9.4    7.5    0.6   0.7   1.5 
 HPI                                  6.8  (4.6)  (3.0)   4.4   6.7 
 ---------------------------  ----  -----  -----  -----  ----  ---- 
30 September 
 2021          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 
 ---------------------------  ----  -----  -----  -----  ----  ---- 
 

(1) Macroeconomic assumptions provided by Oxford Economics on 1 September 2022 and reported on a calendar year basis unless otherwise stated. The changes in macroeconomic assumptions between 1 September 2022 and 30 September 2022 have been considered as part of the PMAs.

Risk Management

Credit risk

The base case macroeconomic estimates and assumptions used at 30 September 2021 reflected the forward-looking view at that time, which recognised the impact of the further lockdown measures introduced in Q4 2020, together with the successful vaccine roll-out programme which resulted in much more positive base case assumptions. The headwinds of inflation and cost of living crisis, and the resultant actions of the BoE to curb inflation dominated much of 2022 and resulted in the significant changes to assumptions over the relatively short term.

Five-year simple averages for the most sensitive inputs of unemployment, GDP and HPI

 
          Unemployment  GDP    HPI 
2022                 %    %      % 
--------  ------------  ---  ----- 
Upside             3.9  3.1    3.3 
Base               4.1  2.1    2.0 
Downside           6.3  0.4  (3.4) 
--------  ------------  ---  ----- 
 
2021 
--------  ------------  ---  ----- 
Upside             3.9  4.6    4.6 
Base               4.3  3.8    2.1 
Downside           6.5  2.1  (5.8) 
--------  ------------  ---  ----- 
 

Graphical illustrations of the above key inputs over the five-year forecast period are:

 
 Unemployment - simple average     HPI - year-on-year movement 
 
 
 GDP - year-on-year movement       While there are inflationary pressures 
                                    at present that are impacting the 
                                    Group's ECL calculations, the following 
                                    graph demonstrates the expected relatively 
                                    short-term nature of these over the 
                                    forecast period (year-on-year movement): 
 
 

The full range of the key macroeconomic assumptions is included in the table on page 45.

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

Asset lifetimes

The calculation of the ECL allowance is dependent on the expected life of the Group's portfolios. The Group assumes the remaining contract term as the maximum period to consider credit losses wherever possible. For the Group's credit card and overdraft portfolios, behavioural factors such as observed retention rates and other portfolio level assumptions are taken into consideration in determining the estimated asset life.

Economic scenarios

The calculation of the Group's impairment provision is sensitive to changes in the chosen weightings as highlighted above. The effect on the closing modelled provision of each portfolio as a result of applying a 100% weighting to each of the selected scenarios is shown below:

 
                         Probability 
                         Weighted(1)  Upside   Base   Downside 
2022                            GBPm    GBPm   GBPm       GBPm 
----------------------  ------------  ------  -----  --------- 
Mortgages                         15      12     13         23 
Unsecured of which:              251     236    237        279 
----------------------  ------------  ------  -----  --------- 
   Cards                         216  209(4)    208        233 
   Personal loans and 
    overdrafts (3)                35      27     29         46 
----------------------  ------------  ------  -----  --------- 
Business (2)                      53      39     43         97 
----------------------  ------------  ------  -----  --------- 
Total                            319     287    293        399 
----------------------  ------------  ------  -----  --------- 
 

(1) In addition to the probability weighted modelled provision shown in the table, the Group holds GBP85m relative to PMAs (2021: GBP207m) and GBP38m of individually assessed provision (2021: GBP31m).

(2) Business and total ECLs in the above table have been calculated using the new LGD model and while not fully implemented in the year, the impact of this was incorporated into the total Business ECLs via the use of PMAs. Consequently, the probability weighted Business and total ECLs reported in the above table are GBP15m lower than the actual figures for the year.

   (3)   Salary Finance contributes more that 50% of the combined Personal Loans and overdrafts ECL. 

(4) Due to a minor model interaction effect, the 100% ECL for Upside is marginally higher than the Base case.

 
                        Probability 
                           Weighted  Upside   Base   Downside 
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 lifetime 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 44.

Within each portfolio, the following are the macroeconomic inputs that 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 and HPI

In addition to assessing the ECL impact of applying a 100% weighting to each of the three chosen scenarios, the Group has also considered the effect changes to key economic inputs would make to the modelled ECL output.

The Group considers the unemployment rate and HPI as the inputs that would have the most significant impact on ECL, and has assessed how these metrics would change ECL across the relevant portfolios, with the reported output assessed against the base case. All changes have been implemented as immediate effects within the first year of the base case scenario, persisting throughout the scenario.

Risk Management

Credit risk

The following table discloses the ECL impact of HPI changes on the Group's Mortgage and Business lending:

 
                  2022   2021 
                  GBPm   GBPm 
---------------  -----  ----- 
Mortgages +10%     (1)    (2) 
Business +10%      (1)    (2) 
Mortgages -10%       2      3 
Business -10%        2      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:

 
                 2022   2021 
                 GBPm   GBPm 
--------------  -----  ----- 
Mortgages +1%       1      1 
Unsecured +1%      15      4 
Business +1%        4      6 
--------------  -----  ----- 
Mortgages -1%     (1)    (1) 
Unsecured -1%    (15)    (4) 
Business -1%      (3)    (4) 
--------------  -----  ----- 
 

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 it 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 assessment 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 that 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.

Refinements were made to the application of SICR on the Group's Business portfolio in the year. Please refer to pages 21 and 35 for further detail.

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.

The table below illustrates this approach with reference to the Group's Mortgage, Unsecured (credit cards) and Business portfolios. In each case the illustration is of the PD threshold based on a 5-year full lifetime PD (not the annualised equivalent). The business example reflects the thresholds appropriate for term lending.

 
                                                Origination 
                                                         PD  SICR Trigger 
------------------  --------------------------  -----------  ------------ 
                    Low origination lifetime 
Mortgages            PD                               2.00%         5.69% 
 High origination lifetime 
  PD                                                 10.00%        17.69% 
 ---------------------------------------------  -----------  ------------ 
Unsecured (credit   Low origination lifetime 
 cards)              PD                               2.00%        22.34% 
 High origination lifetime 
  PD                                                 10.00%        25.52% 
 ---------------------------------------------  -----------  ------------ 
                    Low origination lifetime 
Business             PD                               2.00%         6.03% 
 High origination lifetime 
  PD                                                 10.00%        16.70% 
 ---------------------------------------------  -----------  ------------ 
 

Risk Management

Credit risk

Changes to the overall SICR thresholds can also impact staging, driving accounts into higher stages with the resultant impact on the ECL allowance:

 
                                                       2022   2021 
                                                       GBPm   GBPm 
----------------------------------------------------  -----  ----- 
A 10% movement in the mortgage portfolio from Stage 
 1 to Stage 2(1)                                         +9     +6 
A 10% movement in the credit card portfolio from 
 Stage 1 to Stage 2(1)                                  +87    +69 
A 10% movement in the business portfolio from Stage 
 1 to Stage 2(1)                                        +18    +13 
A PD stress which increases PDs upwards by 20% for 
 all portfolios                                        +106    +94 
----------------------------------------------------  -----  ----- 
 
   (1)   The comparative has been restated in line with the 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

PMAs were GBP85m in 2022 (2021: GBP207m) and are included within the total ECL provision of GBP457m (2021: GBP504m).

These are management judgements that impact the ECL provision by increasing (or decreasing) the collectively assessed modelled output, where not all the known risks identified in a particular product segment have been necessarily reflected within the models. This also takes into account any time lag between the date the macroeconomic assumptions were received and the reporting date. Key PMAs described below:

Mortgages: the Group continue to monitor the level of ECL held on BTL mortgages due to uncertainty of the impact on landlords and tenants and have maintained the PMA for this cohort of customers. A new PMA was introduced to reflect an impact on debt affordability as a result of rising energy prices and other inflationary effects.

Unsecured: a new PMA was introduced for debt affordability as a reaction to the reduction in customers' reduced disposable incomes. Other PMAs are also held with the most material being GBP10m for the potential impact on the sale or future recovery value of Unsecured written-off debt, which can fluctuate in the current environment.

Business: the current uncertain economic environment is also impacting the Business portfolio, where higher prices, wage inflation pressure and rising interest rates are all headwinds faced by customers. The Group has recognised these pressures and introduced an economic resilience PMA accordingly.

The impact of PMAs on the Group's ECL allowance and coverage ratios is as follows:

 
                      Mortgages  Unsecured  Business    Total 
--------------------  ---------  ---------  --------  ------- 
                                    GBP33m 
2022                     GBP34m        (1)    GBP18m   GBP85m 
% of total ECL              70%        11%       21%      20% 
Coverage - total          0.09%      4.66%     1.59%    0.62% 
Coverage - total ex 
 PMAs                     0.02%      4.13%     0.93%    0.45% 
--------------------  ---------  ---------  --------  ------- 
 
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% 
--------------------  ---------  ---------  --------  ------- 
 
   (1)   The actual value GBP32.47m has been rounded up to ensure the table casts. 

The reduction in PMAs in the year of GBP122m predominantly reflects the removal of (i) sector specific PMAs in the Business portfolio (GBP80m) that were necessary as the UK economy continued to feel the effects of Covid-19 and the outlook for businesses remained uncertain, and (ii) the impact of payment holidays on the Mortgage portfolio (GBP20m) as Covid-19 related support was withdrawn.

PMAs are primarily held in Stages 1 and 2 and are discussed in more detail in the divisional commentary on pages 28 to 37.

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 portfolio 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)

2022

 
                                         2022    2023    2024   2025  2026 
                           Economic 
Scenario   VMUK weighting   measure(2)      %       %       %      %     % 
---------  --------------  ------------  ----  ------  ------  -----  ---- 
Upside     10%             Base rate      1.4     3.0     2.5    2.3   2.3 
---------  -------------- 
                           Unemployment   3.8     4.2     4.0    3.7   3.6 
---------  -------------- 
                           GDP            3.9     2.8     3.2    3.4   2.1 
                           Inflation      9.5     8.5     1.8    0.7   1.3 
                           HPI            8.3   (2.3)   (1.8)    5.7   6.5 
---------  --------------  ------------  ----  ------  ------  -----  ---- 
Base       55%             Base rate      1.4     2.2     1.8    1.8   1.7 
---------  -------------- 
                           Unemployment   3.9     4.6     4.4    3.8   3.8 
---------  -------------- 
                           GDP            3.6     0.3     2.1    2.7   2.1 
                           Inflation      9.4     7.5     0.6    0.7   1.5 
                           HPI            6.8   (4.6)   (3.0)    4.4   6.7 
---------  --------------  ------------  ----  ------  ------  -----  ---- 
Downside   35%             Base rate      1.3     1.7     0.6    0.5   0.5 
---------  -------------- 
                           Unemployment   4.0     6.0     7.1    7.3   7.1 
---------  -------------- 
                           GDP            2.6   (5.6)     0.8    2.1   2.1 
                           Inflation      9.3     5.0   (1.0)    0.7   1.5 
                           HPI            3.5  (13.3)  (11.6)  (2.7)   7.4 
---------  --------------  ------------  ----  ------  ------  -----  ---- 
Weighted 
 average                   Base rate      1.4     2.1     1.4    1.4   1.4 
---------  -------------- 
                           Unemployment   3.9     5.0     5.3    5.0   4.9 
---------  -------------- 
                           GDP            3.3   (1.5)     1.7    2.5   2.1 
                           Inflation      9.4     6.7     0.2    0.7   1.5 
                           HPI            5.8   (7.4)   (5.9)    2.0   6.9 
---------  --------------  ------------  ----  ------  ------  -----  ---- 
 

2021

 
                                          2021    2022    2023   2024   2025 
                           Economic 
Scenario   VMUK weighting   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) Macroeconomic assumptions provided by Oxford Economics on 1 September 2022 and reported on a calendar year basis unless otherwise stated. The changes in macroeconomic assumptions between 1 September 2022 and 30 September 2022 have been considered as part of the PMAs.

(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

Strong foundations supporting resilience and growth.

The financial risk framework underpins the Group's robust balance sheet, ensuring strategy is resilient and responsive to external pressures and changing regulatory obligations.

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.

Risk appetite

The primary objective for the management of financial risks is to control the risk profile within approved risk limits in order to maintain the confidence of the Group's customers and other stakeholders. Financial risks are also managed to protect current and future earnings from the impact of market volatility. The Group applies a prudent approach to financial risks in order to safeguard the ongoing strength and resilience of the balance sheet. These activities are undertaken in a manner consistent with the Group's obligations under ring-fencing legislation and prudential rules.

Financial risk appetite is approved by the Board, with authority delegated to ALCO for subsequent implementation and monitoring. The Board has established a range of capital risk appetite measures including CET1, leverage and MREL. Measures for funding and liquidity risks consider the structure of the balance sheet, the Group's overall funding profile and compliance with the regulatory LCR and net stable funding ratio (NSFR) requirements. Board-approved risk appetite covers both regulatory and internal liquidity requirements and the need to maintain access to liquidity resources sufficient to accommodate outflows of funds in a range of stress scenarios over a one-month and three -- month period.

The Group participates in wholesale markets and uses financial instruments to fund its banking activities and manage the liquidity and market risks arising from these activities. The Group establishes an appetite for these risks based on an overriding principle that the Group will not engage in proprietary risk taking.

The Group's pension risk appetite is a component of the Group-wide RAS framework for the management of balance sheet risks and is considered in the context of potential capital impacts as a result of volatility in the Scheme's valuations and future contributions.

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 strategy of sustainable growth. Capital risk is the risk that the Group has or forecasts insufficient capital and other loss-absorbing debt instruments to operate effectively. This includes meeting minimum regulatory requirements, operating within Board approved risk appetite and supporting its strategic goals.

Measurement

The Group manages capital in accordance with prudential rules issued by the PRA and the FCA, which are implemented through the CRD IV CRR regulatory framework. Pillar 1 capital requirements are calculated in respect of credit risk, operational risk, market risk, counterparty credit risk and credit valuation adjustments. The capital requirements are calculated using the following approaches:

   --   Retail mortgages: IRB; 
   --   Business lending: FIRB; 
   --   Specialised lending: IRB slotting; and 

-- All other portfolios: Standardised approach, via either sequential IRB implementation or Permanent Partial Use.

A rigorous approach is taken to assessing risks that are not adequately covered by Pillar 1. The Group also undertakes analysis of a range of stress scenarios to test the impact on capital arising from severe yet plausible scenarios. These approaches to capital are documented in the Group's ICAAP which is subject to review, challenge and approval by the Board. The outputs from the ICAAP and regulatory stress testing are used to inform minimum capital targets and risk appetite, ensuring survivability above peak-to-trough stress movements.

The Group IRB framework looks at the customer PD along with loss severity (EAD and LGD). The outputs are used in the calculation of RWA, expected loss and IFRS 9 ECL. The IRB parameters and rating assessments are actively embedded in the following day-to-day processes:

-- Credit approval - IRB models and parameters are used to assess the customer risk and outputs are used to inform cut-off models that drive the lending decisions;

-- Pricing - Outputs and estimates are used in the assessment of new products and portfolio pricing reviews;

-- Risk appetite - Parameters are included in the assessment of models and are analysed to inform the Group's risk capacity and appetite; and

-- Asset quality - Parameters are monitored to understand the product and segment performance of the Group's portfolios.

Regulatory capital developments

The regulatory landscape for capital is subject to a number of changes, some of 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 respond.

Risk Management

Financial risk

COVID-19 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 and mortgage IRB models were extended. The Group did not adopt hybrid mortgage models in FY22 and intends to do so in FY23.

As part of the Group's implementation of mortgage IRB models (including Hybrid PD), we will consider the need to apply an overlay to increase RWAs in advance of formal approval of models. A final figure has not yet been determined although this may be in the range of GBP1-1.5bn of RWAs.

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.

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', with the publication of Policy Statement 22/21 in October containing final rules. The policy statements covered a range of revisions in the areas of counterparty credit risk, large exposures, LCR, NSFR and reporting and disclosure among other changes. These standards became effective in the UK from 1 January 2022 and did not materially impact capital requirements.

Policy Statement 22/21 confirmed the PRA's treatment to fully deduct software assets from CET1 capital, applicable from 1 January 2022. The PRA's view is that intangible assets are not sufficiently loss absorbent on a going concern basis to warrant recognition as CET1 capital.

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. The PRA is due to publish a Consultation Paper on UK implementation in the fourth quarter of 2022, with the final reforms expected to become effective on 1 January 2025 (delayed from 2023), subject to a five-year transitional period. Uncertainties therefore remain for a number of topics that will be subject to revisions under Basel 3.1. In response the Group has undertaken an assessment of potential outcomes to assist with planning.

Solvency Stress Test and Annual Cyclical Scenarios

The Group was a participant in the BoE SST in 2021. This was the first time the Group had been involved in the BoE's stress testing for major banks. The Group will be an on-going participant in the BoE's Annual Cyclical Scenario (ACS). Results from the SST were published by the BoE at the end of 2021 and were used by the Financial Policy Committee (FPC) to assess the stress severity required to threaten resilience and test the Group's ability to absorb losses and continue to lend. The Group's results on both a transitional and non-transitional basis were in excess of the published reference rates and the Group was not required to take any additional capital actions or to submit a revised capital plan.

The 2022 ACS was postponed due to the uncertainty caused by the Russian invasion of Ukraine. The delay was to enable lenders to focus on managing the disruption in the financial markets associated with the invasion. In July 2022, it was announced that the ACS stress test would commence in September 2022. The BoE published the Key Elements of the 2022 Stress Test on 26 September 2022 and the Group is in the process of undertaking the 2022 ACS exercise. The scenario tests the resilience of the UK Banking system to deep simultaneous recessions in the UK and global economies, real income shocks, large falls in asset prices and higher global interest rates, as well as a separate stress of misconduct costs. The results will be published in summer 2023.

Resolvability Assessment Framework (RAF)

The BoE has introduced a Resolvability Assessment Framework (RAF), with full implementation required by 2022 to ensure major UK banks can be safely resolved. The Group has undertaken an assessment of its resolvability with disclosures published in June 2022. The BoE concluded that, upon their first assessment as resolution authority of the eight major banks, a major UK bank could enter resolution safely, remaining open and continuing to provide vital banking services to the economy.

UK Leverage Ratio Framework

In October 2021 the FPC and PRA published their changes to the UK leverage ratio framework (Policy Statement 21/21). The changes, effective from 1 January 2022, have simplified the framework with the Group being subject to the UK leverage ratio only rather than the two leverage ratio definitions that previously existed. The Group exceeds the 3.25% leverage ratio requirement.

Mitigation

The Group's capital risk policy standard provides the framework for the management of capital within the Group. The objectives of the policy standard are to efficiently manage the capital base to optimise shareholder returns while maintaining capital adequacy and ensuring that excessive leverage is not taken, so meeting regulatory requirements and managing the rating agencies' assessments of the Group.

The Group is able to accumulate additional capital through retention of profit over time, which may be increased by: income growth and cost cutting; raising new equity, for example via a rights issue; reducing or cancelling distributions on capital instruments; and raising AT1 and Tier 2 capital. The availability and cost of additional capital is dependent upon market conditions and perceptions at the time. The Group is also able to manage the demands for capital through management actions including adjusting its lending strategy.

Capital optimisation remains a key strategic priority, ensuring the Group manages the quantity and quality of resources efficiently while meeting internal targets, stress testing requirements and maintaining regulatory compliance.

Risk Management

Financial risk

Monitoring

The Board approves the capital risk appetite annually, defining minimum levels of capital across a range of capital ratios and measurements. The internal appetite ensures the Group operates above minimum regulatory requirements with reporting conducted through ALCO, Board and Executive Risk Committee. The capital plan, which assesses capital adequacy on a forward-looking basis, is also approved by the Board annually. The annual planning process is supported by rolling forecasting which is reported to ALCO monthly. This ensures that performance trends are reviewed and that there is transparency of the impact on capital ratios, risk appetite and the outlook. As part of the monthly forecasting process, ALCO reviews scenario analysis, considering adverse impacts to economic conditions and modelling sensitivities, including changes to regulation.

In recent years, the PRA has also taken a thematic interest in the quality of regulatory reporting across the industry, specifically focusing on the completeness, accuracy and timing of regulatory reports. This has resulted in a number of s166 Skilled Person Reviews being commissioned over the governance, controls and processes supporting the regulatory reporting framework. The Group is subject to such a review which commenced this year and which will ultimately lead to enhancements to the governance and control framework of the Group's regulatory reporting. In May the Board approved that EY be recommended to the PRA as the preferred Skilled Person to undertake the review and the PRA subsequently approved EY's appointment. The review is scheduled to finalise towards the end of calendar year 2022.

Capital resources

The Group's capital resources position as at 30 September 2022 is summarised below:

 
                                          30 Sept  30 Sept 
                                             2022     2021 
Regulatory capital (1)                       GBPm     GBPm 
----------------------------------------  -------  ------- 
Statutory total equity                      6,340    5,473 
 
CET1 capital: regulatory adjustments 
 (2) 
Other equity instruments                    (666)    (915) 
Defined benefit pension fund assets         (650)    (551) 
Prudent valuation adjustment                  (5)      (5) 
Intangible assets                           (256)    (208) 
Goodwill                                     (11)     (11) 
Deferred tax asset relying on future 
 profitability                              (302)    (258) 
Cash flow hedge reserve                     (699)     (10) 
AT1 coupon accrual                           (13)     (19) 
Foreseeable dividend on ordinary shares     (106)     (14) 
Excess expected loss                        (100)        - 
Share buyback                                (13)        - 
IFRS 9 transitional adjustments               114      134 
----------------------------------------  -------  ------- 
Total regulatory adjustments to CET1      (2,707)  (1,857) 
----------------------------------------  -------  ------- 
Total CET1 capital                          3,633    3,616 
----------------------------------------  -------  ------- 
 
AT1 capital 
AT1 capital instruments                       666      697 
----------------------------------------  -------  ------- 
Total AT1 capital                             666      697 
----------------------------------------  -------  ------- 
 
Total Tier 1 capital                        4,299    4,313 
----------------------------------------  -------  ------- 
 
Tier 2 capital 
Subordinated debt                           1,020    1,019 
----------------------------------------  -------  ------- 
Total Tier 2 capital                        1,020    1,019 
----------------------------------------  -------  ------- 
 
Total regulatory capital                    5,319    5,332 
----------------------------------------  -------  ------- 
 

(1) This table shows the capital position on a CRD IV 'fully loaded' basis and transitional IFRS 9 basis.

(2) A number of regulatory adjustments to CET1 capital are required under CRD IV regulatory capital rules.

Risk Management

Financial risk

 
                                                            2022    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                              (1)       2 
Retained earnings and other reserves (including special 
 purpose entities)                                           428     449 
Prudent valuation adjustment                                   -       1 
Amendment to software asset deduction rules(3)             (151)     151 
Intangible assets                                            103     118 
Deferred tax asset relying on future profitability          (44)   (107) 
Defined benefit pension fund assets                         (99)    (81) 
AT1 distribution paid already deducted from CET1              19      21 
Dividend paid already deducted from CET1                      14       - 
Foreseeable distributions                                  (119)    (33) 
Share buyback                                               (13)       - 
Excess expected losses                                     (100)       - 
IFRS 9 transitional relief                                  (20)   (176) 
--------------------------------------------------------  ------  ------ 
Total CET1 capital at 30 September                         3,633   3,616 
--------------------------------------------------------  ------  ------ 
 
AT1 capital 
AT1 capital at 1 October                                     697     915 
AT1 instrument issued net of costs                           346       - 
AT1 instrument repurchased                                 (377)       - 
Less other equity instruments not qualifying as AT1            -   (218) 
--------------------------------------------------------  ------  ------ 
Total AT1 capital at 30 September                            666     697 
--------------------------------------------------------  ------  ------ 
Total Tier 1 capital at 30 September                       4,299   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 30 September                             1,020   1,019 
--------------------------------------------------------  ------  ------ 
Total capital                                              5,319   5,332 
--------------------------------------------------------  ------  ------ 
 

(1) Data in the table is reported under CRD IV 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)   The full deduction treatment for software assets was reinstated by the PRA in January 2022. 

The Group's CET1 capital increased by GBP17m during the year. Statutory profit after tax of GBP537m drove an overall increase in retained earnings, which when offset against other reserves movements resulted in a net increase in CET1 capital of GBP428m. The Group used this surplus principally to fund capital returns in the year of GBP282m (comprising payments of GBP36m for interim dividends, GBP51m for AT1 distributions, a total GBP76m deduction for share buyback, and a final dividend and AT1 accrual for the current year of GBP119m) and further investment in digital software assets of GBP53m. In addition, GBP100m of CET1 capital was absorbed by the movement in excess expected losses, as releases in IFRS 9 provisions widened the gap between regulatory and accounting credit losses.

In June 2022, the Group successfully issued GBP350m of new AT1 securities, achieving significantly tighter pricing on a spread basis than prior issuances. Concurrently, the Group repurchased GBP377m of its existing AT1 securities that are callable in December of this year. The net impact reduced AT1 capital by GBP31m (after costs) as at 30 September 2022.

Subsequent to the report date, the Group announced its intention to redeem the remaining GBP73m of those AT1 securities on their call date in December 2022.

Risk Management

Financial risk

Risk weighted assets

 
                                    2022                             2021 
---------------------  -------------------------------  ------------------------------- 
                                               Minimum                          Minimum 
                                               capital                          capital 
Minimum capital        Exposure     RWA   requirements  Exposure     RWA   requirements 
 requirements              GBPm    GBPm           GBPm      GBPm    GBPm           GBPm 
---------------------  --------  ------  -------------  --------  ------  ------------- 
Retail mortgages         62,545   9,155            732    61,146  10,010            801 
Business lending         11,959   6,196            497    11,670   6,040            483 
Other retail lending     17,408   4,817            385    16,201   4,311            345 
Other lending            18,165     277             22    15,467     326             26 
Other(1)                    584     637             51       765     856             69 
---------------------  --------  ------  -------------  --------  ------  ------------- 
Total credit risk       110,661  21,082          1,687   105,249  21,543          1,724 
---------------------  --------  ------  -------------  --------  ------  ------------- 
Credit valuation 
 adjustment                         258             21               103              8 
Operational risk                  2,623            210             2,481            198 
Counterparty credit 
 risk                               185             15               105              8 
---------------------  --------  ------  -------------  --------  ------  ------------- 
Total                   110,661  24,148          1,933   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, intangible assets on software less than three years old (2021 only), prepayments, other debtors and deferred tax assets that are not deducted.

 
                             12 months to 30 September 2022                    12 months to 30 September 2021 
------------------  ------------------------------------------------  ------------------------------------------------ 
                                   Non-credit                Minimum                 Non-credit                Minimum 
                       IRB    STD        risk                capital     IRB    STD        risk                capital 
                       RWA    RWA      RWA(2)   Total   requirements     RWA    RWA      RWA(2)   Total   requirements 
RWA movements         GBPm   GBPm        GBPm    GBPm           GBPm    GBPm   GBPm        GBPm    GBPm           GBPm 
------------------  ------  -----  ----------  ------  -------------  ------  -----  ----------  ------  ------------- 
Opening RWA         15,699  5,844       2,689  24,232          1,938  15,846  5,642       2,911  24,399          1,953 
Asset size             267    575           -     842             68   (553)    152           -   (401)           (32) 
Asset quality        (959)      4           -   (955)           (75)   (644)     16           -   (628)           (50) 
Model updates(1)      (64)      -           -    (64)            (5)   1,086      -           -   1,086             87 
Methodology and 
 policy                  -  (160)           -   (160)           (13)    (36)    151           -     115              9 
Other                    -  (124)         377     253             20       -  (117)       (222)   (339)           (29) 
------------------  ------  -----  ----------  ------  -------------  ------  -----  ----------  ------  ------------- 
Closing RWA         14,943  6,139       3,066  24,148          1,933  15,699  5,844       2,689  24,232          1,938 
------------------  ------  -----  ----------  ------  -------------  ------  -----  ----------  ------  ------------- 
 
   (1)   Model updates include the mortgage quarterly PD calibrations. 

(2) Other RWA includes operational risk, credit valuation adjustment and counterparty credit risk.

RWA reduced c.GBP0.1bn to GBP24.1bn primarily due to the impact of improvements to the HPI offsetting the impact of higher lending and increased other non-credit RWAs.

As well as the HPI improvements of GBP1.5bn, the asset quality movement includes RWA increases relating to the increased risk weights associated with higher mortgage pipeline commitments.

Model updates include a reversal of the GBP344m in RWA specific to COVID-19 related PMAs, with a new PMA of GBP280m to account for increased RWAs arising from Forced Sale Discounts. A further PMA of GBP47m to the Business portfolio relating to the new definition of default was introduced in January 2022, and this was largely offset by a reduction of GBP46m RWAs following recalibration of PDs throughout the year.

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 from January 2022.

The other movement in standardised RWAs reflects reductions to exposures to fixed assets (GBP39m RWA), deferred tax assets (GBP43m RWA) and SPV deposits with other institutions (GBP58m RWA), partially offset by increases to other assets including prepayments and items in the course of collection.

Other non-credit risk RWA movements include an Operational Risk RWA uplift of GBP142m due to a higher proportion of revenue within Commercial Banking business line over the last three years, compared to the three years prior to September 2021. CCR and CVA RWAs have increased by GBP80m and GBP155m respectively, driven by the move to the more risk sensitive SA-CCR methodology per PS22/21 from 1 January 2022 and increased market volatility in recent months.

Risk Management

Financial risk

IFRS 9 transitional arrangements

The table below shows a comparison of capital resources, requirements and ratios with and without the application of transitional arrangements for

IFRS 9.

 
                                          30 September 2022 
--------------------------------------  ---------------------- 
                                                        IFRS 9 
                                               IFRS 9    Fully 
                                         Transitional   loaded 
                                                basis    basis 
Available capital (amounts)                      GBPm     GBPm 
--------------------------------------  -------------  ------- 
CET1 capital                                    3,633    3,519 
Tier 1 capital                                  4,299    4,185 
Total capital                                   5,319    5,205 
--------------------------------------  -------------  ------- 
RWA (amounts) 
Total RWA                                      24,148   24,056 
--------------------------------------  -------------  ------- 
Capital ratios 
CET1 (as a percentage of RWA)                   15.0%    14.6% 
Tier 1 (as a percentage of RWA)                 17.8%    17.4% 
Total capital (as a percentage of 
 RWA)                                           22.0%    21.6% 
--------------------------------------  -------------  ------- 
Leverage ratio 
Leverage ratio total exposure measure          83,771   83,657 
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 75% in 2022, reducing to 50% in 2023 and 25% in 2024.

At 30 September 2022, GBP114m of IFRS 9 transitional adjustments (2021: GBP134m) have been applied to the Group's capital position in accordance with CRR: GBP7m of static and GBP107m of dynamic adjustments (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. The table below summarises the amount of capital in relation to RWA the Group is currently required to hold, excluding any PRA buffer.

 
                                     30 September 2022 
----------------------------------  ------------------- 
                                                  Total 
Minimum requirements                  CET1      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 are 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.

The Group continues to maintain a significant surplus above its capital requirements. At September the group maintained CET1 capital in excess of its requirements equal to 6.3% of RWAs (equivalent to GBP1,521m).

The PRA sets a Group specific Pillar 2A requirement for risks which are not captured within the Pillar 1 requirement. Together Pillar 1 and Pillar 2A represent the Group's Total Capital Requirement or TCR, which is the minimum requirement which must be met at all times. During the year the PRA updated the Group's Pillar 2A requirement to GBP744m, representing a material reduction in Pillar 2A from 30 September 2021 of GBP209m. At September 2022 this resulted in a TCR of 11.1% of RWAs (equivalent to GBP2,676m) of which 6.2% must be met with CET1 capital (equivalent to GBP1,505m).

Risk Management

Financial risk

In October 2022 the PRA communicated an update to the Group's Pillar 2A requirement setting it as 2.97% of RWAs, of which 1.67% must be met with CET1 capital. In line with previous guidance this requirement has been set as a percentage of RWAs, rather than the fixed nominal Pillar 2A requirements set during 2020 and 2021 in response to COVID-19. Applying this updated requirement as at 30 September 2022 would result in a modest reduction in total capital requirements of GBP27m and CET1 requirements of GBP15m.

The regulatory capital buffer framework is intended to ensure firms maintain a sufficient amount of capital above their regulatory minimum in order to withstand periods of stress and mitigate against firm specific and systemic risks. The UK has implemented the provisions on capital buffers outlined in CRD IV which introduced a combined capital buffer. This includes a Capital Conservation Buffer, a Countercyclical Capital Buffer (CCyB) and where applicable a Global Systemically Important Institution (G-SII) Buffer or an Other Systemically Important Institutions (O-SII) Buffer.

The Group's CCyB reflects an exposure weighted average of the CCyB rates applicable in the geographies the Group operates in. Currently this reflects only the UK. In December 2021, the FPC announced it felt that domestic risks to UK financial stability have returned to around their pre-COVID levels. It subsequently provided guidance that the UK CCyB rate would increase to 1%, effective December 2022, rising to 2% from July 2023 to align with its guidance for the CCyB rate under standard risk conditions. The FPC has noted the considerable uncertainties in relation to the economic outlook and will continue to monitor the situation and stands ready to vary the UK CCyB rate - in either direction - in line with the evolution of economic conditions, underlying vulnerabilities and the overall risk environment.

Currently, the Group does not meet the criteria for the application of either a global or domestic systemically important institution buffer.

MREL

 
                                          2022    2021 
MREL position                             GBPm    GBPm 
--------------------------------------  ------  ------ 
Total capital resources(1)(2)            5,319   5,332 
Eligible senior unsecured securities 
 issued by Virgin Money UK PLC(2)        2,423   2,408 
--------------------------------------  ------  ------ 
Total MREL resources                     7,742   7,740 
Risk-weighted assets                    24,148  24,232 
--------------------------------------  ------  ------ 
Total MREL resources available as 
 a percentage of risk-weighted assets    32.1%   31.9% 
--------------------------------------  ------  ------ 
UK leverage exposure measure            83,771  83,415 
--------------------------------------  ------  ------ 
Total MREL resources available as 
 a percentage of UK leverage exposure 
 measure                                  9.2%    9.3% 
--------------------------------------  ------  ------ 
 
   (1)   The capital position reflects the application of the transitional arrangements for IFRS 9. 

(2) Includes MREL instrument maturity adjustments; the add-back of regulatory amortisation and the deduction of instruments with less than one year to maturity. From September 2022, unamortised costs are also deducted from eligible senior unsecured securities.

The BoE as the UK Resolution Authority has published its framework for setting a minimum requirement for own funds and eligible liabilities (MREL). This requires the Group to hold capital resources and eligible debt instruments equal to the greater of two times the Total Capital Requirement (TCR) or 6.5% of the leverage exposure measure. In addition to MREL the Group must also hold any applicable capital buffers, which together with MREL represent the Group's loss-absorbing capacity (LAC) requirement.

As at 30 September 2022, MREL resources were GBP7.7bn (FY21: GBP7.7bn), equivalent to 32.1% of RWAs (FY21: 31.9%). This provides prudent headroom of GBP1.7bn or 7.2% above LAC requirement of 24.9%.

Dividend

Distributable reserves are determined as required by the Companies Act 2006 by reference to a company's individual financial statements. At 30 September 2022, the Company had accumulated distributable reserves of GBP1,056m (2021: GBP792m).

The Board has recommended a final dividend for the financial year ended 30 September 2022 of 7.5p per share.

Share buyback

At the end of June 2022, the Group announced a share buyback programme with an initial repurchase of GBP75m in aggregate between ordinary shares of GBP0.10 each listed on the LSE and CDIs, each representing one share listed on the ASX. Subject to trading liquidity, Virgin Money intends to repurchase shares and CDIs in approximately equal proportions. The buyback commenced on 30 June 2022 and will end no later than 17 December 2022.

On 21 November 2022 an extension to the share buyback programme was announced with an intent to repurchase a further GBP50m in aggregate of shares and CDIs, ending no later than 2 May 2023.

Risk Management

Financial risk

Leverage

 
                                             2022     2021 
Leverage ratio                               GBPm     GBPm 
---------------------------------------  --------  ------- 
Total Tier 1 capital for the leverage 
 ratio 
Total CET1 capital                          3,633    3,616 
AT1 capital                                   666      697 
---------------------------------------  --------  ------- 
Total Tier 1 capital                        4,299    4,313 
---------------------------------------  --------  ------- 
Exposures for the leverage ratio 
Total assets                               91,907   89,100 
Adjustment for off-balance sheet items      3,204    2,884 
Adjustment for derivative financial 
 instruments                                  282       91 
Adjustment for securities financing 
 transactions                               2,974    2,235 
Adjustment for qualifying central 
 bank claims                             (11,955)  (9,094) 
Other adjustments                         (2,641)  (1,801) 
---------------------------------------  --------  ------- 
UK leverage ratio exposure (1)             83,771   83,415 
---------------------------------------  --------  ------- 
UK leverage ratio (1)(2)                     5.1%     5.2% 
---------------------------------------  --------  ------- 
Average UK leverage ratio exposure 
 (3)                                       83,985   83,213 
---------------------------------------  --------  ------- 
Average UK leverage ratio (3)                5.0%     5.0% 
---------------------------------------  --------  ------- 
 

(1) As the UK leverage ratio is now the single leverage ratio exposure measure, the analysis of the CRD IV leverage ratio has been replaced with the UK equivalent for this period and the comparative.

   (2)   IFRS 9 transitional capital arrangements have been applied to the leverage ratio calculation. 

(3) The transitional average leverage exposure measure is based on the daily average of on-balance sheet items and month-end average of off-balance sheet and capital items over the quarter (1 July 2022 to 30 September 2022).

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 simplified the leverage framework from 1 January 2022 with UK banks now subject to a single UK leverage ratio exposure measure. The CRD IV leverage ratio is no longer applicable to UK banks.

The leverage ratio is monitored monthly against a Board-approved RAS, with the responsibility for managing the ratio delegated to ALCO.

The leverage ratio is the ratio of Tier 1 capital to total exposures, defined as:

capital: Tier 1 capital defined on an 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 PRA regulations 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% (2021: 5.2%) exceeds the UK minimum ratio of 3.25%.

Funding and liquidity risk

Funding risk occurs when 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.

Risk Management

Financial risk

Exposures

The Group is predominantly funded by Personal and Business customers. Customer funding is supported by the Group's ongoing wholesale funding programmes, medium-term secured funding issuance (e.g. the Group's securitisation programmes), Regulated Covered Bonds and unsecured medium-term notes. The Group also has access to and has drawn against the BoE TFS and TFSME, both schemes introduced to support the UK through periods of instability.

Funding risk exposures arise from an unsustainable or undiversified funding base, for example, a reliance on short-term wholesale deposits. The risk may result in deviation from funding strategy, negatively impact market or customer perception, increase the acquisition cost of new funds or reduce lending capacity, thereby adversely impacting financial performance and stability.

The Group's primary liquidity risk exposure arises through the redemption of retail deposits where customers have the ability to withdraw funds with limited or no notice. Exposure also arises from the refinancing of customer and wholesale funding at maturity and the requirement to fund new and existing committed lending obligations including mortgage pipeline and credit card facilities.

Measurement

Funding and liquidity risks are subject to a range of measures contained within the Group's RAS which reflect both regulatory requirements, as a minimum, and the Group's own view on risk sensitivities. The Group RAS is supported by a series of limits agreed by ALCO. These measures provide a short- and long-term view of risks under both normal and stressed conditions. The measures focus on: cash outflows and inflows under stress; concentration risks; refinancing risks; asset encumbrance; and the quantum, diversity and operational capability of mitigating actions.

The Group's funding plan establishes an acceptable level of funding risk which is approved by the Board and is consistent with risk appetite and the Group's strategic objectives. The development of the Group's funding plan is informed by the requirements of the Group's financial risk policy standards. A series of metrics is used across the Group to measure risk exposures, including funding ratios, limits to concentration risk and maximum levels of encumbrance.

Liquidity is managed in accordance with the ILAAP, which is approved by the Board. Liquidity risk exposures are subject to assessment under both regulatory and internal requirements. The volume and quality of the Group's liquid asset portfolio is defined through a series of stress tests across a range of time horizons and stress conditions. The High-Quality Liquid Asset (HQLA) requirement is quantified as the outflow of funds under a series of stress scenarios less the impact of inflows from assets. Stress cash outflow assumptions have been established for individual liquidity risk drivers across idiosyncratic and market-wide stresses.

The Treasury function is responsible for the development and execution of strategy subject to oversight from the Risk function and review at ALCO. The Group continues to maintain its strong funding and liquidity position and seeks to achieve an appropriate balance between profitability, liquidity risk and capital optimisation.

Monitoring

Liquidity is monitored and measured daily by the Group, with reporting conducted through ALCO and the Executive Risk Committee. In a stress situation or in adverse conditions, the level of monitoring and reporting is increased commensurate with the nature of the stress event, as demonstrated in the Group's response to COVID-19.

Monitoring and control processes are in place against internal and regulatory liquidity requirements. The Group monitors a range of market and internal early warning indicators on a routine basis for early signs of liquidity risk in the market or specific to the Group. These indicators cover a mixture of quantitative and qualitative measures including daily variation of customer balances, measurement against stress requirements and monitoring of the macroeconomic environment.

Mitigation

The Group holds a portfolio of HQLA that can be utilised to raise funding in times of stress. The size of the HQLA portfolio is calibrated based on a view of potential outflows under both systemic and idiosyncratic stress events. In addition, the Group can use the repo market and bilateral relationships to generate funds and can also participate in BoE operations through the Sterling Monetary Framework (SMF). The Group has several sources of funding which are well-diversified in terms of the type of instrument and product, counterparty, term structure and market. In addition to customer funding, wholesale funding is used to support balance sheet growth, lengthen the contractual tenor of funding and diversify funding sources. These funding programmes are a source of strength for the Group and leverage the Group's high-quality mortgage book as collateral for secured funding.

As a participant in the BoE SMF, the Group had access to funding via the TFS and TFSME. TFSME was launched in April 2020 to provide cost-effective funds to banks to support additional lending to the real economy and incentivise lending to SMEs during a period of economic disruption caused by COVID-19. During 2022, the Group repaid the remaining outstanding TFS amounts.

The funding plan includes an assessment of the Group's capacity for raising funds across a wide range of primary funding sources, thereby mitigating funding risk. Refinancing risks are carefully managed and are subject to controls overseen by ALCO. The Group's funding plan includes TFSME repayment profiles designed to manage refinancing risk within a suitably prudent time frame.

The Group recovery plan has been established for management of an escalated liquidity requirement, if the Group experiences either restricted access to wholesale funding or a significant increase in the withdrawal of funds. The plan identifies triggers for escalation, assesses capacity, details the action required, allocates the key tasks to individuals, provides a time frame and defines a management committee to manage the action plan and return the balance sheet structure within appetite.

The Group operates a Funds Transfer Pricing system, a key purpose of which is to ensure that liquidity risk is a factor in the pricing of loans and deposits.

Risk Management

Financial risk

Sources of funding

The table below provides an overview of the Group's sources of funding as at 30 September 2022:

 
                                              2022     2021 
                                              GBPm     GBPm 
-----------------------------------------  -------  ------- 
Total assets                                91,907   89,100 
Less: other liabilities(1)                 (3,122)  (3,060) 
-----------------------------------------  -------  ------- 
Funding requirement                         88,785   86,040 
-----------------------------------------  -------  ------- 
Funded by: 
Customer deposits                           65,434   66,971 
Debt securities in issue                     8,509    7,678 
Due to other banks                           8,502    5,918 
   of which: 
-----------------------------------------  -------  ------- 
   Secured loans                             7,230    5,896 
   Securities sold under agreements to 
    repurchase                               1,205        - 
   Transaction balances with other banks        17        - 
   Deposits with other banks                    50       22 
-----------------------------------------  -------  ------- 
Equity                                       6,340    5,473 
-----------------------------------------  -------  ------- 
Total funding                               88,785   86,040 
-----------------------------------------  -------  ------- 
 

(1) Other liabilities include derivative financial instruments, deferred tax liabilities, provisions for liabilities and charges, and other liabilities as per the balance sheet line item.

The Group's funding objective is to prudently manage the sources and tenor of funds in order to provide a sound base from which to support sustainable lending growth. At 30 September 2022, the Group had a funding requirement of GBP88,785m (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 GBP65,434m (2021: GBP66,971m). Customer deposits comprise interest-bearing deposits, term deposits and non-interest-bearing demand deposits from a range of sources including Personal and Business customers. Throughout the year, funding has been managed at a level to support customer lending, with a higher proportion from wholesale, including usage of TFSME and reduced volumes of customer deposits.

Equity

Equity of GBP6,340m (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.

Liquid assets

The quantity and quality of the Group's liquid assets are calibrated to the Board's view of liquidity risk appetite and remain at a prudent level above regulatory requirements.

The LCR decreased from 149% to 138% during the year and remains comfortably above regulatory and internal risk appetite.

 
                                     Restated 
                              2022   2021 (1) 
LCR                           GBPm       GBPm 
--------------------------  ------  --------- 
Eligible liquidity buffer   13,139     10,996 
Net stress outflows          9,537      7,369 
--------------------------  ------  --------- 
Surplus                      3,602      3,627 
--------------------------  ------  --------- 
LCR                           138%       149% 
--------------------------  ------  --------- 
 

(1) In the prior year, certain business customer deposits were incorrectly classified as Corporates, as opposed to Financial Institutions. Due to the different liquidity outflow assumptions applied, this resulted in net outflows being understated by GBP80m and the LCR overstated by 2%. These deposits have been reclassified as Financial Institutions and the prior year comparative has been updated to align with the current year presentation.

Risk Management

Financial risk

The liquid asset portfolio provides a buffer against sudden and potentially sharp outflows of funds. Liquid assets must therefore be high-quality so they can be realised for cash and cannot be encumbered for any other purpose (e.g. to provide collateral for payments systems).

The volume and quality of the Group's liquid asset portfolio is 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).

The key risk driver assumptions applied to the scenarios are:

 
Liquidity Risk     Internal Stress Assumption 
 Driver 
-----------------  ---------------------------------------------- 
Retail funding     Severe unexpected withdrawal of retail 
                    deposits by customers arising from redemption 
                    or refinancing risk. 
                    No additional deposit inflows are assumed. 
-----------------  ---------------------------------------------- 
Wholesale funding  Limited opportunity to refinance wholesale 
                    contractual maturities. Full outflow 
                    of secured and unsecured funding during 
                    the refinancing period, with no reinvestment 
                    of funding. 
-----------------  ---------------------------------------------- 
Off-balance        Cash outflows during the period of stress 
 sheet              as a result of off-balance sheet commitments 
                    such as mortgage pipeline, undrawn credit 
                    card facilities and collateral commitments. 
                    Lending outflows, over and above contractual 
                    obligations, are honoured as the Group 
                    preserves ongoing viability. 
-----------------  ---------------------------------------------- 
Intra-day          Other participants in the payment system 
                    withhold or delay payments or customers 
                    increase transactions resulting in reduced 
                    liquidity. 
-----------------  ---------------------------------------------- 
Liquid assets      The liquidity portfolio value is reduced, 
                    reflecting stressed market conditions. 
-----------------  ---------------------------------------------- 
 

The Group monitors the movements in its credit ratings and the related requirement to post collateral for payment systems and clearing houses. These figures are not considered material compared to the volume of unencumbered liquid assets.

As at 30 September 2022, the Group held eligible liquid assets well in excess of 100% of net stress outflows and Pillar 2 liquidity requirements, as defined through internal risk appetite.

 
                                                    Average  Average 
Liquid asset portfolio        2022    2021  Change     2022     2021 
 (1)                          GBPm    GBPm       %     GBPm     GBPm 
--------------------------  ------  ------  ------  -------  ------- 
Level 1 
Cash and balances with 
 central banks               9,795   7,060    38.7    7,632    7,232 
UK Government treasury 
 bills and gilts               512     771  (33.6)      905      779 
Other debt securities        2,827   3,239  (12.7)    2,993    3,296 
--------------------------  ------  ------  ------  -------  ------- 
Total level 1               13,134  11,070    18.6   11,530   11,307 
Level 2 (2)                    117      23   408.7       32       24 
--------------------------  ------  ------  ------  -------  ------- 
Total LCR eligible assets   13,251  11,093    19.5   11,562   11,331 
--------------------------  ------  ------  ------  -------  ------- 
 
   (1)   Excludes encumbered assets. 
   (2)   Includes Level 2A and Level 2B. 

Cash and balances with central banks of GBP12,221m, as per note 3.4, include: GBP2,094m of assets that are encumbered to support the issuance of Scottish bank notes (excluding notes not in circulation) and to support payments systems; GBP266m of mandatory central bank deposits; and GBP62m excluded from LCR to cover operating expenses.

Financial assets at FVOCI of GBP5,064m, as per note 3.7, include: GBP1,535m of encumbered UK government treasury bills and gilts, GBP317m of which is encumbered to support Operational Continuity in Resolution.

The NSFR was implemented by the PRA on 1 January 2022 based on Basel standards. The ratio as at 30 September 2022 is 136% (2021: 134%) comfortably in excess of the binding minimum requirement of 100%.

Risk Management

Financial risk

Encumbered assets

The Group manages the level of asset encumbrance to ensure appropriate volumes of assets are maintained to support future planned and potential stressed funding requirements. Encumbrance limits are set in the Group RAS and calibrated to ensure that after a stress scenario is applied, the balance sheet can recover over an acceptable period of time. Reasons for asset encumbrance include, among others, supporting the Group's secured funding programmes to provide stable term funding to the Group, the posting of assets in respect of drawings under the TFSME scheme, use of assets as collateral for payments systems in order to support customer transactional activity and providing security for the Group's issuance of Scottish bank notes.

Encumbered assets by asset category

 
                                                                                   Other assets 
------------  -------                                  -----------  -------------------------------------------  ------ 
                      Assets encumbered with                               Assets not positioned 
                  non-central bank counterparties                           at the central bank 
              ---------------------------------------               -----------------------------------  ------ 
                                                        Positioned 
                                                            at the                    Other 
                                                           central      Readily      assets 
                                                              bank    available     capable      Cannot 
              Covered                                   (including          for    of being          be 
30 September    Bonds  Securitisations  Other   Total  encumbered)  encumbrance  encumbered  encumbered   Total   Total 
2022             GBPm             GBPm   GBPm    GBPm         GBPm         GBPm        GBPm        GBPm    GBPm    GBPm 
------------  -------  ---------------  -----  ------  -----------  -----------  ----------  ----------  ------  ------ 
Loans and 
 advances to 
 customers      4,268            4,620      -   8,888       14,879       28,647      17,054       2,353  62,933  71,821 
Cash and 
 balances 
 with 
 central 
 banks              -                -      -       -        2,879        9,342           -           -  12,221  12,221 
Due from 
 other banks       67              305    269     641            -            -          15           -      15     656 
Derivative 
 financial 
 instruments        -                -      -       -            -            -           -         342     342     342 
Financial 
 instruments 
 at 
 FVOCI              -                -  1,535   1,535            -        3,529           -           -   3,529   5,064 
Other assets        -                -     40      40            -            -         218       1,545   1,763   1,803 
------------  -------  ---------------  -----  ------  -----------  -----------  ----------  ----------  ------  ------ 
Total assets    4,335            4,925  1,844  11,104       17,758       41,518      17,287       4,240  80,803  91,907 
------------  -------  ---------------  -----  ------  -----------  -----------  ----------  ----------  ------  ------ 
 
 
                                                                                                  Other assets 
------------  -------                                 -----------  -------------------------------------------  ------ 
                                                                                 Assets not positioned 
                      Assets encumbered with                                            at the central 
                  non-central bank counterparties                                                 bank 
              --------------------------------------               -----------------------------------  ------ 
                                                       Positioned 
                                                               at 
                                                              the                    Other 
                                                          central      Readily      assets 
                                                             bank    available     capable      Cannot 
              Covered                                  (including          for    of being          be 
30 September    Bonds  Securitisations  Other  Total  encumbered)  encumbrance  encumbered  encumbered   Total   Total 
2021             GBPm             GBPm   GBPm   GBPm         GBPm         GBPm        GBPm        GBPm    GBPm    GBPm 
------------  -------  ---------------  -----  -----  -----------  -----------  ----------  ----------  ------  ------ 
Loans and 
 advances 
 to 
 customers      2,618            4,970      -  7,588       14,108       30,175      17,419       2,719  64,421  72,009 
Cash and 
 balances 
 with 
 central 
 banks              -                -      -      -        2,827        6,884           -           -   9,711   9,711 
Due from 
 other banks      352              310     76    738            -            -          62           -      62     800 
Derivative 
 financial 
 instruments        -                -      -      -            -            -           -         140     140     140 
Financial 
 instruments 
 at FVOCI           -                -    586    586            -        3,766           -           -   3,766   4,352 
Other assets        -                -    296    296            -            -         270       1,522   1,792   2,088 
------------  -------  ---------------  -----  -----  -----------  -----------  ----------  ----------  ------  ------ 
Total assets    2,970            5,280    958  9,208       16,935       40,825      17,751       4,381  79,892  89,100 
------------  -------  ---------------  -----  -----  -----------  -----------  ----------  ----------  ------  ------ 
 

The Group's total non-central bank asset encumbrance increased by GBP1,896m to GBP11,104m as at 30 September 2022. This was primarily due to an increase in encumbered mortgages, supporting Covered Bond funding.

Risk Management

Financial risk

Assets and liabilities by maturity

The following tables represent a breakdown of the Group's balance sheet, according to the contractual maturity of the assets and liabilities. Many of the longer-term monetary assets are variable rate products, with behavioural maturities shorter than the contractual terms. The majority of customer deposits are repayable on demand or at short notice on a contractual basis, with behavioural maturities typically longer than their contractual maturity. Accordingly, this information is not relied upon by the Group in its management of interest rate risk. The Group has disclosed certain term facilities within loans and advances to customers with a revolving element at the maturity of the facility as this best reflects their contractual maturity.

 
                                                  3 months  3 to 12  1 to 5  Over 5  No specified 
                                            Call   or less   months   years   years   maturity(1)   Total 
30 September 2022                           GBPm      GBPm     GBPm    GBPm    GBPm          GBPm    GBPm 
----------------------------------------  ------  --------  -------  ------  ------  ------------  ------ 
Assets 
Financial assets at amortised cost 
   Loans and advances to customers           764     2,378    1,019   7,241  55,053         5,296  71,751 
   Cash and balances with central banks   11,015         -        -       -       -         1,206  12,221 
   Due from other banks                      575        81        -       -       -             -     656 
Financial assets at FVTPL 
   Loans and advances to customers             -         2        1      21      46             -      70 
   Derivative financial instruments            2        46       71     190      33             -     342 
   Other financial assets                      -         -        -       -       -             8       8 
Financial assets at FVOCI                      -       620      602   1,917   1,925             -   5,064 
Other assets                                   -         7      152       1       1         1,634   1,795 
----------------------------------------  ------  --------  -------  ------  ------  ------------  ------ 
Total assets                              12,356     3,134    1,845   9,370  57,058         8,144  91,907 
----------------------------------------  ------  --------  -------  ------  ------  ------------  ------ 
Liabilities 
Financial liabilities at amortised cost 
   Customer deposits                      48,750     3,786   10,209   2,689       -             -  65,434 
   Debt securities in issue                    -       485    1,047   6,669     308             -   8,509 
   Due to other banks                         67       285      250   7,900       -             -   8,502 
Financial liabilities at FVTPL 
   Derivative financial instruments            3         9       29     253      33             -     327 
Other liabilities                          1,822       135      134      54      59           591   2,795 
----------------------------------------  ------  --------  -------  ------  ------  ------------  ------ 
Total liabilities                         50,642     4,700   11,669  17,565     400           591  85,567 
----------------------------------------  ------  --------  -------  ------  ------  ------------  ------ 
 
Off-balance sheet items 
Financial guarantees                           -        33       23      12      44             -     112 
Other credit commitments                  19,247         -        -       -       -             -  19,247 
----------------------------------------  ------  --------  -------  ------  ------  ------------  ------ 
Total off-balance sheet items             19,247        33       23      12      44             -  19,359 
----------------------------------------  ------  --------  -------  ------  ------  ------------  ------ 
 

(1) The no specified maturity balance within loans and advances to customers relates to credit cards.

Risk Management

Financial risk

 
                                                               3 to    1 to    Over 
                                                  3 months       12       5       5  No specified 
                                            Call   or less   months   years   years   maturity(1)   Total 
30 September 2021                           GBPm      GBPm     GBPm    GBPm    GBPm          GBPm    GBPm 
----------------------------------------  ------  --------  -------  ------  ------  ------------  ------ 
Assets 
Financial assets at amortised cost 
   Loans and advances to customers           766     1,966    1,051   6,654  56,812         4,627  71,876 
   Cash and balances with central banks    8,337         -        -       -       -         1,374   9,711 
   Due from other banks                      800         -        -       -       -             -     800 
Financial assets at FVTPL 
   Loans and advances to customers             -         3       12      44      74             -     133 
   Derivative financial instruments            1         8       21     102       8             -     140 
   Other financial assets                      -         -        -       -       -            20      20 
Financial assets at FVOCI                      -        35      448   2,176   1,693             -   4,352 
Other assets                                   -        14      192       2       1         1,859   2,068 
----------------------------------------  ------  --------  -------  ------  ------  ------------  ------ 
Total assets                               9,904     2,026    1,724   8,978  58,588         7,880  89,100 
----------------------------------------  ------  --------  -------  ------  ------  ------------  ------ 
Liabilities 
Financial liabilities at amortised 
 cost 
   Customer deposits                      49,477     4,079    9,327   4,088       -             -  66,971 
   Debt securities in issue                    -       145    1,141   6,392       -             -   7,678 
   Due to other banks                         18         2    1,248   4,650       -             -   5,918 
Financial liabilities at FVTPL 
   Derivative financial instruments            1         5       38      94      71             -     209 
Other liabilities                          2,104        52       87      65      70           473   2,851 
----------------------------------------  ------  --------  -------  ------  ------  ------------  ------ 
Total liabilities                         51,600     4,283   11,841  15,289     141           473  83,627 
----------------------------------------  ------  --------  -------  ------  ------  ------------  ------ 
 
Off-balance sheet items 
Financial guarantees                           -        20       21      15      45             -     101 
Other credit commitments                  17,020         -        -       -       -             -  17,020 
----------------------------------------  ------  --------  -------  ------  ------  ------------  ------ 
Total off-balance sheet items             17,020        20       21      15      45             -  17,121 
----------------------------------------  ------  --------  -------  ------  ------  ------------  ------ 
 

(1) The no specified maturity balance within loans and advances to customers relates to credit cards.

Risk Management

Financial risk

Cash flows payable under financial liabilities by contractual maturity

 
                                                      3 months  3 to 12   1 to 5  Over 5  No specified 
                                                Call   or less   months    years   years      maturity    Total 
30 September 2022                               GBPm      GBPm     GBPm     GBPm    GBPm          GBPm     GBPm 
--------------------------------------------  ------  --------  -------  -------  ------  ------------  ------- 
Liabilities 
Financial liabilities at amortised cost 
   Customer deposits                          48,750     3,801   10,291    2,732       -             -   65,574 
   Debt securities in issue                        -       521    1,294    7,863     315             -    9,993 
   Due to other banks                             67       289      492    8,793       -             -    9,641 
Financial liabilities at FVTPL 
   Trading derivative financial instruments        -        12       40       63      14             -      129 
Hedging derivative liabilities 
   Contractual amounts payable                     -        21      557    1,720       -             -    2,298 
   Contractual amounts receivable                  -       (6)    (459)  (1,477)       -             -  (1,942) 
Other liabilities                              1,822       135      134       54      59           591    2,795 
--------------------------------------------  ------  --------  -------  -------  ------  ------------  ------- 
Total liabilities                             50,639     4,773   12,349   19,748     388           591   88,488 
--------------------------------------------  ------  --------  -------  -------  ------  ------------  ------- 
 
 
                                                      3 months  3 to 12   1 to 5  Over 5  No specified 
                                                Call   or less   months    years   years      maturity    Total 
30 September 2021                               GBPm      GBPm     GBPm     GBPm    GBPm          GBPm     GBPm 
--------------------------------------------  ------  --------  -------  -------  ------  ------------  ------- 
Liabilities 
Financial liabilities at amortised cost 
   Customer deposits                          49,477     4,104    9,403    4,127       -             -   67,111 
   Debt securities in issue                        -       148    1,283    6,886       -             -    8,317 
   Due to other banks                             18         2    1,258    4,756       -             -    6,034 
Financial liabilities at FVTPL 
   Trading derivative financial instruments        -        16       38       31      20             -      105 
Hedging derivative liabilities 
   Contractual amounts payable                     -         5      244    1,750      25             -    2,024 
   Contractual amounts receivable                  -       (9)    (199)  (1,614)       -             -  (1,822) 
All other liabilities                          2,104        52       87       65      70           473    2,851 
--------------------------------------------  ------  --------  -------  -------  ------  ------------  ------- 
Total liabilities                             51,599     4,318   12,114   16,001     115           473   84,620 
--------------------------------------------  ------  --------  -------  -------  ------  ------------  ------- 
 

The balances in the cash flow table above do not agree directly to the balances in the balance sheet or the assets and liabilities by maturity table presented above, as the table incorporates all cash flows, on an undiscounted basis, related to both principal and future coupon payments.

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 to    1 to    Over 
                        3 months       12       5       5  Total  Total 
                         or less   months   years   years   2022   2021 
                            GBPm     GBPm    GBPm    GBPm   GBPm   GBPm 
----------------------  --------  -------  ------  ------  -----  ----- 
Covered bonds                  4       13   3,450       -  3,467  1,852 
Securitisation               462      586     524     308  1,880  2,389 
Medium-term notes              6      447   1,796       -  2,249  2,422 
Subordinated debt             13        1     899       -    913  1,015 
----------------------  --------  -------  ------  ------  -----  ----- 
Total debt securities 
 in issue                    485    1,047   6,669     308  8,509  7,678 
----------------------  --------  -------  ------  ------  -----  ----- 
Of which issued 
 by Virgin Money 
 UK PLC                       19      448   2,695       -  3,162  3,437 
----------------------  --------  -------  ------  ------  -----  ----- 
 

Risk Management

Financial risk

External credit ratings

The Group's long-term credit ratings are summarised below:

 
Material risk for the Group   Outlook       As at 
                                as at 
---------------------------  --------  ---------------- 
                              30 Sept  30 Sept  30 Sept 
                              2022(1)     2022     2021 
---------------------------  --------  -------  ------- 
Virgin Money UK PLC 
Moody's                        Stable     Baa1     Baa2 
Fitch                          Stable     BBB+     BBB+ 
Standard & Poor's              Stable     BBB-     BBB- 
---------------------------  --------  -------  ------- 
Clydesdale Bank PLC 
Moody's(2)                     Stable       A3     Baa1 
Fitch                          Stable       A-       A- 
Standard & Poor's              Stable       A-       A- 
---------------------------  --------  -------  ------- 
 

(1) For detailed background on the latest credit opinion by Standard & Poor's, Fitch and Moody's, please refer to the respective rating agency website.

   (2)   Long-term deposit rating. 

In March 2022, Standard & Poor's affirmed Virgin Money UK PLC's and Clydesdale Bank PLC's ratings with stable outlook, reflecting their view that the Group will maintain a sound capital position, deliver statutory profit for full-year 2022 and maintain strong asset quality metrics. This rating reflects the agency's view of the UK economy at the time, coupled with the Group's improving asset quality outlook, conservative risk appetite and robust provisioning.

In June 2022, Moody's upgraded the long-term ratings of Virgin Money UK PLC and Clydesdale Bank PLC by 1-notch, reflecting the closure of payment protection insurance (PPI), finalisation of integration, stable asset quality during the pandemic and strong allowance against loan losses, sound funding & liquidity position and new long-term CET1 target of 13-13.5%. At the same time Moody's reaffirmed the 'Stable' outlook on all of Virgin Money UK PLC's and Clydesdale Bank PLC's ratings.

In July 2022, Fitch affirmed the ratings of Virgin Money UK PLC and Clydesdale Bank PLC with 'Stable' outlook.

As at 20 November 2022, there have been no other changes to the Group's long-term credit ratings or outlooks since the report date.

Market risk

Market risk is the risk of loss associated with adverse changes in the value of assets and liabilities held by the Group as a result of movements in market factors such as foreign exchange risk, interest rates (duration risk), customer behaviour (optionality risk), and the movement in rate spreads across types of assets or liabilities (basis risk and credit spread risk). The Group's balance sheet is predominantly UK based and is denominated in GBP, therefore foreign exchange risk is not a material risk for the Group.

Exposures

The Group's principal exposure comes from structural interest rate risk. It comprises the sensitivity of the Group's current and future NII and economic value to movements in market interest rates. The major contributors to interest rate risk are:

   --   the mismatch, or duration, between repricing dates of interest-bearing assets and liabilities; 

-- basis risk or assets and liabilities repricing to different reference rates, for example, customer asset and liability products repricing against BoE base rate and Sterling Overnight Index Average (SONIA); and

-- customer optionality, for example, the right to repay borrowing in advance of contractual maturity dates.

The Group provides foreign exchange products and derivative products to enable customers to manage risks within their businesses. As a result of these activities, the Group may be exposed to forms of market risk that would arise from movements in the price on these products. These risks are not a material component of the Group's risk profile. Controls include the hedging of these products as and when they arise.

Risk Management

Financial risk

Measurement

IRRBB is measured, monitored, and managed from both an internal management and regulatory perspective. The RMF incorporates both market valuation and earnings-based approaches. In accordance with the Group IRRBB policy standard, risk measurement techniques include: basis point sensitivity, NII sensitivity, value at risk (VaR), economic value of equity, interest rate risk stress testing, and scenario analysis.

The key features of the internal interest rate risk management model are:

-- basis point sensitivity analysis is performed daily and compares the potential impact of a one basis point (0.01%) change on the present value of all future cash flows;

-- NII sensitivity assesses changes to earnings over a 12-month time horizon as a result of interest rate movements and changes to customer behaviour;

-- VaR is measured on a statistical basis using a 99% confidence level based on daily rate movements over a ten-year history set with a one-year holding period;

-- economic value of equity is measured in line with PRA Rulebook with all six interest rate shock scenarios assessed on a quarterly basis, including customer optionality stresses. Reporting is performed including and excluding equity;

-- static balance sheet (i.e. any new business is assumed to be matched, hedged or subject to immediate repricing);

   --   investment term for capital is modelled with a benchmark term agreed by ALCO; 

-- investment term for core non-interest-bearing assets and liabilities is modelled on a behavioural basis with a benchmark term agreed by ALCO;

-- assumptions covering the behavioural life of products and customer behaviour for optionality are reviewed and approved by ALCO; and

-- credit spread risk in the banking book (CSRBB) is assessed through VaR applied to the Group's liquid asset buffer portfolio. CSRBB is measured at a 99% confidence level based on daily spread movements over a ten-year history set with a three-month holding period.

Foreign exchange risk is assessed based on the absolute exposure to each currency.

Mitigation

Market risks are overseen by ALCO with delegation for day-to-day management given to Treasury. Treasury uses a number of techniques and products to manage market risks including interest rate swaps, cash flow netting and foreign exchange.

The Group uses derivative financial instruments to manage interest rate and foreign currency risk within approved limits. The Group elects to apply hedge accounting for the majority of its risk management activity that uses derivatives. Certain derivatives are designated as either fair value hedge or cash flow hedge:

Fair value hedges - the Group hedges part of its existing interest rate risk, resulting from potential movements in the fair value of fixed rate assets and liabilities. The fair value of these swaps is disclosed within note 3.6 to the Group's consolidated financial statements. There were no transactions for which fair value hedge accounting had to be discontinued in the year.

Cash flow hedges - the Group hedges a portion of the variability in future cash flows attributable to interest rate risk. The interest risk arises from variable interest rate assets and liabilities which are hedged using interest rate swaps. There were no transactions for which cash flow hedge accounting had to be discontinued in the year as a result of the highly probable cash flows no longer being expected to occur. The fair value of derivatives is disclosed within note 3.6 to the Group's consolidated financial statements.

Monitoring

Model parameters and assumptions are reviewed and updated on at least an annual basis. Material changes require the approval of ALCO. Oversight of market risk is conducted by the Group's Financial Risk team which is independent of the Treasury function. The Board and Executive Risk Committee, through ALCO's oversight, monitor risk to ensure it remains within approved policy limits and Board requirements.

 
                         Duration risk(1)       Credit spread 
--------------------- 
Value at Risk          2022 GBPm  2021 GBPm  2022 GBPm  2021 GBPm 
---------------------  ---------  ---------  ---------  --------- 
As at 30 September            17          2         41         45 
Average value during 
 the year                     19          2         48         48 
Minimum value during 
 the year                     14          1         41         45 
Maximum value during 
 the year                     27          3         52         52 
---------------------  ---------  ---------  ---------  --------- 
 

(1) The history set for duration risk VaR was increased from two years to ten years and the holding period increased from one day to one year from 1 October 2021 under internal methodology. This results in the significant increase in the reported risk positions year on year with the change in parameters resulting in larger rate shocks applied in the VaR analysis.

Risk Management

Financial risk

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. +/- 25 basis point shocks and +/- 100 basis point shocks represent the primary NII sensitivities assessed internally, though a range of scenarios are assessed on a monthly basis.

 
                                  30 Sept  30 Sept 
                                     2022     2021 
12 months NII sensitivity            GBPm     GBPm 
--------------------------------  -------  ------- 
+ 25 basis point parallel shift        18       30 
+100 basis point parallel shift        66      100 
- 25 basis point parallel shift         5     (23) 
--------------------------------  -------  ------- 
 

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.

Market risk linkage to the balance sheet

The following table shows the Group's principal market risks, linked to the balance sheet assets and liabilities.

 
                                                           Interest 
                                            2022    2021       rate                       Credit    Foreign 
                                            GBPm    GBPm   duration  Optionality  Basis   spread   exchange 
----------------------------------------  ------  ------  ---------  -----------  -----  -------  --------- 
Assets 
Financial assets at amortised cost 
   Loans and advances to customers        71,751  71,876         --           --     --                  -- 
   Cash and balances with central banks   12,221   9,711         --                  -- 
   Due from other banks                      656     800         --                  --                  -- 
Financial assets at FVTPL 
   Loans and advances to customers            70     133         --           --     --                  -- 
   Derivative financial instruments          342     140         --                  --                  -- 
   Other financial assets                      8      20         --                                      -- 
Financial instruments at FVOCI             5,064   4,352         --                  --       --         -- 
Other assets                               1,795   2,068         --                                      -- 
----------------------------------------  ------  ------  ---------  -----------  -----  -------  --------- 
Total assets                              91,907  89,100 
----------------------------------------  ------  ------  ---------  -----------  -----  -------  --------- 
Liabilities 
Financial liabilities at amortised cost 
   Customer deposits                      65,434  66,971         --           --     --                  -- 
   Debt securities in issue                8,509   7,678         --                  --                  -- 
   Due to other banks                      8,502   5,918         --                  --                  -- 
Financial liabilities at FVTPL 
   Derivative financial instruments          327     209         --                  --                  -- 
Other liabilities                          2,795   2,851         --                                      -- 
----------------------------------------  ------  ------  ---------  -----------  -----  -------  --------- 
Total liabilities                         85,567  83,627 
----------------------------------------  ------  ------  ---------  -----------  -----  -------  --------- 
 

Risk Management

Financial risk

Repricing periods of assets and liabilities by asset/liability category

The following table shows the repricing periods of the Group's assets and liabilities as assessed by the Group. This repricing takes account of behavioural assumptions where material and the Group's policy to hedge capital in accordance with a benchmark term agreed by ALCO.

 
                                                            3 months  3 to 12    1 to 5   Over 5  Non-interest 
                                                 Overnight   or less   months     years    years       bearing   Total 
30 September 2022                                     GBPm      GBPm     GBPm      GBPm     GBPm          GBPm    GBPm 
-----------------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
Assets 
Financial assets at amortised cost 
   Loans and advances to customers                   7,293     8,796   13,234    41,514    1,699         (785)  71,751 
   Cash and balances with central banks             10,765        12       37       196        -         1,211  12,221 
   Due from other banks                                656         -        -         -        -             -     656 
Financial assets at FVTPL 
   Loans and advances to customers                       -        30        4        16       20             -      70 
   Derivative financial assets                           -         -        -         -        -           342     342 
Financial assets at FVOCI                            1,265       525      320     1,159    1,733            62   5,064 
Other assets                                            40        38      113       604        -         1,008   1,803 
-----------------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
Total assets                                        20,019     9,401   13,708    43,489    3,452         1,838  91,907 
-----------------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
Liabilities 
Financial liabilities at amortised cost 
   Customer deposits                                 7,026    18,725   13,449    26,077        -           157  65,434 
   Debt securities in issue                          3,606       191      432     4,686        -         (406)   8,509 
   Due to other banks                                8,438        12        -         -        -            52   8,502 
Financial liabilities at FVTPL 
   Derivative financial instruments                      -         -        -         -        -           327     327 
Other liabilities                                    1,717         -        -         -        -         1,078   2,795 
Equity                                                   -       264      573     3,306      350         1,847   6,340 
-----------------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
Total liabilities and equity                        20,787    19,192   14,454    34,069      350         3,055  91,907 
-----------------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
Notional value of derivatives managing interest 
 rate sensitivity                                   16,448     (359)    (239)  (12,146)  (3,704)             -       - 
-----------------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
Total interest rate gap                             15,680  (10,150)    (985)   (2,726)    (602)       (1,217)       - 
-----------------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
Cumulative interest rate gap                        15,680     5,530    4,545     1,819    1,217             -       - 
-----------------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
 

Risk Management

Financial risk

 
                                                                  3 to      1 to     Over 
                                                     3 months       12         5        5  Non-interest 
                                          Overnight   or less   months     years    years       bearing   Total 
30 September 2021                              GBPm      GBPm     GBPm      GBPm     GBPm          GBPm    GBPm 
----------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
Assets 
Financial assets at amortised cost 
   Loans and advances to customers            3,978    12,399   14,199    39,732    1,568             -  71,876 
   Cash and balances with central banks       8,182        12       37       196        -         1,284   9,711 
   Due from other banks                         538       262        -         -        -             -     800 
Financial assets at FVTPL 
   Loans and advances to customers                -        83        8        20       22             -     133 
   Derivative financial assets                    -         -        -         -        -           140     140 
Financial assets at FVOCI                     1,147       537      228     1,172    1,268             -   4,352 
Other assets                                      -        38      113       604        -         1,333   2,088 
----------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
Total assets                                 13,845    13,331   14,585    41,724    2,858         2,757  89,100 
----------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
Liabilities 
Financial liabilities at amortised 
 cost 
   Customer deposits                          4,619    27,599   11,877    22,874        2             -  66,971 
   Debt securities in issue                   2,329       272      198     4,879        -             -   7,678 
   Due to other banks                         5,918         -        -         -        -             -   5,918 
Financial liabilities at FVTPL 
   Derivative financial instruments               -         -        -         -        -           209     209 
Other liabilities                                 -         -        -         -        -         2,851   2,851 
Equity                                          723       421      573     3,756        -             -   5,473 
----------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
Total liabilities and equity                 13,589    28,292   12,648    31,509        2         3,060  89,100 
----------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
Notional value of derivatives managing 
 interest rate sensitivity                   21,786   (1,891)  (7,089)  (10,415)  (2,391)             -       - 
----------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
Total interest rate gap                      22,042  (16,852)  (5,152)     (200)      465         (303)       - 
----------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
Cumulative interest rate gap                 22,042     5,190       38     (162)      303             -       - 
----------------------------------------  ---------  --------  -------  --------  -------  ------------  ------ 
 

LIBOR replacement

The Group's LIBOR cessation programme successfully met the 2021 GBP regulatory and industry milestones. 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.

The Group engaged with the BoE's Working Group on Sterling Risk Free Reference Rates and other industry forums in transitioning to SONIA/ARRs and ensured the risks of being unable to offer products with suitable reference rates are mitigated and that full consideration is given to the other risks, including legal, conduct, financial and operational risks, that may arise.

As at 30 September 2022, all market-facing derivative flows are executed against SONIA. The focus for 2023 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:

Risk Management

Financial risk

Amounts yet to be transitioned

 
                         Non derivative 
                              financial  Non derivative 
                                 assets       financial     Derivatives 
                                      -     liabilities               - 
                               carrying      - carrying         nominal 
                            value(1)(2)           value    amount(1)(3) 
30 September 2022                  GBPm            GBPm            GBPm 
-----------------------  --------------  --------------  -------------- 
GBP LIBOR                            94               -              67 
Other(4)                            164               -               - 
 
Cross currency swaps 
GBP LIBOR to USD LIBOR                                                - 
-----------------------  --------------  --------------  -------------- 
Total                               258               -              67 
-----------------------  --------------  --------------  -------------- 
 
 
                         Non derivative 
                              financial  Non derivative 
                                 assets       financial     Derivatives 
                                      -     liabilities               - 
                               carrying      - carrying         nominal 
                            value(1)(2)           value    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).

Pension risk

The Group operates a defined benefit pension scheme, the Yorkshire and Clydesdale Bank Pension Scheme (the Scheme). The Bank is the Scheme's principal employer and there are no other participating employers. The Scheme was closed to future accrual on 1 August 2017 for most members. A small number of members remain on a defined benefit accruals basis subject to certain conditions.

Defined benefit pension schemes provide a promise to pay members a pre-determined level of income at retirement which is independent of the contributions, investments and returns (the scheme assets) used to fund these benefit promises (the scheme liabilities). The operation of a defined benefit pension scheme gives rise to several risks, for example, movements in equity valuations, changes in bond yields, life expectancy of scheme members, movements in interest and inflation rates and changes in legislation. The Group also supports a defined contribution scheme, however the nature of this type of scheme places the investment and liability risk on the member rather than the Group.

Pension risk is the risk that, at any point in time, the value of the scheme assets is not enough to meet the current or expected future value of the scheme liabilities. This risk will continue to exist until the scheme is formally wound up, either if all the liabilities are transferred to a third party (for example an insurer) or once all individual member benefits have been honoured.

Risk appetite

The Group's pension risk appetite is a component of the Group-wide RAS framework for the management of balance sheet risks and is considered in the context of potential capital impacts as a result of volatility in the Scheme's valuations.

Assets

The Trustee governs investments according to a Statement of Investment Principles. This is reviewed and agreed by the Trustee Board on a regular basis, with the Bank consulted on any proposed changes. The Statement of Investment Principles is drafted in accordance with the requirements of Section 35 of the Pensions Act 1995 (as amended by the Pensions Act 2004 and regulations made under it). This sets out the Scheme objectives and the journey plan to meet these objectives.

This results in an appropriate mix of return-seeking assets as well as liability matching assets to better match future pension obligations. The split of Scheme assets is shown within note 3.9 of the Group's consolidated financial statements. The fair value of the assets was GBP3.2bn as at 30 September 2022 (2021: GBP4.6bn).

Risk Management

Financial risk

Liabilities

The retirement benefit obligations are a series of future cash outflows with relatively long duration and are responsive to movements on many of the inputs including interest rates. On an IAS 19 basis these cash flows are primarily sensitive to changes in the expected long-term price inflation rates (Retail Price Index (RPI)/Consumer Price Index (CPI)), the life expectancy of members and the discount rate (linked to yields on AA corporate bonds):

   --   an increase in long-term expected inflation corresponds to an increase in liabilities; 
   --   an increase in life expectancy corresponds to an increase in liabilities; and 
   --   a decrease in the discount rate corresponds to an increase in liabilities. 

The actual outcome on Scheme valuations will also be affected by hedging and investment decisions made by the Trustees and inflationary caps within the terms of the Scheme.

Exposure

The Group's defined benefit pension scheme affects its regulatory capital in two ways:

-- CET1 capital - while an IAS 19 surplus will increase the Group's balance sheet assets and reserves, any such amount is not recognised for the purposes of determining CET1 capital. However, an IAS 19 deficit, which increases balance sheet liabilities and reduces reserves, is recognised for regulatory capital purposes, and so will decrease CET1 capital.

-- Pillar 2A capital - the Group is also required to determine the level of capital required to be held under Pillar 2A for pension obligation risk as part of the annual ICAAP process. This requirement forms part of the Group's regulatory Total Capital Requirement.

Within the Scheme itself, risk arises because the assets (e.g. equities, bonds/gilts, property) are exposed to market valuation movements, within and between asset classes, while the liabilities are more sensitive to interest rate and inflation rate changes, and changes in other actuarial assumptions which may not be borne out in experience, for example life expectancy.

Mitigation

The Trustee and Group have a common view of the Scheme's long-term strategic aims, encapsulated by an agreed de-risking journey plan. Within the journey plan, several core principles have been established, including a long-term self-sufficiency funding target (i.e. the point in time when the Scheme would no longer need to call on the Bank for additional funding) with assumptions as to how this target is expected to be managed, monitored and met. Potential actions to address deviations in the actual funding level relative to the journey plan have also been considered.

Several other activities have been implemented by the Group and Trustee with the specific aim of reducing risk in the Scheme, including increasing the levels of inflation, interest rate hedging and several member benefit reforms, culminating in closure to future accrual for most members.

The Group has signed a contingent security arrangement to provide the Trustee with protection to partially mitigate the risk of adverse changes impacting the Scheme's assets or liabilities. This arrangement also provided security for the Group's obligations under a Recovery Plan, however all payments subject to that Plan have now been made. Further information is shown within note 3.9 to the Group's consolidated financial statements.

The Bank and the Trustee continue to explore other cost-effective options to further reduce risk within the Scheme, for example, approaches for hedging against longevity risk.

Monitoring

Information on the Scheme's current valuations, asset holdings and discount and inflation rate assumptions are presented to ALCO. The impact of the Scheme on the Group is also subject to risk oversight from the Risk function. In addition, semi-annual pension risk updates are provided to the Board Risk Committee.

Performance of the Scheme's asset portfolio against the various risk metrics is independently monitored by the Scheme investment adviser, Willis Towers Watson, and reported to the Investment Sub Committee, which includes Group representation, and Trustee Board on a quarterly basis.

The Scheme's de-risking plan has delivered resilience to stress-testing and continued improvements in Group and Trustee valuations.

Liability Driven Investment (LDI) portfolios are commonly used by pension schemes to protect against adverse movements in interest rates and inflation. In the case of interest rates, this protects against falls in rates which increase the value of a scheme's liabilities. The general trend since LDI strategies were introduced has been long-term interest rates falling, and LDI has helped schemes to maintain more stable and improved funding positions. However, when interest rates rise instead of fall, LDI derivatives require collateral to be posted in order to maintain the same level of interest rate and inflation protection. Therefore sufficient liquidity is needed to meet such a collateral call.

Within the Scheme's matching assets there is an LDI portfolio, which consists of both physical assets and derivatives. The Scheme uses a bespoke, segregated strategy which reflects, as far as possible, the specifics of the Scheme's liabilities in terms of exposure to movements in interest rates and inflation. As at 30 September 2022, the LDI portfolio was valued at GBP968m.

Over the year to 30 September 2022, gilt yields have risen significantly. The Scheme therefore posted additional collateral, resulting in there being net GBP335m collateral posted by the Scheme as at 30 September 2022 (compared to net GBP65m collateral posted by the counterparties as at 30 September 2021). As at 30 September 2022, the Scheme is still estimated to have sufficient collateral headroom available to meet further rises in interest rates of more than 3%. The Scheme also has over GBP1bn of further assets which could be liquidated within a week if needed to meet collateral calls.

Although increased collateral postings have been required, the Scheme's funding position for IAS 19 purposes has improved over the year to 30 September 2022. The IAS 19 position continues to drive the Group's Pillar 2A and regulatory stress testing processes.

The next Triennial Valuation is due to complete by end FY23 (effective date 30 September 2022). The Trustee funding position at 30 September 2022 is a surplus, indicating no further contributions will be required.

Directors' responsibility statement in respect of the Annual Report & Accounts

The responsibility statement below has been prepared in connection with the Company's full Annual Report and Accounts for the year ending 30 September 2022. Certain parts thereof are not included within this announcement.

The Directors confirm that to the best of their knowledge:

- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the Group and the undertakings included in the consolidation taken as a whole; and

- the Strategic report includes a fair review of the development and performance of the business and the position of the Company and the Group, together with a description of the principal risks and uncertainties that they face.

The Directors consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's and Group's position and performance, business model and strategy.

David Duffy

Chief Executive Officer

20 November 2022

Group financial statements

Consolidated income statement

 
                                              2022     2021 
For the year ended 30 September      Note     GBPm     GBPm 
-----------------------------------  ----  -------  ------- 
Interest income                              2,215    1,906 
Other similar interest                           2        4 
Interest expense and similar 
 charges                                     (641)    (553) 
-----------------------------------  ----  -------  ------- 
Net interest income                   2.2    1,576    1,357 
Gains less losses on financial 
 instruments at fair value                    (17)      (5) 
Other operating income                         157      137 
-----------------------------------  ----  -------  ------- 
Non-interest income                   2.3      140      132 
-----------------------------------  ----  -------  ------- 
Total operating income                       1,716    1,489 
Operating and administrative 
 expenses before impairment 
 losses                               2.4  (1,069)  (1,203) 
-----------------------------------  ----  -------  ------- 
Operating profit before impairment 
 losses                                        647      286 
Impairment (losses)/credit 
 on credit exposures                  3.2     (52)      131 
-----------------------------------  ----  -------  ------- 
Profit on ordinary activities 
 before tax                                    595      417 
Tax (expense)/credit                  2.5     (58)       57 
-----------------------------------  ----  -------  ------- 
Profit for the year                            537      474 
-----------------------------------  ----  -------  ------- 
 
Attributable to: 
Ordinary shareholders                          467      395 
Other equity holders                            70       79 
-----------------------------------  ----  -------  ------- 
Profit for the year                            537      474 
-----------------------------------  ----  -------  ------- 
Basic earnings per share (pence)      2.6     32.4     27.3 
-----------------------------------  ----  -------  ------- 
Diluted earnings per share 
 (pence)                              2.6     32.3     27.3 
-----------------------------------  ----  -------  ------- 
 

All material items dealt with in arriving at the profit before tax for the above years relate to continuing activities.

The notes on pages 75 to 123 form an integral part of these financial statements.

Group financial statements

Consolidated statement of comprehensive income

 
                                                        2022   2021 
For the year ended 30 September                  Note   GBPm   GBPm 
---------------------------------------------  ------  -----  ----- 
Profit for the year                                      537    474 
 
Items that may be reclassified 
 to the income statement 
Change in cash flow hedge 
 reserve 
Gains during the year                                    962     99 
Transfers to the income statement                       (13)     24 
Taxation thereon - deferred 
 tax charge                                            (260)   (33) 
---------------------------------------------  ------  -----  ----- 
                                                4.1.5    689     90 
---------------------------------------------  ------  -----  ----- 
Change in FVOCI reserve 
Gains during the year                                     15     33 
Transfers to the income statement                        (4)      - 
Taxation thereon - deferred 
 tax charge                                              (1)   (11) 
---------------------------------------------  ------  -----  ----- 
                                                          10     22 
---------------------------------------------  ------  -----  ----- 
Total items that may be reclassified to the income 
 statement                                               699    112 
-----------------------------------------------------  -----  ----- 
 
Items that will not be reclassified 
 to the income statement 
Change in defined benefit 
 pension plan                                     3.9    122     54 
Taxation thereon - deferred 
 tax charge                                             (50)   (46) 
Taxation thereon - current 
 tax credit                                                6     21 
---------------------------------------------  ------  -----  ----- 
Total items that will not be reclassified to the 
 income statement                                         78     29 
-----------------------------------------------------  -----  ----- 
 
Other comprehensive income, 
 net of tax                                              777    141 
---------------------------------------------  ------  -----  ----- 
Total comprehensive income 
 for the year, net of tax                              1,314    615 
---------------------------------------------  ------  -----  ----- 
 
Attributable to: 
Ordinary shareholders                                  1,244    536 
Other equity holders                                      70     79 
---------------------------------------------  ------  -----  ----- 
Total comprehensive income 
 for the year, net of tax                              1,314    615 
---------------------------------------------  ------  -----  ----- 
 

The notes on pages 75 to 123 form an integral part of these financial statements.

Group financial statements

Consolidated balance sheet

 
                                              2022     2021 
As at 30 September                    Note    GBPm     GBPm 
------------------------------------  ----  ------  ------- 
Assets 
Financial assets at amortised 
 cost 
   Loans and advances to customers     3.1  71,751   71,876 
   Cash and balances with central 
    banks                              3.4  12,221    9,711 
   Due from other banks                        656      800 
Financial assets at FVTPL 
   Loans and advances to customers     3.5      70      133 
   Derivative financial instruments    3.6     342      140 
   Other financial assets              3.5       8       20 
Financial assets at FVOCI              3.7   5,064    4,352 
Property, plant and equipment                  211      250 
Intangible assets and goodwill         3.8     267      373 
Current tax assets                               -       13 
Deferred tax assets                    2.5     146      377 
Defined benefit pension assets         3.9   1,000      847 
Other assets                                   171      208 
------------------------------------  ----  ------  ------- 
Total assets                                91,907   89,100 
------------------------------------  ----  ------  ------- 
Liabilities 
Financial liabilities at 
 amortised cost 
   Customer deposits                  3.10  65,434   66,971 
   Debt securities in issue           3.11   8,509    7,678 
   Due to other banks                 3.12   8,502    5,918 
Financial liabilities at 
 FVTPL 
   Derivative financial instruments    3.6     327      209 
Current tax liabilities                          1        - 
Deferred tax liabilities               2.5     350      296 
Provisions for liabilities 
 and charges                          3.13      50      104 
Other liabilities                     3.14   2,394    2,451 
------------------------------------  ----  ------  ------- 
Total liabilities                           85,567   83,627 
------------------------------------  ----  ------  ------- 
Equity 
Share capital and share premium        4.1     148      149 
Other equity instruments               4.1     666      915 
Capital reorganisation reserve         4.1   (839)    (839) 
Merger reserve                         4.1   2,128    2,128 
Other reserves                         4.1     766       71 
Retained earnings                            3,471    3,049 
------------------------------------  ----  ------  ------- 
Total equity                                 6,340    5,473 
------------------------------------  ----  ------  ------- 
Total liabilities and equity                91,907   89,100 
------------------------------------  ----  ------  ------- 
 

The notes on pages 75 to 123 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 20 November 2022 and were signed on its behalf by:

   David Duffy                                           Clifford Abrahams 
   Chief Executive Officer         Chief Financial Officer 

Virgin Money UK PLC, Registered number: 09595911

Group financial statements

Consolidated statement of changes in equity

 
                                                                         Other reserves 
--------------  -------  -------  -------  -----------  ------------------------------------------------  --------  ------ 
                  Share 
                capital                                                        Equity               Cash 
                    and  Capital                 Other     Capital  Deferred    based               flow 
                  share   reorg'   Merger       equity  redemption    shares    comp'    FVOCI     hedge 
                premium  reserve  reserve  instruments     reserve   reserve  reserve  reserve   reserve  Retained   Total 
                   GBPm     GBPm     GBPm         GBPm        GBPm      GBPm     GBPm     GBPm      GBPm  earnings  equity 
          Note    4.1.1    4.1.3    4.1.4        4.1.2       4.1.5     4.1.5    4.1.5    4.1.5     4.1.5      GBPm    GBPm 
--------------  -------  -------  -------  -----------  ----------  --------  -------  -------  --------  --------  ------ 
As at 1 
 October 2020       147    (839)    2,128          915           -        16       10       11      (80)     2,624   4,932 
Profit for the 
 year                 -        -        -            -           -         -        -        -         -       474     474 
Other 
 comprehensive 
 income, net 
 of tax               -        -        -            -           -         -        -       22        90        29     141 
--------------  -------  -------  -------  -----------  ----------  --------  -------  -------  --------  --------  ------ 
Total 
 comprehensive 
 income for 
 the year             -        -        -            -           -         -        -       22        90       503     615 
AT1 
 distributions 
 paid                 -        -        -            -           -         -        -        -         -      (79)    (79) 
Ordinary 
 shares issued        2        -        -            -           -         -        -        -         -         -       2 
Transfer from 
 equity 
 based 
 compensation 
 reserve              -        -        -            -           -         -      (1)        -         -         1       - 
Equity based 
 compensation 
 expensed             -        -        -            -           -         -        5        -         -         -       5 
Settlement of 
 Virgin 
 Money 
 Holdings (UK) 
 Limited share 
 awards               -        -        -            -           -       (2)        -        -         -         -     (2) 
--------------  -------  -------  -------  -----------  ----------  --------  -------  -------  --------  --------  ------ 
As at 30 
 September 
 2021               149    (839)    2,128          915           -        14       14       33        10     3,049   5,473 
Profit for the 
 year                 -        -        -            -           -         -        -        -         -       537     537 
Other 
 comprehensive 
 income, net 
 of tax               -        -        -            -           -         -        -       10       689        78     777 
--------------  -------  -------  -------  -----------  ----------  --------  -------  -------  --------  --------  ------ 
Total 
 comprehensive 
 income for 
 the year             -        -        -            -           -         -        -       10       689       615   1,314 
AT1 
 distributions 
 paid                 -        -        -            -           -         -        -        -         -      (70)    (70) 
Dividends paid 
 to ordinary 
 shareholders         -        -        -            -           -         -        -        -         -      (50)    (50) 
Ordinary 
 shares issued        2        -        -            -           -         -        -        -         -         -       2 
Share buyback       (3)        -        -            -           3         -        -        -         -      (63)    (63) 
Transfer from 
 equity 
 based 
 compensation 
 reserve              -        -        -            -           -         -      (9)        -         -         9       - 
Equity based 
 compensation 
 expensed             -        -        -            -           -         -        5        -         -         -       5 
Settlement of 
 Virgin 
 Money 
 Holdings (UK) 
 Limited share 
 awards               -        -        -            -           -       (3)        -        -         -         1     (2) 
AT1 issuance          -        -        -          346           -         -        -        -         -         -     346 
AT1 redemption        -        -        -        (595)           -         -        -        -         -      (20)   (615) 
--------------  -------  -------  -------  -----------  ----------  --------  -------  -------  --------  --------  ------ 
As at 30 
 September 
 2022               148    (839)    2,128          666           3        11       10       43       699     3,471   6,340 
--------------  -------  -------  -------  -----------  ----------  --------  -------  -------  --------  --------  ------ 
 

The notes on pages 75 to 123 form an integral part of these financial statements.

Group financial statements

Consolidated statement of cash flows

 
                                                       2022     2021 
For the year ended 30 September               Note     GBPm     GBPm 
-------------------------------------------  -----  -------  ------- 
Operating activities 
Profit on ordinary activities before 
 tax                                                    595      417 
Adjustments for: 
Non-cash or non-operating items included 
 in profit before tax                          5.2  (1,326)  (1,225) 
Changes in operating assets                    5.2    1,212      832 
Changes in operating liabilities               5.2    (238)  (1,026) 
Payments for short-term and low value 
 leases                                                 (2)      (1) 
Interest received                                     2,112    2,088 
Interest paid                                         (378)    (461) 
Tax paid                                               (59)     (27) 
-------------------------------------------  -----  -------  ------- 
Net cash provided by operating activities             1,916      597 
-------------------------------------------  -----  -------  ------- 
Cash flows from investing activities 
Interest received                                        47       19 
Proceeds from maturity of financial 
 assets at FVOCI                                        479    1,079 
Proceeds from sale of financial assets 
 at FVOCI                                               194        - 
Purchase of financial assets at FVOCI               (2,019)    (521) 
Purchase of shares issued by UTM                        (4)     (12) 
Proceeds from sale of property, plant 
 and equipment                                            1        6 
Purchase of property, plant and equipment              (13)     (26) 
Purchase and development of intangible 
 assets                                        3.8     (53)     (80) 
-------------------------------------------  -----  -------  ------- 
Net cash (used in)/provided by investing 
 activities                                         (1,368)      465 
-------------------------------------------  -----  -------  ------- 
Cash flows from financing activities 
Interest paid                                         (246)    (161) 
Repayment of principal portions of 
 lease liabilities                            3.16     (26)     (28) 
Redemption of AT1 securities                          (614)        - 
Proceeds from issuance of AT1 securities                347        - 
Redemption and principal repayment 
 on RMBS and covered bonds                    3.11  (1,264)  (1,543) 
Redemption and principal repayment 
 on medium-term notes/subordinated 
 debt                                         3.11        -     (30) 
Issuance of RMBS and covered bonds            3.11    2,480        - 
Issuance of medium-term notes/subordinated 
 debt                                         3.11        -      732 
Amounts drawn down under the TFSME                    2,550    3,350 
Amounts repaid under the TFS                        (1,244)  (2,864) 
Purchase of own shares                                 (53)        - 
AT1 distributions                            4.1.2     (70)     (79) 
Ordinary dividends paid                                (50)        - 
-------------------------------------------  -----  -------  ------- 
Net cash provided by/(used in) financing 
 activities                                           1,810    (623) 
-------------------------------------------  -----  -------  ------- 
Net increase in cash and cash equivalents             2,358      439 
Cash and cash equivalents at the beginning 
 of the year                                         10,253    9,814 
-------------------------------------------  -----  -------  ------- 
Cash and cash equivalents at the 
 end of the year                               5.2   12,611   10,253 
-------------------------------------------  -----  -------  ------- 
 

Group financial statements

Consolidated statement of cash flows

Movements in liabilities arising from financing activities

 
                                                      Restated 
                                             Term         debt 
                                          funding   securities         Lease 
                                       schemes(1)     in issue   liabilities  Restated 
                                             GBPm         GBPm          GBPm     total 
                                Note         3.12         3.11          3.16      GBPm 
------------------------------------  -----------  -----------  ------------  -------- 
At 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 and other associated 
    adjustments(2)                             12        (183)             -     (171) 
   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(2)                                -         (69)             -      (69) 
   Unamortised costs                            -            6             -         6 
------------------------------------  -----------  -----------  ------------  -------- 
At 1 October 2021                           5,896        7,678           154    13,728 
------------------------------------  -----------  -----------  ------------  -------- 
Cash flows: 
   Issuances                                    -        2,480             -     2,480 
   Drawdowns                                2,550            -             -     2,550 
   Redemptions                                  -      (1,264)             -   (1,264) 
   Repayment                              (1,244)            -          (26)   (1,270) 
Non-cash flows: 
   Fair value and other associated 
    adjustments                                 -        (400)             -     (400) 
   Additions to right-of-use 
    asset in exchange for increased 
    lease liabilities                           -            -             4         4 
   Remeasurement                                -            -           (4)       (4) 
   Movement in accrued interest                28            8             4        40 
   Unrealised foreign exchange 
    movements                                   -            5             -         5 
   Unamortised costs                            -            2             -         2 
------------------------------------  -----------  -----------  ------------  -------- 
At 30 September 2022                        7,230        8,509           132    15,871 
------------------------------------  -----------  -----------  ------------  -------- 
 
   (1)   This includes amounts drawn under the TFS and TFSME. 

(2) The accumulated amount of the fair value adjustments on the debt securities in issue has been restated in the comparative year in line with the current year presentation. The restatement had no impact on the debt securities in issue balance, however fair value and other adjustments have increased in the comparative period by GBP59m from GBP124m to GBP183m and unrealised foreign exchange movements has decreased by GBP59m from GBP128m to GBP69m.

The notes on pages 75 to 123 form an integral part of these financial statements.

Group financial statements

Notes to the consolidated financial statements

Section 1: Basis of preparation

 
 Overview 
  This section sets out the Group's accounting policies 
  that relate to the consolidated financial statements 
  as a whole. Where an accounting policy is specific 
  to one note, the policy is described in the note 
  to which it relates. This section also highlights 
  newly adopted accounting standards, amendments and 
  interpretations which are relevant to the Group. 
  Where relevant, we explain how these changes are 
  expected to impact the financial position and performance 
  of the Group. 
  The Group has adopted the UK Finance Code for Financial 
  Reporting Disclosure and has prepared the 2022 Annual 
  Report and Accounts in compliance with the Code. 
 

1.1 General information

The Company is a public company limited by shares, incorporated in the United Kingdom under the Companies Act and registered in England and Wales.

The consolidated financial statements comprise those of the Company and its controlled entities, together the 'Group'.

1.2 Basis of accounting

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 year.

The consolidated financial statements have been prepared in accordance with UK adopted IASs. The comparative year financial statements were prepared and presented in accordance with IASs in conformity with the Companies Act 2006 and IFRSs adopted pursuant to regulation (EC) No. 1606/2002 as it applied in the European Union. This also included 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 IAS.

The financial information has been prepared under the historical cost convention, as modified by the revaluation of certain financial assets and liabilities at fair value through profit or loss and other comprehensive income. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

1.3 Presentation of risk, offsetting and maturity disclosures

Certain disclosures required under IFRS 7 'Financial instruments: disclosures' and IAS 1 'Presentation of financial statements' have been included within the Risk management section of this results announcement.

1.4 Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic report contained in the Group's Annual Report & Accounts. In addition, the full Risk report contained in the Group's Annual Report & Accounts includes the Group's risk management objectives and the objectives, policies and processes for managing its capital.

In assessing the Group's going concern position as at 30 September 2022, the Directors have considered a number of factors, including the current balance sheet position (which reflected the Group's consideration of the potential impact of climate-related risks), the Group's strategic and financial plan, taking account of possible changes in trading performance and funding retention, and stress testing and scenario analysis. The assessment concluded that the Group has sufficient capital and liquidity for at least the next 12 months. The Group's capital ratios and its total capital resources are comfortably in excess of PRA requirements and internal stress testing indicates the Group can withstand severe economic and competitive stresses.

As a result of the assessment, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and that the Group is well placed to manage its business risks successfully. Accordingly, they continue to adopt the going concern basis in preparing the consolidated financial statements.

The Directors' report contained in the Group's Annual Report & Accounts provides further detail on the Group's going concern and viability assessment.

1.5 Basis of consolidation

Controlled entities are all entities (including structured entities) to which the Company is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. An assessment of control is performed on an ongoing basis.

Controlled entities are consolidated from the date on which control is established by the Group until the date that control ceases. The acquisition method of accounting is used to account for business combinations other than those under common control. A non -- controlling interest is recognised by the Group in respect of any portion of the total assets less total liabilities of an acquired entity or entities that is not owned by the Group. Balances and transactions between entities within the Group and any unrealised gains and losses arising from those transactions are eliminated in full upon consolidation.

The Group's interests in JV entities are accounted for using the equity method and then assessed for impairment in the relevant holding companies' financial statements.

The consolidated financial statements have been prepared using uniform accounting policies.

Group financial statements

Notes to the consolidated financial statements

Section 1: Basis of preparation

1.6 Foreign currency

Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates, the 'functional currency'. The consolidated financial statements are presented in pounds sterling (GBP), which is also the Group's presentation currency, rounded to the nearest million pounds sterling (GBPm) unless otherwise stated.

Transactions and balances

The Group records an asset, liability, expense or revenue arising from a transaction using the closing exchange rate between the functional and foreign currency on the transaction date. At each subsequent reporting date, the Group translates foreign currency monetary items at the closing rate. Foreign exchange differences arising on translation or settlement of monetary items are recognised in the income statement during the year in which the gains or losses arise.

Foreign currency non-monetary items measured at historical cost are translated at the date of the transaction, with those measured at fair value translated at the date when the fair value is determined. Foreign exchange differences are recognised directly in equity for non-monetary items where any component of associated gains or losses is recognised directly in equity. Foreign exchange differences arising from non-monetary items, whereby the associated gains or losses are recognised in the income statement, are also recognised in the income statement.

1.7 Financial instruments

Recognition and derecognition

Financial instruments are recognised when the Group becomes party to the contractual provisions of the instrument. Purchases and sales of financial assets classified within FVTPL or FVOCI are recognised on trade date.

The Group derecognises a financial asset when the contractual cash flows from the asset expire or it transfers the right to receive contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership are transferred. Financial liabilities are derecognised when the Group has discharged its obligation to the contract, or the contract is cancelled or expires.

Classification and measurement

The Group measures a financial asset or liability on initial recognition at its fair value, plus or minus transaction costs that are directly attributable to the acquisition or issue of the financial asset or the financial liability (with the exception of financial assets or liabilities at FVTPL, where transaction costs are recognised directly in the income statement as they are incurred).

Financial assets

Subsequent accounting for a financial asset is determined by the classification of the asset depending on the underlying business model and contractual cash flow characteristics. This results in classification within one of the following categories: i) amortised cost; ii) FVTPL; or iii) FVOCI.

A financial asset is measured at amortised cost when: (1) the asset is held within a business model whose objective is achieved by collecting contractual cash flows; and (2) the contractual terms give rise to cash flows on specified dates which are solely payments of principal and interest on the principal amount outstanding. The amortised cost classification applies to the Group's loans and advances to customers (note 3.1), cash and balances from central banks (note 3.4) and balances due from other banks. Financial assets classified at amortised cost are subject to ECL requirements as detailed in note 3.2.

Specific accounting policies for financial assets at FVTPL and FVOCI can be found in notes 3.5 and 3.7 respectively.

Financial liabilities

All financial liabilities are measured at amortised cost, except for financial liabilities at FVTPL. Such liabilities include derivative contracts, other than those which are financial guarantee contracts or designated and effective hedging instruments.

Repurchase agreements

Securities sold subject to repos are retained in their respective balance sheet categories. The associated liabilities are included in amounts due to other banks based upon the counterparties to the transactions. The difference between the sale and repurchase price of repos is treated as interest and accrued over the life of the agreements using the effective interest method.

Offsetting

This can only occur, and the net amount be presented on the balance sheet, when the Group currently has a legally enforceable right to offset the recognised amounts and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Group financial statements

Notes to the consolidated financial statements

Section 1: Basis of preparation

1.8 Property, plant and equipment

The Group's property, plant and equipment is carried at cost, less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to acquisition of the asset. Impairment is assessed whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

All items of property, plant and equipment are depreciated or amortised using the straight line method, at rates appropriate to their estimated useful life to the Group. The annual rates of depreciation or amortisation are:

   --   Buildings                                                           50 years 

-- Leases (leasehold improvements) the lower of the expected lease term or the asset's remaining useful life

   --   Fixtures and equipment                   3-10 years 

Residual values and useful lives of assets are reviewed at each reporting date. Depreciation is recognised within operating expenses in the income statement. The policy for lessee accounting is provided in note 3.16.

1.9 Critical accounting estimates and judgements

The preparation of financial statements requires the use of certain critical accounting estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosed amount of contingent liabilities. Actual results may differ from those on which management's estimates are based. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable. The Group considers the most significant use of accounting estimates and judgements relate to the following areas:

 
Area                   Estimates             Judgements            Further detail 
--------------------  --------------------  --------------------  ----------------- 
Impairment             Asset lifetimes       SICR                  Credit risk 
 provisions             Economic scenarios    Definition            section of 
 on credit                                    of default            Risk management 
 exposures                                    PMAs                  and note 3.2 
--------------------  --------------------  --------------------  ----------------- 
EIR                    Product life          Standard variable     Note 2.2 
                        Post promotion        rate 
                        attrition             Macroeconomic 
                        and yield             factors 
                                              Model risk 
                                              reserve (MRR) 
--------------------  --------------------  --------------------  ----------------- 
Deferred tax                                 Period for            Note 2.5 
                                              the recoverability 
                                              of deferred 
                                              tax assets 
--------------------  --------------------  --------------------  ----------------- 
Retirement             Discount rate                               Note 3.9 
 benefit obligations    Inflation 
                        assumptions 
                        Mortality 
                        assumptions 
--------------------  --------------------  --------------------  ----------------- 
 

Critical accounting estimates and judgements related to climate change

In addition, management has also considered and reflected on the potential impact of climate -- related risks on the Group's financial position and performance.

This involved undertaking an assessment over the Group's assets (both financial and non-financial) and evaluating whether the observable effects of physical and transition risk of climate change would have a material impact on the Group's financial position and performance in the current year. It is widely understood and appreciated that the effects of climate change will not be significant in the short term and that the inherent risks and uncertainties in quantifying the effect of climate change in the financial statements are considerable and more likely to impact in the medium to longer term.

The Group's customer lending is the most significant financial asset exposed to the potential impact of climate-related risks, primarily the ECL implications and the ability of the customer to meet their contractual payments. As a UK-based bank with no significant lending outside of the UK, the Group considers the potential for material ECLs to emerge as a result of climate change in the short term to be negligible.

Other non-financial assets that may be impacted include the Group's deferred tax asset and the pension assets held by the Group's defined benefit pension scheme. The Group assesses the recoverability of deferred tax assets over a six-year corporate planning time horizon which incorporates all aspects of the Group's future performance and expectations. The Trustee of the defined benefit pension scheme is responsible for all investment decisions, and these are made in accordance with a Statement of Investment Principles which incorporates climate change considerations. In addition, by necessity, the investment decisions made by the Trustees are normally medium to long term in nature.

Overall, while the effects of climate change represent a source of significant uncertainty, the Group does not consider there to be a material impact on its estimates and judgements from physical and transition risks of climate change in these financial statements.

Group financial statements

Notes to the consolidated financial statements

Section 1: Basis of preparation

1.10 New accounting standards and interpretations

The Group has adopted the following International Accounting Standards Board (IASB) pronouncement in the current financial year:

Amendment to IFRS 16 and COVID-19 related rent concessions beyond June 2021 was issued in March 2021 and endorsed for use in the UK in May 2021. The original amendment (issued in May 2020 and effective for annual reporting periods beginning on or after 1 June 2020) 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 the period of application of the practical expedient to 30 June 2022, effective for annual reporting periods beginning on or after 1 April 2021. These pronouncements had no material impact on the Group's consolidated financial statements as it does not receive rent concessions.

The Group also acknowledges the decision by the IFRS Interpretations Committee (IFRIC) in April 2022, which concluded that certain demand deposits with restrictions should be presented as part of the cash and cash equivalents balance. The IFRIC agenda decision was considered but there are no impacts that would require a change in accounting policy for demand deposits.

New accounting standards and interpretations not yet adopted

The IASB has issued a number of other minor amendments to IFRSs that are not mandatory for the current reporting year and have not been early adopted by the Group. These amendments are not expected to have a material impact for the Group.

1.11 Other changes in the year

The following changes took place during the year:

Hedge accounting

The Group has changed the presentation of certain items in the derivative financial instruments note to the financial statements (note 3.6), with the relevant sections of the note restated. These are presentational changes only and have no impact on the Group's primary financial statements or net asset position.

The restatement was necessary to correct the historic presentation of the foreign exchange component of the fair value hedge adjustment, with the following restatements made:

Derivative financial instruments - hedge accounting (note 3.6)

The spot foreign exchange element was previously excluded from the disclosures. This has been corrected and impacts both the hedging instrument and the hedged item. The impact of the restatement on the previous year disclosure is as follows:

 
                                            Change in fair value 
                                                 of hedging 
                                           instrument in the year 
                                                  used for 
                                         ineffectiveness measurement 
-------------------------------------  ------------------------------ 
                                             Original        Restated 
Hedging instrument                               GBPm            GBPm 
-------------------------------------  --------------  -------------- 
Fair value hedges 
Foreign exchange and interest rate 
 risk 
   Cross currency swaps                          (12)            (86) 
-------------------------------------  --------------  -------------- 
Total derivatives designated as fair 
 value hedges                                     488             414 
-------------------------------------  --------------  -------------- 
 
 
                                                           Change in fair value 
                                                                 of hedged 
                              Accumulated hedge           items in the year used 
                           adjustment on the hedged                 for 
                                     item               ineffectiveness measurement 
-----------------------  ---------------------------  ------------------------------ 
                              Original      Restated        Original        Restated 
Hedged item                       GBPm          GBPm            GBPm            GBPm 
-----------------------  -------------  ------------  --------------  -------------- 
Fair value hedges 
   Fixed rate currency 
    issuances                     (13)            72              17              91 
-----------------------  -------------  ------------  --------------  -------------- 
Total                            (273)         (188)           (498)           (424) 
-----------------------  -------------  ------------  --------------  -------------- 
 

Expected credit losses

During the year, the Group made refinements to the operation of the SICR criteria within the Business portfolio. Further detail can be found in the credit risk section within the Risk report, pages 21 and 35. These refinements do not require any change to the prior period reported position.

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.1 Segment information

The Group's operating segments are operating units engaged in providing different products or services and whose operating results and overall performance are regularly reviewed by the Group's Chief Operating Decision Maker, the Executive Leadership Team.

The Group operates under four commercial lines: Mortgages, Unsecured, Business, and Deposits, 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.

Summary income statement

 
                                           2022      2021 
                                           GBPm      GBPm 
--------------------------------------  -------  -------- 
Net interest income                       1,576     1,357 
Non-interest income                         140       132 
--------------------------------------  -------  -------- 
Total operating income                    1,716     1,489 
Operating and administrative expenses   (1,069)   (1,203) 
Impairment (losses)/credit on credit 
 exposures                                 (52)       131 
--------------------------------------  -------  -------- 
Segment profit before tax                   595       417 
--------------------------------------  -------  -------- 
 
Average interest earning assets          86,275    86,947 
--------------------------------------  -------  -------- 
 

The Group has no operations outside the UK and therefore no secondary geographical area information is presented. The Group is not reliant on a single customer. Liabilities are managed on a centralised basis.

2.2 Net interest income

 
 Accounting policy 
  Interest income is recognised in the income statement 
  using the effective interest method which discounts 
  the estimated future cash payments or receipts, 
  at the effective interest rate, over the expected 
  life of the financial instrument to the gross carrying 
  amount of the non-credit impaired financial asset. 
  Interest expense is recognised in the income statement 
  using the same effective interest method on the 
  amortised cost of the financial liability. 
  When calculating the EIR, cash flows are estimated 
  considering all contractual terms of the financial 
  instrument (e.g. prepayment, call and similar options) 
  excluding future credit losses. The calculation 
  includes all amounts paid or received that are an 
  integral part of the EIR such as transaction costs 
  and all other premiums or discounts. Where it is 
  not possible to reliably estimate the cash flows 
  or the expected life of a financial instrument (or 
  group of financial instruments), the contractual 
  cash flows over the full contractual term of the 
  financial instrument (or group of financial instruments) 
  are used. 
  Loan origination and commitment fees are recognised 
  within the EIR calculation. Fees in relation to 
  the non-utilisation of a commitment are recognised 
  as revenue upon expiry of the agreed commitment 
  period. Loan related administration and service 
  fees are recognised as revenue over the period of 
  service. 
  Interest income on financial assets in impairment 
  Stages 1 and 2 is recognised on the gross carrying 
  value of the financial asset using the original 
  EIR. Once a financial asset or group of similar 
  financial assets has been categorised as credit-impaired 
  (Stage 3), interest income is recognised on the 
  net carrying value (after deducting the ECL allowance 
  from the gross lending) using the asset's original 
  EIR. The interest income for POCI financial assets 
  is calculated using the credit-adjusted EIR applied 
  to the amortised cost of the financial asset from 
  initial recognition. The Group recognises and presents 
  the reversal of ECLs following the curing of a credit 
  impaired financial asset as a reversal of impairment 
  losses. The Group's policy on ECLs can be found 
  in note 3.2. 
  Interest income and interest expense on hedged assets 
  and liabilities and financial assets and liabilities 
  designated as FVTPL are also recognised as part 
  of NII. 
  Interest income and expense on derivatives economically 
  hedging interest bearing financial assets or liabilities 
  (but not designated as hedging instruments) and 
  other financial assets and liabilities held at FVTPL 
  (either mandatory or by election) are presented 
  within other similar interest. 
  Included in interest income is finance lease income 
  which is recognised at a constant periodic rate 
  of return on the net investment. 
 

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.2 Net interest income continued

 
 Critical accounting estimates and judgements 
  EIR 
  The EIR is determined at initial recognition based 
  upon the Group's best estimate of the future cash 
  flows of the financial instrument over its expected 
  life. Where these estimates are subsequently revised, 
  a present value adjustment to the carrying value 
  of the asset is recognised in profit or loss. Such 
  adjustments can introduce income statement volatility 
  and consequently the EIR method is a source of estimation 
  uncertainty. 
  The Group considers that significant judgement is 
  exercised over the mortgage and credit card portfolios. 
  Due to the inherent judgement and estimation uncertainty 
  that exists in determining the EIR adjustment, a 
  MRR is held to mitigate this uncertainty. 
  Mortgages 
  For mortgage products the main accounting estimates 
  and judgements when assessing the cash flows are 
  the product life (including assumptions based on 
  observed historic customer behaviour when in a standard 
  variable rate (SVR) period) and the applicable SVR. 
  As at 30 September 2022, a total EIR adjustment 
  of GBP201m (2021: GBP210m) has been recognised for 
  mortgages. This represented 0.3% (2021: 0.4%) of 
  the balance sheet carrying value of gross loans 
  and advances to customers for mortgage lending. 
  The net impact of the mortgage EIR adjustments on 
  the income statement in the year represented (0.7)% 
  of gross customer interest income for mortgages 
  (2021: 1.4%). 
  Product life 
  This primarily involves assumptions of customer 
  behaviour when a fixed rate product comes to an 
  end and reverts to the Group's SVR. The Group currently 
  assumes that 85% (2021: 85%) of customers will have 
  fully repaid or switched to a new product within 
  two months of reverting to SVR. 
  SVR 
  Changes to the BoE base rate have an impact on the 
  SVR charged to customers and consequently on the 
  Group's interest income. The Group historically 
  passes base rate changes through to the SVR in full 
  but, on occasion, may choose not to do so. 
  The significant accounting estimates above are monitored 
  on an ongoing basis to ensure they remain appropriate 
  based on recent, observable customer behaviour, 
  market data (such as market derived base rate forecasts) 
  and take account of the competitive environment 
  in which the Group operates. The Group also considers 
  potential changes to future customer behaviour as 
  a result of macroeconomic factors. There continues 
  to be increased uncertainty in purchase and switching 
  activity as a result of actual and anticipated bate 
  rate rises. The Group has taken this into account 
  when determining the EIR model assumptions. 
  Sensitivity analysis 
  As noted above, the calculation of the Group's EIR 
  adjustment is sensitive to changes in product life 
  and SVR assumptions. There are inter-dependencies 
  between the assumptions which add to the complexity 
  of the judgements the Group has to make. This means 
  that no single factor is likely to move independently 
  of others, however, the sensitivities disclosed 
  below assume all other assumptions remain unchanged. 
                                            2022     2021 
  Sensitivity impact on the mortgage 
   EIR adjustment                         (GBPm)   (GBPm) 
  -------------------------------------  -------  ------- 
  +/- 1 month change to the timing 
   of customer repayments, redemptions 
   and product transfers                 16/(13)  12/(10) 
  50bps increase to the BoE base rate 
   not passed through to the Group's 
   SVR                                      (46)     (43) 
  -------------------------------------  -------  ------- 
 
 
 
  Credit cards 
  An EIR adjustment arises on credit card products 
  that have a low introductory rate, followed by a 
  higher reversionary rate in future years when the 
  promotional period expires. However, receipt of 
  such interest income depends on the customer staying 
  with the Group beyond promotional expiry and therefore 
  significant judgement is involved in forecasting 
  customer behaviour and estimating the future cash 
  flows. Key behavioural assumptions include an estimation 
  of the utilisation of available credit, transaction 
  and repayment activity and the retention of the 
  customer balance after the end of a promotional 
  period. As at 30 September 2022, a total EIR adjustment 
  of GBP285m (2021: GBP273m) has been recognised for 
  credit cards. This represented 5.5% (2021: 6.4%) 
  of the balance sheet carrying value of gross loans 
  and advances to customers for credit cards. The 
  impact of the net credit card EIR adjustments on 
  the income statement in the year represented 3.3% 
  of gross customer interest income for credit cards 
  (2021: 24.3%). 
  Expected cash flows are estimated based on historical 
  experience of similar products and are consistent 
  with those used in product pricing models. The Group 
  reviews and adjusts assumptions where necessary 
  on an ongoing basis, using the most recent observable 
  customer behaviour and market data. The Group also 
  considers potential future changes to customer behaviour 
  as a result of macroeconomic factors. 
  Post-promotional yield 
  The yield on a credit card following the post-promotional 
  period is a significant estimate within the EIR 
  assumptions. Yield is a function of the Interest 
  Bearing Balance (IBB) and the APR charged to customers. 
  IBB is impacted by customer behaviour and while 
  there is evidence to support the expected IBB following 
  the post-promotional period, there is inherent risk 
  that this data may differ in the future. If the 
  IBB differs to the Group's estimate it can have 
  a material impact on the revised future cash flows. 
  Based on recent experience, the Group has applied 
  an average IBB of 55% (2021: 55%) following the 
  end of the promotional period. 
 

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.2 Net interest income continued

 
 Post-promotional attrition 
  The level of repayment in the post-promotional period 
  is a key sensitivity within the EIR assumptions. 
  There is evidence to support the expected behaviour 
  of customers after the end of promotional periods, 
  however there is inherent risk that this data may 
  not be indicative of actual future behaviour. If 
  the proportion of customers who repay their balance 
  post-promotion differs to the Group's estimate it 
  can have a material impact on the revised future 
  cash flows. Based on recent experience, the Group 
  has applied a long run average attrition rate of 
  1.5% per month (2021: 1.5% per month) following 
  the end of the promotional period. 
  Macroeconomic factors 
  When determining assumptions, the Group has considered 
  the impact to customers of inflationary pressures 
  including high energy and utility costs and the 
  recent and anticipated future base rate rises. As 
  a result, temporary adjustments have been made to 
  assumptions. Post promotional IBB has been decreased 
  to 50% for 12 months and balance attrition has been 
  increased to reflect a reduction in retail and balance 
  transfer transaction activity for 12 months. If, 
  however, the stress period was to increase to 24 
  months, the Group estimates it would result in a 
  negative present value adjustment of approximately 
  GBP35m, which would be recognised in the income 
  statement. 
  Sensitivity analysis 
  As noted above, the calculation of the Group's EIR 
  adjustment for credit cards is sensitive to changes 
  in post-promotional yield and post-promotional attrition. 
  There are inter-dependencies between the key assumptions 
  which add to the complexity of the judgements the 
  Group has to make. This means that no single factor 
  is likely to move independently of others, however, 
  the sensitivities disclosed below assume all other 
  assumptions remain unchanged.                                             2022     2021 
  Sensitivity impact on the credit 
   card EIR adjustment                       (GBPm)   (GBPm) 
  ----------------------------------------  -------  ------- 
  +/- 5 ppts change to post-promotional 
   IBB assumption(1) (9.1% relative 
   increase/decrease)                       34/(28)  31/(31) 
  +/- 0.5 ppts change to post-promotional 
   monthly balance attrition rate (33% 
   relative increase/decrease)              (20)/23  (23)/27 
  ----------------------------------------  -------  ------- 
 
 
  MRR 
  The complicated nature of EIR models means the Group 
  exercises prudence on the modelled outcome and therefore 
  chooses to hold a MRR in relation to both mortgages 
  and credit cards to mitigate the risk of estimation 
  uncertainty. 
  In arriving at the level of MRR, the Group assesses 
  the judgements made within the EIR modelling and 
  applies severe downside stress scenarios to quantify 
  emerging or potential risks. This allows the Group 
  to hold an appropriate level of MRR across both 
  asset classes. The MRR is reviewed quarterly based 
  on the conditions prevalent at the time and adjusted 
  where necessary. 
  (1) Where the IBB assumption is already equal to 
  or less than 50% IBB, no further adjustment has 
  been made on the basis this already represents a 
  downside economic stress. 
 
 
                                             2022   2021 
                                             GBPm   GBPm 
------------------------------------------  -----  ----- 
Interest income 
Loans and advances to customers             2,095  1,880 
Loans and advances to other banks              70      8 
Financial assets at FVOCI                      50     18 
------------------------------------------  -----  ----- 
Total interest income                       2,215  1,906 
------------------------------------------  -----  ----- 
 
Other similar interest 
Financial assets at FVTPL                       5      9 
Derivatives economically hedging interest 
 bearing assets                               (3)    (5) 
------------------------------------------  -----  ----- 
Total other similar interest                    2      4 
------------------------------------------  -----  ----- 
 
Less: interest expense and similar 
 charges 
Customer deposits                           (342)  (361) 
Debt securities in issue                    (227)  (168) 
Due to other banks                           (70)   (20) 
Other interest expense                        (2)    (4) 
------------------------------------------  -----  ----- 
Total interest expense and similar 
 charges                                    (641)  (553) 
------------------------------------------  -----  ----- 
Net interest income                         1,576  1,357 
------------------------------------------  -----  ----- 
 

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.3 Non-interest income

 
 Accounting policy 
  Gains less losses on financial instruments at fair 
  value 
  This includes fair value gains and losses from three 
  distinct activities: 
   *    Derivatives classified as held for trading - the full 
        change in fair value of trading derivatives is 
        recognised inclusive of interest income and expense 
        arising on those derivatives except when economically 
        hedging other assets and liabilities at fair value as 
        outlined in note 2.2. 
 
 
   *    Other financial assets designated at FVTPL - these 
        relate principally to the Group's fixed interest rate 
        loan portfolio (note 3.5), which were designated at 
        inception as FVTPL. The fair value of these loans is 
        derived from the future loan cash flows using 
        appropriate discount rates and includes adjustments 
        for credit risk and credit losses. The valuation 
        technique used is reflective of current market 
        practice. 
 
 
   *    Hedged assets, liabilities and derivatives designated 
        in hedge relationships - fair value movements are 
        recognised on both the hedged item and hedging 
        derivative in a fair value hedge relationship, the 
        net of which represents hedge ineffectiveness, and 
        hedge ineffectiveness on cash flow hedge 
        relationships (note 3.6). 
 
 
  Fees and commissions 
  Fees and commissions receivable which are not an 
  integral part of the EIR are recognised as income 
  as the Group fulfils its performance obligations. 
  The Group's principal performance obligations arising 
  from contracts with customers are in respect of 
  current accounts, debit cards and credit cards. 
  The Group provides the service and consequently 
  generates the fee and commission income monthly, 
  with amounts recognised in income on this basis. 
  Costs incurred to generate fee and commission income 
  are charged to fees and commissions expense as they 
  are incurred. 
 
 
                                              2022   2021 
                                              GBPm   GBPm 
-------------------------------------------  -----  ----- 
Gains less losses on financial instruments 
 at fair value 
Held for trading derivatives                     6      6 
Financial assets at fair value(1)             (19)      4 
Ineffectiveness arising from fair 
 value hedges (note 3.6)                        46   (10) 
Amounts recycled to profit and loss 
 from cash flow hedges(2) (note 3.6)           (4)    (5) 
Ineffectiveness arising from cash 
 flow hedges (note 3.6)                       (46)      - 
-------------------------------------------  -----  ----- 
                                              (17)    (5) 
-------------------------------------------  -----  ----- 
Other operating income 
Net fee and commission income                  134    124 
Margin on foreign exchange derivative 
 brokerage                                      19     16 
Gains on sale of financial assets 
 at FVOCI                                        4      - 
Share of JV loss after tax                     (4)    (5) 
Other income                                     4      2 
-------------------------------------------  -----  ----- 
                                               157    137 
-------------------------------------------  -----  ----- 
Total non-interest income                      140    132 
-------------------------------------------  -----  ----- 
 

(1) Included within financial assets at fair value is a credit risk gain on loans and advances at fair value of GBP1m (2021: GBP1m gain), and a fair value gain on equity investments of GBP2m (2021: GBP15m gain).

   (2)   In respect of terminated hedges. 

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.3 Non-interest income continued

The Group's unrecognised share of losses of JVs for the year was GBP8m (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 GBP9m (2021: GBP1m).

Non-interest income includes the following fee and commission income disaggregated by income type:

 
                                         2022   2021 
                                         GBPm   GBPm 
--------------------------------------  -----  ----- 
Current account and debit card fees       102     90 
Credit cards                               52     38 
Insurance, protection and investments       8     10 
Other fees(1)                              26     29 
--------------------------------------  -----  ----- 
Total fee and commission income           188    167 
Total fee and commission expense         (54)   (43) 
--------------------------------------  -----  ----- 
Net fee and commission income             134    124 
--------------------------------------  -----  ----- 
 
   (1)   Other fees include mortgages, invoice and asset finance and ATM fees. 

2.4 Operating and administrative expenses before impairment losses

 
 Accounting policy 
  Staff costs primarily consist of wages and salaries, 
  accrued bonus and social security costs arising 
  from services rendered by employees during the financial 
  year. 
  The Group recognises bonus costs where it has a 
  present obligation that can be reliably measured. 
  Bonus costs are recognised over the relevant service 
  period required to entitle the employee to the reward. 
  The Group's accounting policies on pension expenses 
  and equity based compensation are included in notes 
  3.9 and 4.2 respectively. 
 
 
                                             2022    2021 
                                             GBPm    GBPm 
------------------------------------------  -----  ------ 
Staff costs                                   435     426 
Property and infrastructure                    38      89 
Technology and communications                 119     121 
Corporate and professional services           135     160 
Depreciation, amortisation and impairment     179     191 
Other expenses                                163     216 
------------------------------------------  -----  ------ 
Total operating and administrative 
 expenses                                   1,069   1,203 
------------------------------------------  -----  ------ 
 

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.4 Operating and administrative expenses before impairment losses continued

Staff costs comprise the following items:

 
                                        2022   2021 
                                        GBPm   GBPm 
-------------------------------------  -----  ----- 
Salaries and wages                       254    248 
Social security costs                     30     30 
Defined contribution pension expense      50     49 
Defined benefit pension credit          (24)    (8) 
-------------------------------------  -----  ----- 
Compensation costs                       310    319 
-------------------------------------  -----  ----- 
Equity based compensation(1)               4      8 
Bonus awards                              27     22 
-------------------------------------  -----  ----- 
Performance costs                         31     30 
-------------------------------------  -----  ----- 
Redundancy and restructuring               3     29 
Temporary staff costs                     13     13 
Other(2)                                  78     35 
-------------------------------------  -----  ----- 
Other staff costs                         94     77 
-------------------------------------  -----  ----- 
Total staff costs                        435    426 
-------------------------------------  -----  ----- 
 
   (1)   Includes National Insurance on equity based compensation. 
   (2)   Includes a one-off cost of living allowance of GBP7m (2021: GBPNil). 

The defined benefit pension credit in the current period includes a credit of GBP10m (2021: GBP5m) arising from the ongoing Pension Increase Exchange (PIE) exercise which will complete in calendar year 2023 (note 3.9). A PIE gives members the option to exchange future increases on their pensions for a one-off uplift to their current pension.

The average number of FTE employees of the Group during the year was made up as follows:

 
                    2022     2021 
                  Number   Number 
---------------  -------  ------- 
Managers(1)        2,574    2,691 
Clerical staff     4,292    4,724 
---------------  -------  ------- 
                   6,866    7,415 
---------------  -------  ------- 
 
   (1)   Includes a combination of managers with and without staff responsibilities. 

The average monthly number of employees was 7,829 (2021: 8,613). All staff are contracted employees of the Group and its subsidiary undertakings. The average figures above do not include contractors.

Auditor's remuneration included within other operating and administrative expenses:

 
                                                      2022      2021 
                                                   GBP'000   GBP'000 
------------------------------------------------  --------  -------- 
Fees payable to the Company's auditor 
 for the audit of the Company's financial 
 statements                                             24        23 
Fees payable to the Company's auditor 
 for the audit of the Company's subsidiaries(1)      4,564     4,272 
------------------------------------------------  --------  -------- 
Total audit fees                                     4,588     4,295 
Audit related assurance services                       262       255 
Other assurance services                             1,877       330 
------------------------------------------------  --------  -------- 
Total non-audit fees                                 2,139       585 
Fees payable to the Company's auditor 
 in respect of associated pension schemes              107        79 
------------------------------------------------  --------  -------- 
Total fees payable to the Company's 
 auditor                                             6,834     4,959 
------------------------------------------------  --------  -------- 
 
   (1)   Includes the audit of the Group's structured entities. 

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.4 Operating and administrative expenses before impairment losses continued

Non-audit fees of GBP2.1m (2021: GBP0.6m) were paid to the auditor during the year for services including the skilled person reporting as required by the PRA, the review of the Interim Financial Report, PRA Written Auditor Reporting, comfort letters for the global medium-term note and covered bond programmes, TFSME assurance, client money reviews and profit attestations.

Out of pocket expenses of GBP13k (2021: GBPNil) were borne by the Group during the year.

2.5 Taxation

 
 Accounting policy 
  Income tax on the profit or loss for the year comprises 
  current and deferred tax. 
  Income tax is recognised in the income statement 
  except to the extent that it is related to items 
  recognised directly in equity, in which case the 
  tax is also recognised in equity (excluding AT1 
  distributions where the tax impact is recognised 
  in the income statement). 
  Current tax is the expected tax payable or receivable 
  on the taxable profit or loss for the year, using 
  tax rates enacted or substantively enacted at the 
  balance sheet date, and any adjustment to tax payable 
  in respect of previous years. 
  Deferred tax assets and liabilities are recognised 
  on temporary differences arising between the tax 
  bases of assets and liabilities and their carrying 
  amounts in the financial statements. Deferred tax 
  is determined using tax rates and laws that have 
  been enacted or substantively enacted by the balance 
  sheet date and are expected to apply when the related 
  deferred tax asset is realised, or the deferred 
  tax liability is settled. 
  A deferred tax asset is recognised for unused tax 
  losses and unused tax credits only if it is probable 
  that future taxable amounts will arise against which 
  those temporary differences and losses may be utilised. 
  Critical accounting estimates and judgements 
  In arriving at the Group's deferred tax asset balance 
  of GBP146m (2021: GBP377m), significant judgement 
  is exercised on the component of deferred tax assets 
  that relate to tax losses carried forward of GBP302m 
  (2021: GBP255m). 
  The Group has assessed the potential for the recovery 
  of these tax losses carried forward for this component 
  of deferred tax assets at 30 September 2022 and 
  considers it probable that sufficient future taxable 
  profits will be available against which the underlying 
  deductible temporary differences can be utilised 
  over the corporate planning horizon. Deferred tax 
  assets are recognised to the extent that they are 
  expected to be utilised over six years from the 
  balance sheet date. If instead of six years the 
  period were five years or seven years, the recognised 
  deferred tax asset would be GBP115m or would remain 
  at GBP146m respectively. If Group profit forecasts 
  were 10% lower than anticipated, the deferred tax 
  asset would be GBP140m. This is only GBP6m lower 
  than the reported position as there is excess plan 
  profit capacity for losses to be recognised; all 
  historic tax losses are now recognised on the balance 
  sheet. All tax assets arising will be used within 
  the UK. 
 
 
                                        2022   2021 
                                        GBPm   GBPm 
-------------------------------------  -----  ----- 
Current tax 
Current year                              81     62 
Adjustment in respect of prior years       4      - 
-------------------------------------  -----  ----- 
                                          85     62 
-------------------------------------  -----  ----- 
Deferred tax 
Current year                            (21)  (124) 
Adjustment in respect of prior years     (6)      5 
-------------------------------------  -----  ----- 
                                        (27)  (119) 
-------------------------------------  -----  ----- 
Tax expense/(credit) for the year         58   (57) 
-------------------------------------  -----  ----- 
 

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.5 Taxation continued

The tax assessed for the year differs from that arising from applying the standard rate of corporation tax in the UK of 19%. A reconciliation from the expense implied by the standard rate to the actual tax expense/(credit) is as follows:

 
                                         2022   2021 
                                         GBPm   GBPm 
--------------------------------------  -----  ----- 
Profit on ordinary activities before 
 tax                                      595    417 
--------------------------------------  -----  ----- 
Tax expense based on the standard 
 rate of corporation tax in the UK 
 of 19% (2021: 19%)                       113     79 
--------------------------------------  -----  ----- 
Effects of: 
Disallowable expenses                       4     13 
Bank levy                                   -      1 
Conduct indemnity adjustment             (12)     58 
Deferred tax assets recognised           (83)  (126) 
Impact of rate changes                     23   (92) 
AT1 distribution                         (13)   (15) 
Banking surcharge                          28     20 
Adjustments in respect of prior years     (2)      5 
--------------------------------------  -----  ----- 
Tax expense/(credit) for the year          58   (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 year. The impact is a reduction in the value of deferred tax assets, reflected within the GBP23m charge to the income statement above.

The Group has recognised deferred tax in relation to the following items in the balance sheet, income statement, and statement of other comprehensive income:

Movement in deferred tax (liability)/asset

 
                                              Gains 
                                                 on                                                         Defined 
                                  Cash    financial      Tax                                         Total  benefit        Total 
                  Acquisition     flow  instruments   losses                               Other  deferred  pension     deferred 
                   accounting    hedge           at  carried     Capital    Pension    temporary       tax   scheme          tax 
                  adjustments  reserve        FVOCI  forward  allowances  spreading  differences    assets  surplus  liabilities 
                         GBPm     GBPm         GBPm     GBPm        GBPm       GBPm         GBPm      GBPm     GBPm         GBPm 
----------------  -----------  -------  -----------  -------  ----------  ---------  -----------            ------- 
At 1 October 
 2020                    (10)       23          (4)      151         113          9           23       305    (253)        (253) 
Income statement 
 (charge)/credit            -        1            -      104          11          -            6       122      (3)          (3) 
Other 
 comprehensive 
 income 
 charge                     -     (33)         (11)        -           -        (4)          (2)      (50)     (40)         (40) 
----------------  -----------  -------  -----------  -------  ----------  ---------  -----------  --------  -------  ----------- 
At 30 September 
 2021                    (10)      (9)         (15)      255         124          5           27       377    (296)        (296) 
----------------  -----------  -------  -----------  -------  ----------  ---------  -----------  --------  -------  ----------- 
Income statement 
 credit/(charge)            2        2            -       47        (13)          -          (2)        36      (9)          (9) 
Other 
 comprehensive 
 income 
 charge                     -    (260)          (1)        -           -        (5)          (1)     (267)     (45)         (45) 
----------------  -----------  -------  -----------  -------  ----------  ---------  -----------  --------  -------  ----------- 
At 30 September 
 2022                     (8)    (267)         (16)      302         111          -           24       146    (350)        (350) 
----------------  -----------  -------  -----------  -------  ----------  ---------  -----------  --------  -------  ----------- 
 

Other temporary differences include the IFRS 9 transitional adjustment of GBP11m and equity based compensation of GBP6m (2021: GBP15m and GBP9m respectively).

The Group has deferred tax assets of GBP146m (2021: GBP377m), the principal components of which are tax losses of GBP302m (2021: GBP255m) and capital allowances of GBP111m (2021: GBP124m) offset by the cash flow hedge reserve deferred tax liability of GBP267m (2021: GBP9m). The Group also has deferred tax liabilities of GBP350m (2021: GBP296m) in relation to the defined benefit pension surplus.

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 year where they relate to payments of income tax to this tax authority.

Historic trade tax losses are now fully recognised (2021: unrecognised deferred tax asset of GBP112m representing trading losses with a gross value of GBP449m). The Group also has historic non-trading losses of GBP6m gross, tax value GBP1m; a deferred tax asset has not been recognised in respect of these losses as their use cannot be foreseen.

On 17 October 2022, the Chancellor of the Exchequer confirmed that the UK corporation tax rate will increase to 25% from 1 April 2023. On 17 November 2022 it was confirmed that the previously enacted reduction in Banking Surcharge to 3%, with an allowance of GBP100m, would proceed, also from 1 April 2023. In line with the requirements of IAS 12, these enacted tax rates have been used to determine the deferred tax balances at 30 September 2022.

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.6 Earnings per share

 
 Accounting policy 
  Basic EPS 
  Basic EPS is calculated by taking the profit attributable 
  to ordinary shareholders of the parent company and 
  then dividing this by the weighted average number 
  of ordinary shares outstanding during the year after 
  deducting the weighted average of the Group's holdings 
  of its own shares. 
  Diluted EPS 
  This requires the weighted-average number of ordinary 
  shares in issue to be adjusted to assume conversion 
  of all dilutive potential ordinary shares. These 
  arise from awards made under equity based compensation 
  schemes. Share awards with performance conditions 
  attaching to them are not considered to be dilutive 
  unless these conditions have been met at the reporting 
  date. 
 

The Group presents basic and diluted loss per share data in relation to the ordinary shares of Virgin Money UK PLC.

 
                                          2022   2021 
                                          GBPm   GBPm 
---------------------------------------  -----  ----- 
Profit attributable to ordinary equity 
 holders for the purposes of basic 
 and diluted EPS                           467    395 
---------------------------------------  -----  ----- 
 
 
                                          2022   2021 
---------------------------------------  -----  ----- 
Weighted-average number of ordinary 
 shares in issue (millions) 
- Basic                                  1,441  1,442 
Adjustment for share awards made under 
 equity based compensation schemes           3      1 
---------------------------------------  -----  ----- 
- Diluted                                1,444  1,443 
---------------------------------------  -----  ----- 
Basic earnings per share (pence)          32.4   27.3 
Diluted earnings per share (pence)        32.3   27.3 
---------------------------------------  -----  ----- 
 

Basic earnings per share has been calculated after deducting 0.3m (2021: 0.1m) ordinary shares representing the weighted-average of the Group's holdings of its own shares.

Note 4.1 provides details of the share buyback programme including buybacks intended for beyond 30 September 2022.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1 Loans and advances to customers

 
 Accounting policy 
  Loans and advances to customers arise when the Group 
  provides money directly to a customer and includes 
  mortgages, term lending, overdrafts, credit card 
  lending, lease finance and invoice financing. They 
  are recognised initially at fair value and are subsequently 
  measured at amortised cost, using the effective 
  interest method, adjusted for ECLs (note 3.2). They 
  are derecognised when the rights to receive cash 
  flows have expired or the Group has transferred 
  substantially all the risks and rewards of ownership. 
  Leases entered into by the Group as lessor, where 
  the Group transfers substantially all the risks 
  and rewards of ownership to the lessee, are classified 
  as finance leases. The leased asset is not held 
  on the Group balance sheet; instead, a finance lease 
  is recognised representing the minimum lease payments 
  receivable under the terms of the lease, discounted 
  at the rate of interest implicit in the lease. Interest 
  income is recognised in interest receivable, allocated 
  to accounting years to reflect a constant periodic 
  rate of return. 
 
 
                                                 2022     2021 
                                                 GBPm     GBPm 
---------------------------------------------  ------  ------- 
Gross loans and advances to customers          73,146   72,551 
Impairment provisions on credit exposures(1) 
 (note 3.2)                                     (454)    (496) 
Fair value hedge adjustment                     (941)    (179) 
---------------------------------------------  ------  ------- 
                                               71,751   71,876 
---------------------------------------------  ------  ------- 
 

(1) ECLs on off-balance sheet exposures of GBP3m (2021: GBP8m) are presented as part of the provisions for liabilities and charges balance (note 3.13).

The Group has a portfolio of fair valued business loans of GBP70m (2021: GBP133m) which are classified separately as financial assets at FVTPL on the balance sheet (note 3.5). Combined with the above, this is equivalent to total loans and advances of GBP71,821m (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 (note 3.3).

Lease finance

The Group leases a variety of assets to third parties under finance lease arrangements, including vehicles and general plant and machinery. The cost of assets acquired by the Group during the year for the purpose of letting under finance leases and hire purchase contracts amounted to GBP46m (2021: GBP9m) and GBP405m (2021: GBP301m) respectively.

Finance lease receivables are presented in the statement of financial position within loans and advances to customers. The maturity analysis of lease receivables, including the undiscounted lease payments to be received, are as follows:

Gross investment in finance lease and hire purchase receivables

 
                                       2022   2021 
                                       GBPm   GBPm 
------------------------------------  -----  ----- 
Less than 1 year                        269    257 
1-2 years                               170    156 
2-3 years                               117     99 
3-4 years                                66     50 
4-5 years                                46     26 
More than 5 years                        24     26 
------------------------------------  -----  ----- 
                                        692    614 
Unearned finance income                (45)   (30) 
------------------------------------  -----  ----- 
Net investment in finance lease and 
 hire purchase receivables              647    584 
------------------------------------  -----  ----- 
 

Finance income recognised on the net investment in the lease was GBP21m (2021: GBP19m) and is included in interest income in the income statement (note 2.2).

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.2 Impairment provisions on credit exposures

 
 Accounting policy 
  At each reporting date, the Group assesses financial 
  assets measured at amortised cost, as well as loan 
  commitments and financial guarantees not measured 
  at FVTPL, for impairment. The impairment loss allowance 
  is calculated using an ECL methodology and reflects: 
  (i) an unbiased and probability weighted amount; 
  (ii) the time value of money which discounts the 
  impairment loss; and (iii) reasonable and supportable 
  information that is available without undue cost 
  or effort at the reporting date about past events, 
  current conditions and forecasts of future economic 
  conditions. 
  ECL methodology is based upon the combination of 
  PD, LGD and EAD estimates that consider a range 
  of factors that impact on credit risk and consequently 
  the level of impairment loss provisioning. The Group 
  uses reasonable and supportable forecasts of future 
  economic conditions in estimating the ECL allowance. 
  The methodology and assumptions used in the ECL 
  calculation are reviewed regularly and updated as 
  necessary. 
  SICR assessment and staging 
  The ECL is calculated as either a 12-month (Stage 
  1) or lifetime ECL depending on whether the financial 
  asset has suffered a SICR since origination (Stage 
  2) or has otherwise become credit impaired (Stage 
  3) as at the reporting date. The Group uses a PD 
  threshold curve (distinct for each portfolio) to 
  assess for a SICR in addition to the 30 DPD and 
  90 DPD backstops for recognising Stage 2 and Stage 
  3 provisions respectively. 
  Financial assets can move between stages when the 
  relevant staging criteria are no longer satisfied 
  subject to certain restrictions for forborne assets. 
  If the level of impairment loss reduces in a subsequent 
  year, the previously recognised impairment loss 
  allowance is reversed and recognised in the income 
  statement. 
  POCI financial assets are those which are assessed 
  as being credit impaired upon initial recognition. 
  Once a financial asset is classified as POCI, it 
  remains there until derecognition irrespective of 
  its credit quality at each reporting date. POCI 
  financial assets are disclosed separately from those 
  financial assets in Stage 3. The Group regards the 
  date of acquisition as the origination date for 
  purchased portfolios. 
  The Group has not made use of the low credit risk 
  option under IFRS 9 for loans and advances at amortised 
  cost. Further detail on the low credit risk option 
  can be found in note 3.7. 
  The ECL assessment is performed on either a collective 
  or individual basis: 
  Collective: these assets are assessed and provided 
  for on a group or a pooled basis due to the existence 
  of shared risk characteristics for as long as they 
  retain those similar characteristics. Financial 
  assets are considered to have shared risk characteristics 
  when, at a given point in time, they will tend to 
  display a similar PD and credit risk profile and 
  can be allocated to Stages 1, 2 or 3. 
  Individual: these assets are assessed and provided 
  for at the financial instrument level, with the 
  assessment (which is governed by the Group's Credit 
  Policy) taking into consideration a range of likely 
  potential outcomes relating to each customer and 
  their associated financial assets. These will be 
  allocated to Stage 3. 
  Regardless of the calculation basis, the Group generates 
  a modelled ECL allowance at the individual financial 
  instrument level. The modelled ECL output can be 
  supplemented by management judgements in the form 
  of PMAs where appropriate. 
  Write-offs and recoveries 
  When there is no reasonable expectation of recovery 
  for a loan, it is written off against the related 
  provision. Such loans are written off after all 
  the necessary procedures have been completed and 
  the amount of the loss has been determined. Subsequent 
  recoveries of amounts previously written off decrease 
  the amount of the impairment charge in the income 
  statement. 
  The Group's impairment policy for debt instruments 
  at FVOCI is included in note 3.7. The impact of 
  the ECL methodology on the Group's cash and balances 
  with central banks and due from other banks balances 
  held at amortised cost is immaterial. ECLs relating 
  to loan commitments and financial guarantees can 
  be found in note 3.13. 
  Critical accounting estimates and judgements 
  ECL methodology requires the Group to apply estimates 
  and exercise judgement when calculating an impairment 
  allowance for credit exposures. 
  Further information on the chosen scenarios, macroeconomic 
  assumptions, and scenario weightings used in the 
  ECL calculation, including management's use of PMAs 
  together with sensitivity analysis, is contained 
  in the credit risk section of Risk management on 
  pages 39 to 45. 
 

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.2 Impairment provisions on credit exposures continued

Movement in impairment provisions on credit exposures

 
                                      2022    2021 
                                      GBPm    GBPm 
-----------------------------------  -----  ------ 
Opening balance                        496     735 
Charge/(credit) for the year(1)         57   (132) 
Amounts written off                  (129)   (126) 
Recoveries of amounts written off 
 in previous years                      30      26 
Transfer of off-balance sheet ECLs 
 to provisions (note 3.13)               -     (7) 
-----------------------------------  -----  ------ 
Closing balance                        454     496 
-----------------------------------  -----  ------ 
 

(1) The GBP52m charge (2021: GBP131m credit) for impairment losses on credit exposures shown in the income statement also includes a GBP5m credit (2021: GBP1m charge) in respect of off-balance sheet ECLs (note 3.13).

Off-balance sheet ECLs are presented as part of the provisions for liabilities and charges balance (note 3.13).

3.3 Securitisation and covered bond programmes

 
 Accounting policy 
  The Group sponsors the formation of structured entities, 
  primarily for the purpose of facilitation of asset 
  securitisation and covered bond transactions, the 
  full details of which can be found in note 6.2 to 
  the Company financial statements. The Group has 
  no shareholding in these entities, but is exposed, 
  or has rights, to variable returns and has the ability 
  to affect those returns. The entities are consolidated 
  in the Group's financial statements in accordance 
  with note 1.5. 
  Securitisation 
  The Group has securitised a portion of its retail 
  mortgage loan portfolio under both master trust 
  (Lanark and Lannraig) and standalone (Gosforth) 
  securitisation programmes. The securitised mortgage 
  loans have been assigned at principal value to bankruptcy 
  remote structured entities. The securitised debt 
  holders have no recourse to the Group other than 
  the principal and interest (including fees) generated 
  from the securitised mortgage loan portfolio. 
  The externally held securitised notes in issue are 
  included within debt securities in issue (note 3.11). 
  There are a number of notes held internally by the 
  Group which are used as collateral for repurchases 
  and similar transactions or for credit enhancement 
  purposes. 
  Covered bond 
  A subset of the Group's retail mortgage loan portfolio 
  has been ring-fenced and assigned to a bankruptcy 
  remote limited liability partnership, Eagle Place 
  Covered Bonds LLP, to provide a guarantee for the 
  obligations payable on the covered bonds issued 
  by the Group. 
  The covered bond partnership is consolidated with 
  the mortgage loans retained on the Group balance 
  sheet and the covered bonds issued included within 
  debt securities in issue (note 3.11). The covered 
  bond holders have dual recourse: firstly, to the 
  bond issuer on an unsecured basis; and secondly, 
  to the LLP under the Covered Bond Guarantee secured 
  against the mortgage loans. 
  Under both the securitisation and covered bond programmes, 
  the mortgage loans do not qualify for derecognition 
  because the Group remains exposed to the majority 
  of the risks and rewards of the mortgage loan portfolio, 
  principally the associated credit risk. The Group 
  continues to service the mortgage loans in return 
  for an administration fee and is also entitled to 
  any residual income after all payment obligations 
  due under the terms of the programmes and senior 
  programme expenses have been met. A deemed loan 
  liability is recognised in the programme sponsor 
  for the proceeds of the funding transaction. 
  Significant restrictions 
  Where the Group uses its financial assets to raise 
  finance through securitisation and the sale of securities 
  subject to repurchase agreements, the assets become 
  encumbered and are not available for transfer around 
  the Group. 
 

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.3 Securitisation and covered bond programmes continued

The assets and liabilities in relation to securitisation and covered bonds in issue at 30 September are as follows:

 
                                     2022                     2021 
--------------------------  -----------------------  ----------------------- 
                                   Loans      Notes         Loans      Notes 
                                     and   in issue           and   in issue 
                                advances       GBPm      advances       GBPm 
                             securitised              securitised 
                                    GBPm                     GBPm 
--------------------------  ------------  ---------  ------------  --------- 
Securitisation programmes 
Lanark                             3,776      2,768         4,383      3,396 
Lannraig                             768        622           921        693 
Gosforth 2017-1                        -          -           712        591 
Gosforth 2018-1                      872        745         1,107        887 
--------------------------  ------------  ---------  ------------  --------- 
                                   5,416      4,135         7,123      5,567 
Less held by the Group                      (2,260)                  (3,181) 
--------------------------  ------------  ---------  ------------  --------- 
                                              1,875                    2,386 
--------------------------  ------------  ---------  ------------  --------- 
Covered bond programmes 
Clydesdale Bank PLC                    -          -           999        742 
Clydesdale Bank PLC 
 (formerly Virgin Money 
 PLC)                              6,739      3,450         3,960      1,100 
--------------------------  ------------  ---------  ------------  --------- 
                                   6,739      3,450         4,959      1,842 
--------------------------  ------------  ---------  ------------  --------- 
 

During the year the Clydesdale Bank PLC Global Covered Bond Programme ceased activity and the Series 2012-2 Covered Bonds transferred 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.

The fair values of financial assets and associated liabilities relating to the securitisation programmes were GBP5,235m and GBP1,878m respectively (2021: GBP7,171m and GBP2,406m) where the counterparty to the liabilities has recourse only to the financial assets.

There were no events during the year that resulted in any Group transferred financial assets being derecognised.

The Group has contractual and non-contractual arrangements which may require it to provide financial support as follows:

Securitisation programmes

The Group provides credit support to the structured entities via reserve funds, which are partly funded through subordinated debt arrangements and by holding junior notes. Exposures are shown in the table below:

 
                            2022    2021 
                            GBPm    GBPm 
-------------------------  -----  ------ 
Beneficial interest held   1,239   1,521 
Subordinated loans            42       1 
Junior notes held            978   1,206 
-------------------------  -----  ------ 
                           2,259   2,728 
-------------------------  -----  ------ 
 

Looking forward through future reporting years there are a number of date-based options on the notes issued by the structured entities which could be actioned by them as issuer. These could require the Group, as sponsor, to provide additional liquidity support.

Covered bond programmes

The nominal level of over-collateralisation was GBP3,127m (2021: GBP2,827m) in the Clydesdale Bank PLC (formerly Virgin Money PLC) programme. In the prior year there was also GBP541m over -- collateralisation in the Clydesdale Bank PLC programme. From time to time the obligations of the Group to provide over -- collateralisation may increase due to the formal requirements of the programme.

Under all programmes, the Group has an obligation to repurchase mortgage exposures if certain mortgage loans no longer meet the programme criteria.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.4 Cash and balances with central banks

 
 Accounting policy 
  Cash and balances with central banks are measured 
  at amortised cost, using the effective interest 
  method, and are derecognised when the rights to 
  receive cash flows have expired or the Group has 
  transferred substantially all the risks and rewards 
  of ownership. These balances form part of the Group's 
  treasury-related activities and are mostly short 
  term in nature and repayable on demand or within 
  a short timescale, generally three months. 
 
 
                                           2022    2021 
                                           GBPm    GBPm 
---------------------------------------  ------  ------ 
Cash assets                               1,206   1,374 
Balances with central banks (including 
 EU payment systems)                     11,015   8,337 
---------------------------------------  ------  ------ 
                                         12,221   9,711 
Less mandatory deposits with central 
 banks(1)                                 (266)   (258) 
---------------------------------------  ------  ------ 
Included in cash and cash equivalents 
 (note 5.2)                              11,955   9,453 
---------------------------------------  ------  ------ 
 

(1) Mandatory deposits are not available for use in the Group's day-to-day business and are non-interest bearing.

3.5 Financial assets at fair value through profit or loss

 
 Accounting policy 
  A financial asset is measured at FVTPL if it: (i) 
  does not fall into one of the business models for 
  amortised cost (note 1.7) or FVOCI (note 3.7); (ii) 
  is specifically designated as FVTPL on initial recognition 
  in order to eliminate or significantly reduce a 
  measurement mismatch; or (iii) is classified as 
  held for trading. 
  A financial instrument is classified as held for 
  trading if it is acquired principally for the purpose 
  of selling in the near term, forms part of a portfolio 
  of financial instruments that are managed together 
  and for which there is evidence of short-term profit 
  taking, or it is a derivative not in a qualifying 
  hedge relationship. 
  Associated gains and losses are recognised in the 
  income statement as they arise (note 2.3). 
 

Loans and advances

Included in financial assets at FVTPL is a historical portfolio of loans (sales ceased in 2012). Interest rate risk associated with these loans is managed using interest rate derivative contracts and the loans are recorded at fair value to avoid an accounting mismatch. The maximum credit exposure of the loans is GBP70m (2021: GBP133m). The cumulative loss in the fair value of the loans attributable to changes in credit risk amounts to GBP1m (2021: GBP2m); the change for the current year is a decrease of GBP1m (2021: decrease of GBP1m), of which GBP1m (2021: GBP1m) has been recognised in the income statement.

Other financial assets

Included in other financial assets are GBP7m (2021: GBP19m) of unlisted securities and GBP1m (2021: GBP1m) of debt instruments.

Note 3.15 contains further information on the valuation methodology applied to financial assets held at FVTPL and their classification within the fair value hierarchy. Details of the credit quality of financial assets is provided in the Risk management section of this results announcement.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.6 Derivative financial instruments

 
 Accounting policy 
  The Group uses derivative financial instruments 
  to manage exposure to interest rate, contractually 
  specified inflation and foreign currency risk. Interest 
  rate risk arises primarily due to the mismatch, 
  or duration, between repricing dates of interest-bearing 
  assets and liabilities, or basis risk from assets 
  and liabilities repricing to different reference 
  rates. Contractually specified inflation risk arises 
  from financial instruments whose cash flows are 
  linked to an inflation index. Currency risk arises 
  when assets and liabilities are not denominated 
  in the functional currency of the entity. Derivatives 
  are recognised on the balance sheet at fair value 
  on trade date and are measured at fair value throughout 
  the life of the contract. Derivatives are carried 
  as assets when the fair value is positive and as 
  liabilities when the fair value is negative. The 
  notional amount of a derivative contract is not 
  recorded on the balance sheet but is disclosed as 
  part of this note. 
  Netting 
  Derivative assets and liabilities are offset against 
  collateral received and paid respectively, and the 
  net amount reported in the balance sheet only when 
  there is a legally enforceable right to offset the 
  recognised amounts, and there is an intention to 
  settle on a net basis. Amounts offset on the balance 
  sheet represent the Group's centrally cleared derivative 
  financial instruments and collateral paid to/from 
  central clearing houses, which meet the criteria 
  for offsetting under IAS 32. 
  Hedge accounting 
  The Group elects to apply hedge accounting for the 
  majority of its risk management activity that uses 
  derivatives. This results in greater alignment in 
  the timing of recognition of gains and losses on 
  hedged items and hedging instruments and therefore 
  reduces income statement volatility. The Group does 
  not have a trading book, however derivatives that 
  do not meet the hedging criteria, or for which hedge 
  accounting is not applied, are classified as held 
  for trading. 
  The Group has elected, as a policy choice permitted 
  under IFRS 9, to continue to apply hedge accounting 
  in accordance with IAS 39. The method of recognising 
  the fair value gain or loss on a derivative depends 
  on whether it is designated as a hedging instrument 
  and the nature of the item being hedged. Certain 
  derivatives are designated as either hedges of highly 
  probable future cash flows attributable to a recognised 
  asset or liability, or a highly probable forecast 
  transaction (a cash flow hedge); or hedges of the 
  fair value of recognised assets or liabilities or 
  firm commitments (a fair value hedge). 
  Cash flow hedge 
  The effective portion of changes in the fair value 
  of derivatives that are designated and qualify as 
  cash flow hedges is recognised in equity. Specifically, 
  the separate component of equity (note 4.1) is adjusted 
  to the lesser of the cumulative gain or loss on 
  the hedging instrument and the cumulative change 
  in fair value of the expected future cash flows 
  on the hedged item from the inception of the hedge. 
  Any remaining gain or loss on the hedging instrument 
  is recognised in the income statement. The carrying 
  value of the hedged item is not adjusted. Amounts 
  accumulated in equity are transferred to the income 
  statement in the period in which the hedged item 
  affects profit or loss. 
  When a hedging instrument expires or is sold, or 
  when a hedge is discontinued or no longer meets 
  the criteria for hedge accounting, any cumulative 
  gain or loss remains in equity and is recognised 
  when the forecast transaction is ultimately recognised 
  in the income statement. When a forecast transaction 
  is no longer expected to occur, the cumulative gain 
  or loss that was reported in equity is immediately 
  transferred to the income statement. 
  Fair value hedge 
  Changes in the fair value of derivatives that are 
  designated and qualify as fair value hedges are 
  recorded in the income statement, together with 
  any changes in the fair value of the hedged asset 
  or liability that are attributable to the hedged 
  risk. This movement in the fair value of the hedged 
  item is made as an adjustment to the carrying value 
  of the hedged asset or liability. 
  Where the hedged item is derecognised from the balance 
  sheet, the adjustment to the carrying amount of 
  the asset or liability is immediately transferred 
  to the income statement. When a hedging instrument 
  expires or is sold, or when a hedge no longer meets 
  the criteria for hedge accounting, the adjustment 
  to the carrying amount of a hedged item is amortised 
  to the income statement over the remaining life 
  of the asset or liability. 
  Derivatives held for trading 
  Changes in value of held for trading derivatives 
  are immediately recognised in the income statement 
  (note 2.3). 
 

The tables below analyse derivatives between those designated as hedging instruments and those classified as held for trading:

 
                                      2022   2021 
                                      GBPm   GBPm 
-----------------------------------  -----  ----- 
Fair value of derivative financial 
 assets 
Designated as hedging instruments      277     94 
Designated as held for trading          65     46 
-----------------------------------  -----  ----- 
                                       342    140 
-----------------------------------  -----  ----- 
Fair value of derivative financial 
 liabilities 
Designated as hedging instruments      201    143 
Designated as held for trading         126     66 
-----------------------------------  -----  ----- 
                                       327    209 
-----------------------------------  -----  ----- 
 

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.6 Derivative financial instruments continued

Cash collateral totalling GBP241m (2021: GBP18m) has been pledged and GBP38m has been received (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 GBP149m (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.

Total derivative contracts

 
                                            2022                                    2021 
-------------------------  --------------------------------------  -------------------------------------- 
                            Notional        Fair             Fair   Notional        Fair             Fair 
                            contract       value            value   contract       value            value 
                              amount   of assets   of liabilities     amount   of assets   of liabilities 
                                GBPm        GBPm             GBPm       GBPm        GBPm             GBPm 
-------------------------  ---------  ----------  ---------------  ---------  ----------  --------------- 
Derivatives designated 
 as hedging instruments 
Cash flow hedges 
                           ---------  ----------  ---------------  ---------  ----------  --------------- 
Interest rate swaps 
 (gross)                      35,753       1,988              930     24,886          71               90 
Less: net settled 
 interest rate swaps(1)     (33,188)     (1,803)            (900)   (21,500)        (64)             (79) 
                           ---------  ----------  ---------------  ---------  ----------  --------------- 
Interest rate swaps 
 (net)(2)                      2,565         185               30      3,386           7               11 
 
Fair value hedges 
                           ---------  ----------  ---------------  ---------  ----------  --------------- 
Interest rate swaps 
 (gross)                      16,600       1,201              636     30,707         295              447 
Less: net settled 
 interest rate swaps(1)     (14,611)     (1,144)            (570)   (25,260)       (209)            (390) 
                           ---------  ----------  ---------------  ---------  ----------  --------------- 
Interest rate swaps 
 (net)(2)                      1,989          57               66      5,447          86               57 
Cross currency swaps(2)        2,113          35              105      1,880           1               75 
                               4,102          92              171      7,327          87              132 
-------------------------  ---------  ----------  ---------------  ---------  ----------  --------------- 
Total derivatives 
 designated as hedging 
 instruments                   6,667         277              201     10,713          94              143 
-------------------------  ---------  ----------  ---------------  ---------  ----------  --------------- 
 
Derivatives designated 
 as held for trading 
Foreign exchange 
 rate related contracts 
Spot and forward 
 foreign exchange(2)             599          26               20        805          13               12 
Cross currency swaps(2)            -           -                -        490           -                3 
Options(2)                         1           -                -          1           -                - 
-------------------------  ---------  ----------  ---------------  ---------  ----------  --------------- 
                                 600          26               20      1,296          13               15 
-------------------------  ---------  ----------  ---------------  ---------  ----------  --------------- 
Interest rate related 
 contracts 
                           ---------  ----------  ---------------  ---------  ----------  --------------- 
Interest rate swaps 
 (gross)                       1,411          52               66        734          14               31 
Less: net settled 
 interest rate swaps(1)        (665)        (50)                -          -           -                - 
                           ---------  ----------  ---------------  ---------  ----------  --------------- 
Interest rate swaps 
 (net)(2)                        746           2               66        734          14               31 
Swaptions(2)                      10           -                2         10           -                1 
Options(2)                       501          16               17        495           1                2 
-------------------------  ---------  ----------  ---------------  ---------  ----------  --------------- 
                               1,257          18               85      1,239          15               34 
-------------------------  ---------  ----------  ---------------  ---------  ----------  --------------- 
Commodity related 
 contracts                       199          21               21         97          17               17 
Equity related contracts           -           -                -          1           1                - 
-------------------------  ---------  ----------  ---------------  ---------  ----------  --------------- 
Total derivatives 
 designated as held 
 for trading                   2,056          65              126      2,633          46               66 
-------------------------  ---------  ----------  ---------------  ---------  ----------  --------------- 
 
   (1)   Presented within other assets and other liabilities. 
   (2)   Presented within derivative financial instruments. 

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.6 Derivative financial instruments continued

Hedge accounting

The hedging strategy of the Group is divided into micro hedges, where the hedged item is a distinctly identifiable asset or liability, and portfolio hedges, where the hedged item is a homogenous portfolio of assets or liabilities.

In some hedge accounting relationships, the Group designates risk components of hedged items as follows:

-- benchmark interest rate risk as a component of interest rate risk, such as the SONIA component;

   --   exchange rate risk for foreign currency financial assets and financial liabilities; 
   --   inflation risk where it is a contractually specified component of a debt instrument; and 

-- components of cash flows of hedged items, for example certain interest payments for part of the life of an instrument.

Other risks such as credit risk and liquidity risk are managed by the Group but are not included in the hedge accounting relationship. Changes in the designated risk component usually account for the largest portion of the overall change in fair value or cash flows of the hedged item.

Portfolio cash flow hedges

The Group applies macro cash flow hedge accounting to a portion of its floating rate financial assets and liabilities. The hedged cash flows are a group of forecast transactions that result in cash flow variability from resetting of interest rates, reinvestment of financial assets, or refinancing and rollovers of financial liabilities. This cash flow variability can arise on recognised assets or liabilities or highly probable forecast transactions. The hedged items are designated as the gross asset or liability positions allocated to time buckets based on projected repricing and interest profiles. The Group aims to maintain a position where the principal amount of the hedged items is greater than or equal to the notional amount of the corresponding interest rate swaps used as the hedging instruments. The hedge accounting relationship is reassessed on a monthly basis with the composition of hedging instruments and hedged items changing frequently in line with the underlying risk exposures. If necessary, the hedge relationships are de-designated and redesignated based on the effectiveness test results.

Micro cash flow hedges

Floating rate issuances that are denominated in currencies other than the functional currency of the Group are designated in cash flow hedges with cross currency swaps. There are no active micro cash flow hedges at the Group's balance sheet date.

Portfolio fair value hedges

The Group applies macro fair value hedging to a portion of its fixed rate mortgages. The Group determines hedged items by identifying portfolios of homogeneous loans based on their contractual maturity and other risk characteristics. Loans within the identified portfolios are allocated to repricing time buckets based on expected, rather than contractual, repricing dates. The hedging instruments are designated to those repricing time buckets. Hedge effectiveness is measured on a monthly basis, by comparing fair value movements of the designated proportion of the bucketed loans due to the hedged risk against the fair value movements of the derivatives.

The aggregated fair value changes in the hedged loans are recognised on the Group's balance sheet as an asset. At the end of every month, in order to minimise the ineffectiveness from early repayments and accommodate new exposures, the Group voluntarily de-designates the hedge relationships and redesignates them as new hedges. Fair value hedging of fixed rate deposits was discontinued in 2020, and the hedge adjustment recognised on the Group's balance sheet is amortised to profit and loss over the life of the hedged item.

Micro fair value hedges

The Group uses this hedging strategy on GBP, inflation or foreign currency denominated fixed rate assets held at FVOCI and GBP and foreign currency denominated fixed rate debt issuances by the Group. Where assets and liabilities are exposed to multiple risk components, for example interest rate and foreign currency risk, these components are simultaneously designated as hedged risks within the same hedge relationship.

Hedge ineffectiveness

Hedge ineffectiveness can arise from:

-- mismatches between the contractual terms of the hedged item and hedging instrument, including basis differences;

   --   differences in timing of cash flows of hedged items and hedging instruments; 
   --   changes in expected timings and amounts of forecast future cash flows; and 

-- derivatives used as hedging instruments having a non-zero fair value at the time of designation.

Additionally, for portfolio fair value hedges of the Group's fixed rate mortgage portfolio, ineffectiveness also arises from the difference between forecast and actual repayments (e.g. prepayment risk).

The Group has no remaining hedge relationships exposed to LIBOR and as no uncertainty remains regarding interest rate benchmark reform, the Group no longer applies the reliefs provided by '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 65.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.6 Derivative financial instruments continued

Summary of hedging instruments in designated hedge relationships

In the table below, the Group sets out the accumulated adjustments arising from the corresponding continuing hedge relationships, irrespective of whether or not there has been a change in hedge designation during the year:

 
                                         2022                                              2021 
-----------------  ------------------------------------------------  ------------------------------------------------- 
 
 
 
                                 Carrying amount                                  Carrying amount 
                   ---------  -------------------  ----------------  ---------  -------------------  ----------------- 
                                                             Change                                             Change 
                                                            in fair                                            in fair 
                                                              value                                           value of 
                                                         of hedging                                            hedging 
                                                         instrument                                         instrument 
                                                             in the                                             in the 
                                                               year                                          year used 
                    Notional                               used for   Notional                                     for 
                    contract                        ineffectiveness   contract                         ineffectiveness 
                      amount  Assets  Liabilities    measurement(2)     amount  Assets  Liabilities  measurement(2)(3) 
                        GBPm    GBPm         GBPm              GBPm       GBPm    GBPm         GBPm               GBPm 
-----------------  ---------  ------  -----------  ----------------  ---------  ------  -----------  ----------------- 
Cash flow hedges 
Interest rate 
risk 
   Interest rate 
    swaps(1)          35,753   1,988          930               916     24,886      71           90                127 
Foreign exchange 
risk 
   Cross currency 
    swaps                  -       -            -                 -          -       -            -               (28) 
-----------------  ---------  ------  -----------  ----------------  ---------  ------  -----------  ----------------- 
Total derivatives 
 designated 
 as cash flow 
 hedges               35,753   1,988          930               916     24,886      71           90                 99 
-----------------  ---------  ------  -----------  ----------------  ---------  ------  -----------  ----------------- 
 
Fair value hedges 
Interest rate 
risk 
   Interest rate 
    swaps(1)          16,150   1,059          361             1,052     30,707     295          447                500 
Inflation and 
interest rate 
risk 
   Inflation 
    linked 
    interest 
    rate swaps(1)        450     142          275                96          -       -            -                  - 
Foreign exchange 
and interest 
rate risk 
   Cross currency 
    swaps              2,113      35          105                 6      1,880       1           75               (86) 
-----------------  ---------  ------  -----------  ----------------  ---------  ------  -----------  ----------------- 
Total derivatives 
 designated 
 as fair value 
 hedges               18,713   1,236          741             1,154     32,587     296          522                414 
-----------------  ---------  ------  -----------  ----------------  ---------  ------  -----------  ----------------- 
 

(1) As shown in the total derivatives contracts table on page 94, for centrally cleared derivatives, where the IAS 32 'Financial Instruments: Presentation' netting criteria is met, the derivative balances are offset within other assets.

For all other derivatives, the derivative balances are presented within derivative financial instruments.

(2) Changes in fair value of cash flow hedging instruments are recognised in other comprehensive income. Changes in fair value of fair value hedging instruments are recognised in the income statement in non-interest income.

(3) The change in fair value of the hedging instrument used for ineffectiveness measurement has been restated in the comparative year in line with the current year presentation, as detailed in note 1.11.

Summary of hedged items in designated hedge relationships

In the table below, the Group sets out the accumulated adjustments arising from the corresponding continuing hedge relationships, irrespective of whether or not there has been a change in hedge designation during the year.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.6 Derivative financial instruments continued

 
                                                   2022                                        2021 
------------------------------  ------------------------------------------  ------------------------------------------ 
 
                                                       Cash flow hedge                        Cash flow hedge 
                                                           reserve                             reserve 
                                ----------------  ------------------------  ----------------  ------------------------ 
                                          Change                                      Change 
                                         in fair                                     in fair 
                                           value                                       value 
                                              of                                          of 
                                          hedged                                      hedged 
                                            item                                        item 
                                          in the                                      in the 
                                            year                                        year 
                                        used for                                    used for 
                                 ineffectiveness  Continuing  Discontinued   ineffectiveness  Continuing  Discontinued 
                                     measurement      hedges        hedges       measurement      hedges        hedges 
                                            GBPm        GBPm          GBPm              GBPm        GBPm          GBPm 
------------------------------  ----------------  ----------  ------------  ----------------  ----------  ------------ 
Cash flow hedges 
Interest rate risk 
   Gross floating rate assets 
    and gross floating rate 
    liabilities(1)                         (962)         979          (14)             (127)           2            13 
Foreign exchange risk 
   Floating rate currency 
    issuances(2)                               -           -             -                29           -             - 
------------------------------  ----------------  ----------  ------------  ----------------  ----------  ------------ 
Total                                      (962)         979          (14)              (98)           2            13 
------------------------------  ----------------  ----------  ------------  ----------------  ----------  ------------ 
 
 
                                          2022                                                2021 
------------------  -------------------------------------------------  -------------------------------------------------- 
 
                       Carrying amount                                   Carrying amount 
                       of hedged items                                    of hedged items 
                    -------------------  -----------  ---------------  --------------------  -----------  --------------- 
                                                               Change 
                                                              in fair                                              Change 
                                                                value                                             in fair 
                                                            of hedged                                               value 
                                                                items                                           of hedged 
                                         Accumulated           in the                        Accumulated            items 
                                               hedge             year                              hedge           in the 
                                          adjustment             used                         adjustment        year used 
                                              on the              for                             on the              for 
                                              hedged  ineffectiveness                             hedged  ineffectiveness 
                    Assets  Liabilities         item      measurement   Assets  Liabilities      item(3)   measurement(3) 
                      GBPm         GBPm         GBPm             GBPm     GBPm         GBPm         GBPm             GBPm 
------------------  ------  -----------  -----------  ---------------  -------  -----------  -----------  --------------- 
Fair value hedges 
Interest rate risk 
   Fixed rate 
    mortgages(4)     9,520            -        (941)            (779)   24,265            -        (179)            (420) 
   Fixed rate 
    customer 
    deposits(5)          -            -          (2)                -        -            -          (5)                - 
   Fixed rate 
    FVOCI debt 
    instruments(6)   2,443            -        (613)            (629)    3,010            -        (115)            (197) 
   Fixed rate 
    issuances(2)         -      (2,392)          350              388        -      (2,779)           39              107 
Inflation and 
interest 
rate risk 
   Fixed rate 
    FVOCI debt 
    instruments(6)     589            -        (105)             (96)        -            -            -                - 
Foreign exchange 
and 
interest rate risk 
   Fixed rate 
    currency FVOCI 
    debt 
    instruments(6)      76            -          (3)              (3)       78            -            -              (5) 
   Fixed rate 
    currency 
    issuances(2)         -      (1,954)           83               11        -      (1,730)           72               91 
------------------  ------  -----------  -----------  ---------------  -------  -----------  -----------  --------------- 
Total               12,628      (4,346)      (1,231)          (1,108)   27,353      (4,509)        (188)            (424) 
------------------  ------  -----------  -----------  ---------------  -------  -----------  -----------  --------------- 
 

(1) Highly probable future cash flows arising from loans and advances to customers, due to customers and debt securities in issue.

   (2)   Hedged item is recorded in debt securities in issue. 

(3) The accumulated hedge adjustment on the hedged item and the change in fair value of the hedged items used for ineffectiveness measurement have been restated in the comparative year in line with the current year presentation, as detailed in note 1.11.

(4) Hedged item and the cumulative fair value changes, are recorded in loans and advances to customers.

(5) Hedge relationship was discontinued in 2020. The fair value adjustment taken will be amortised over the remaining life of the hedged items, and is recorded in customer deposits.

   (6)   Hedged item is recorded in financial assets at FVOCI. 

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.6 Derivative financial instruments continued

 
                                          2022                                                    2021 
---------------  ------------------------------------------------------  ------------------------------------------------------ 
 
                                                       Reclassified                                           Reclassified 
                                                       into income                                             into income 
                                                        statement                                               statement 
                                                            as                                                     as 
                 ---------------  -------------  ----------------------  ---------------  -------------  ---------------------- 
                                      Effective                                               Effective 
                           Hedge        portion                                    Hedge        portion 
                 ineffectiveness     recognised                          ineffectiveness     recognised 
                      recognised       in other       Net                     recognised       in other       Net 
                       in income  comprehensive  interest  Non-interest        in income  comprehensive  interest  Non-interest 
                    statement(1)         income    income        income     statement(1)         income    income        income 
                            GBPm           GBPm      GBPm          GBPm             GBPm           GBPm      GBPm          GBPm 
---------------  ---------------  -------------  --------  ------------  ---------------  -------------  --------  ------------ 
Cash flow 
hedges 
Interest rate 
risk 
   Gross 
    floating 
    rate assets 
    and gross 
    floating 
    rate 
    liabilities             (46)            962        17           (4)                -            127        10           (5) 
Foreign 
exchange risk 
   Floating 
    rate 
    currency 
    issuances                  -              -         -             -                -           (28)         -             - 
---------------  ---------------  -------------  --------  ------------  ---------------  -------------  --------  ------------ 
Total 
 gains/(losses) 
 on cash flow 
 hedges                     (46)            962        17           (4)                -             99        10           (5) 
---------------  ---------------  -------------  --------  ------------  ---------------  -------------  --------  ------------ 
 
 
                                                 Hedge ineffectiveness 
                                                  recognised in income 
----------------------------------------------  ----------------------- 
                                                       2022        2021 
                                                       GBPm        GBPm 
----------------------------------------------  -----------  ---------- 
Fair value hedges 
Interest rate risk 
   Fixed rate mortgages                                  33        (10) 
   Fixed rate FVOCI debt instruments                    (2)           1 
   Fixed rate issuances                                   1         (1) 
Inflation and interest rate risk 
   Fixed rate FVOCI debt instruments                      -           - 
Foreign exchange and interest rate risk 
   Fixed rate currency FVOCI debt instruments           (1)           - 
   Fixed rate currency issuances                         15           - 
----------------------------------------------  -----------  ---------- 
Total losses on fair value hedges(1)                     46        (10) 
----------------------------------------------  -----------  ---------- 
 
   (1)   Recognised in gains less losses on financial assets at fair value. 

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.7 Financial assets at fair value through other comprehensive income

 
 Accounting policy 
  A financial asset is measured at FVOCI when: (i) 
  the asset is held within a business model whose 
  objective is achieved by both collecting contractual 
  cash flows and selling financial assets; and (ii) 
  the contractual terms give rise to cash flows on 
  specified dates which are solely payments of principal 
  and interest on the principal amount outstanding 
  unless the financial asset is designated at FVTPL 
  on initial recognition. An option for equity investments 
  that are not held for trading can be taken to classify 
  them at FVOCI where an irrevocable election is made 
  at initial recognition. This option is available 
  for each separate investment. The Group has not 
  exercised this option for any equity investments. 
  Interest income and impairment gains and losses 
  on FVOCI assets are measured in the same manner 
  as for assets measured at amortised cost and are 
  recognised in the income statement, with all other 
  gains or losses recognised in other comprehensive 
  income as a separate component of equity in the 
  year in which they arise. Gains and losses arising 
  from changes in fair value are included as a separate 
  component of equity until sale when the cumulative 
  gain or loss is transferred to the income statement. 
  For all FVOCI assets, the gain or loss is calculated 
  with reference to the gross carrying amount. 
  Debt instruments at FVOCI are subject to the same 
  impairment criteria as amortised cost financial 
  assets (note 3.2), with the ECL element recognised 
  directly in the income statement. As the financial 
  asset is fair valued through other comprehensive 
  income, the change in its value includes the ECL 
  element, with the remaining fair value change recognised 
  in other comprehensive income. Any reversal of the 
  ECL is recorded in the income statement up to the 
  value recognised previously. 
  A low credit risk option is available which allows 
  entities not to assess whether there has been a 
  significant increase in credit risk since initial 
  recognition where the financial asset is deemed 
  as being of low credit risk at the reporting date. 
  The result of exercising the low credit risk exemption 
  is that the financial assets are classed under Stage 
  1 with a 12-month ECL calculation applied. 
  The Group exercises the low credit risk option for 
  debt instruments classified as FVOCI, recognising 
  the high credit quality of the instruments. No material 
  ECL provision is held for these financial assets. 
 

Financial assets at FVOCI consists of GBP5,064m of listed securities (2021: GBP4,352m).

Note 3.15 contains further information on the valuation methodology applied to financial instruments at FVOCI at 30 September 2022 and their classification within the fair value hierarchy. Details of the credit quality of financial assets is provided in the Risk management section of this results announcement.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.8 Intangible assets and goodwill

 
 Accounting policy 
  Capitalised software is stated at cost, less amortisation 
  and any provision for impairment. 
  Identifiable and directly associated external and 
  internal costs of acquiring and developing software 
  are capitalised where the software is controlled 
  by the Group, and where it is probable that future 
  economic benefits that exceed its cost will flow 
  from its use over more than one year. Costs associated 
  with maintaining software are recognised as an expense 
  as incurred. Capitalised software costs are amortised 
  on a straight-line basis over their expected useful 
  lives, usually between three and ten years. Impairment 
  losses are recognised in the income statement as 
  incurred. 
  Goodwill arises on the acquisition of an entity 
  and represents the excess of the fair value of the 
  purchase consideration and direct costs of making 
  the acquisition over the fair value of the Group's 
  share of the net assets at the date of the acquisition. 
  Goodwill is not subject to amortisation and is tested 
  for impairment on an annual basis. 
  Assets that are subject to amortisation are reviewed 
  for impairment whenever events or changes in circumstances 
  indicate that the carrying amount may not be recoverable, 
  which typically arises when the benefits associated 
  with the software were substantially reduced from 
  what had originally been anticipated or the asset 
  has been superseded by a subsequent investment. 
  In such situations, an impairment loss is recognised 
  for the amount by which the carrying amount of an 
  asset exceeds its recoverable amount. The recoverable 
  amount of an asset is the higher of its fair value 
  less costs of disposal or its value-in-use. 
  Intangible assets which are fully amortised are 
  reviewed annually to consider whether the assets 
  remain in use. 
 
 
                           Capitalised            Core deposit 
                              software  Goodwill    intangible  Total 
                                  GBPm      GBPm          GBPm   GBPm 
-------------------------  -----------  --------  ------------  ----- 
Cost 
At 1 October 2020                1,028        11             6  1,045 
Additions                           80         -             -     80 
Write-off                         (65)         -             -   (65) 
-------------------------  -----------  --------  ------------  ----- 
At 30 September 2021             1,043        11             6  1,060 
Additions                           53         -             -     53 
Write-off                         (28)         -             -   (28) 
Disposal                           (8)         -             -    (8) 
-------------------------  -----------  --------  ------------  ----- 
At 30 September 2022             1,060        11             6  1,077 
-------------------------  -----------  --------  ------------  ----- 
 
Accumulated amortisation 
 and impairment 
At 1 October 2020                  552         -             2    554 
Charge for the year                123         -             1    124 
Impairment                           9         -             -      9 
-------------------------  -----------  --------  ------------  ----- 
At 30 September 2021               684         -             3    687 
Charge for the year                 81         -             3     84 
Impairment                          47         -             -     47 
Disposal                           (8)         -             -    (8) 
-------------------------  -----------  --------  ------------  ----- 
At 30 September 2022               804         -             6    810 
-------------------------  -----------  --------  ------------  ----- 
 
Net book value 
-------------------------  -----------  --------  ------------  ----- 
At 30 September 2022               256        11             -    267 
-------------------------  -----------  --------  ------------  ----- 
At 30 September 2021               359        11             3    373 
-------------------------  -----------  --------  ------------  ----- 
 

All (2021: all) of the software additions form part of internally generated software projects.

A GBP62m charge (2021: GBP68m) (comprising write-offs of GBP17m (2021: GBP65m) and impairments of GBP45m (2021: GBP3m)) was recognised in the year following a reassessment of the Group's accounting practices on the capitalisation of internally generated software against the backdrop of the move to an Agile project delivery.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.9 Retirement benefit obligations

 
 Accounting policy 
  The Group makes contributions to both defined benefit 
  and defined contribution pension schemes which entitle 
  employees to benefits on retirement or disability. 
  Defined contribution pension scheme 
  The Group recognises its obligation to make contributions 
  to the scheme as an expense in the income statement 
  as incurred. Prepaid contributions are recognised 
  as an asset to the extent that a cash refund or 
  a reduction in future payments is available. 
  Defined benefit pension scheme 
  A liability or asset is recognised on the balance 
  sheet in respect of the defined benefit scheme and 
  is measured as the difference between the present 
  value of the defined benefit obligation less the 
  fair value of the defined benefit scheme assets 
  at the reporting date. The present value of the 
  defined benefit obligation for the scheme is discounted 
  by high-quality corporate bond rates that have maturity 
  dates approximating to the terms of the defined 
  benefit obligation. Surpluses are only recognised 
  to the extent that they are recoverable through 
  reduced contributions in the future or through refunds 
  from the scheme. In assessing whether a surplus 
  is recoverable, the Group considers its current 
  right to obtain a refund or a reduction in future 
  contributions and does not anticipate any future 
  acts by other parties that could change the amount 
  of the surplus that may ultimately be recovered. 
  Pension expense attributable to the Group's defined 
  benefit scheme comprises current service cost, past 
  service cost resulting from a scheme amendment or 
  curtailment, net interest on the net defined benefit 
  obligation/asset, gains or losses on settlement 
  and administrative costs incurred. Where actuarial 
  remeasurements arise, the Group recognises such 
  amounts directly in equity through the statement 
  of comprehensive income in the year in which they 
  occur. Actuarial remeasurements arise from experience 
  adjustments (the effects of differences between 
  previous actuarial assumptions and what has actually 
  occurred) and changes in actuarial assumptions. 
 

The Group's principal trading subsidiary, Clydesdale Bank PLC, is the sponsoring employer of the Yorkshire and Clydesdale Bank Pension Scheme, a defined benefit pension scheme, which was closed to future benefit accrual for the majority of current employees on 1 August 2017.

The following table summarises the present value of the defined benefit obligation and fair value of plan assets for the Scheme as at 30 September:

 
                                                     2022      2021 
                                                     GBPm      GBPm 
------------------------------------------------  -------  -------- 
Active members' defined benefit obligation            (9)      (16) 
Deferred members' defined benefit 
 obligation                                         (987)   (1,973) 
Pensioner and dependant members' defined 
 benefit obligations                              (1,220)   (1,800) 
------------------------------------------------  -------  -------- 
Total defined benefit obligation                  (2,216)   (3,789) 
Fair value of Scheme assets                         3,216     4,636 
------------------------------------------------  -------  -------- 
Net defined benefit pension asset                   1,000       847 
------------------------------------------------  -------  -------- 
Post-retirement medical benefits obligations(1)       (2)       (2) 
------------------------------------------------  -------  -------- 
 

(1) Post-retirement medical benefits obligations are included within other liabilities (note 3.14).

The Group's pension arrangements

The current version of the Scheme was established under trust on 30 September 2009 with the assets held in a Trustee administered fund. The Trustee is responsible for the operation and governance of the Scheme, including making decisions regarding the Scheme's funding and investment strategy.

The Scheme is subject to the funding legislation outlined in the Pensions Act 2004 which came into force on 30 December 2005. This, together with documents issued by the Pensions Regulator, sets out the framework for funding defined benefit occupational pension plans in the UK.

The Group has implemented several reforms to the Scheme to manage the obligation. It closed the Scheme to new members in 2004 and since April 2006 has provided benefits accruing on a career average revalued earnings basis. On 1 August 2017, the Scheme was closed to future benefit accrual for the majority of current employees, with both affected and new employees' future pension benefits being provided through the Group's existing defined contribution scheme, 'My Retirement'. The income statement charge for this is separately disclosed in note 2.4.

The Group also provides post-retirement healthcare under a defined benefit scheme for some pensioners and their dependant relatives for which provision has been made on a basis consistent with the methodology applied to the defined benefit pension scheme. This is a closed scheme and the provision will be utilised over the life of the remaining scheme members. The obligation in respect of this scheme was GBP2m at 30 September 2022 (2021: GBP2m) and is included within other liabilities in note 3.14.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.9 Retirement benefit obligations continued

Scheme valuations

There are a number of means of measuring liabilities in the defined benefit schemes, with the ultimate aim of the Trustee being that the Scheme is 100% funded on an agreed self-sufficiency basis (which is where the Scheme is essentially self-funded and does not need to call on the Group for any additional funding). The two bases used by the Group to value its obligations are: (i) an IAS 19 accounting basis; and (ii) a Trustee's Technical Provision basis.

(i) IAS 19 accounting basis

The valuations of the Scheme assets and obligations are calculated on an accounting basis in accordance with the applicable accounting standard IAS 19 which provides the basis for the accounting framework and methodology for entries in the income statement, balance sheet and capital reporting. The principal purpose of this valuation is to allow comparison of pension obligations between companies. The obligation under an accounting valuation can be higher or lower than those under a Trustee's Technical Provision valuation.

The rate used to discount the obligation on an IAS 19 basis is a key driver of any potential volatility and is based on yields on AA rated high-quality corporate bonds, regardless of how the Trustee of the Scheme invests the assets. The accounting valuation under IAS 19 can therefore move adversely because of low rates and narrowing credit spreads which are not fully matched by the Scheme assets. Inflation is another key source of volatility and arises as a result of member benefits having an element of index linking, which causes the obligation to increase in line with rises in long-term inflation assumptions. In practice however, over the long term, the relationship between interest and inflation rates tends to be negatively correlated resulting in a degree of risk offset.

(ii) Trustee's Technical Provision basis

This valuation basis reflects how much money the Trustee considers is required now in order to provide for the promised benefits as they come up for payment in the future. The Trustee is responsible for ensuring that the calculation is conducted prudently on an actuarial basis, considering factors including the Scheme's investment strategy and the relative financial strength of the sponsoring employer.

A key aspect of this valuation is the investment strategy the Trustee proposes to follow as part of the policy for meeting the Scheme's obligations. Because there are no guarantees about investment returns over long periods, legislation requires the Trustee to consider carefully how much of their expected future investment returns it would be prudent for them to account for in advance.

During 2020 the Trustee concluded the latest triennial valuation for the Scheme, which was conducted in accordance with Scheme data and market conditions as at 30 September 2019. The valuation resulted in an improvement in the Scheme's funding position, with a reported surplus of GBP144m (previously a deficit of GBP290m) and a technical provisions funding level of 103% (previously 94%). As the 2019 valuation outcome was a funding surplus, the future payments to the Scheme were limited solely to those relating to a payment holiday agreed between the Group and Scheme Trustee in respect of contributions due under the prior 2016 valuation. These totalled GBP52m and were paid in full by the end of September 2021.

The next triennial valuation is due to be conducted in 2023 with Scheme data and market conditions as at 30 September 2022.

Scheme assets are not subject to the same valuation differences as Scheme obligations and are consistently valued at current market value.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.9 Retirement benefit obligations continued

IAS 19 position

The Scheme movements in the year are as follows:

 
                                         2022                                               2021 
-----------------  -------------------------------------------------  ------------------------------------------------ 
                                                          Cumulative                                        Cumulative 
                                                              impact                                            impact 
                         Present  Fair value                in other        Present  Fair value               in other 
                           value     of plan           comprehensive          value     of plan          comprehensive 
                   of obligation      assets    Total         income  of obligation      assets  Total          income 
                            GBPm        GBPm     GBPm           GBPm           GBPm        GBPm   GBPm            GBPm 
-----------------  -------------  ----------  -------  -------------  -------------  ----------  -----  -------------- 
Balance sheet 
 surplus at 1 
 October                 (3,789)       4,636      847                       (3,958)       4,681    723 
                                                               (248)                                             (302) 
Total expense 
Past service 
 credit                        9           -        9                             3           -      3 
Interest 
 (expense)/income           (84)         104       20                          (61)          73     12 
Administrative 
 costs                         -         (5)      (5)                             -         (6)    (6) 
-----------------  -------------  ----------  -------  -------------  -------------  ----------  -----  -------------- 
Total 
 (expense)/income 
 recognised in 
 the 
 consolidated 
 income statement           (75)          99       24                          (58)          67      9 
 
Remeasurements 
Return on Scheme 
 assets greater 
 than discount 
 rate                          -     (1,393)  (1,393)        (1,393)              -        (19)   (19)            (19) 
Actuarial: 
Loss - experience 
 adjustments                (16)           -     (16)           (16)           (15)           -   (15)            (15) 
Gain - 
 demographic 
 assumptions                  36           -       36             36              2           -      2               2 
Gain - financial 
 assumptions               1,495           -    1,495          1,495             86           -     86              86 
-----------------  -------------  ----------  -------  -------------  -------------  ----------  -----  -------------- 
Remeasurement 
 gains/(losses) 
 recognised 
 in other 
 comprehensive 
 income                    1,515     (1,393)      122            122             73        (19)     54              54 
 
Contributions and 
payments 
Employer 
 contributions                 -           7        7                             -          61     61 
Benefit payments             105       (105)        -                            99        (99)      - 
Transfer payments             28        (28)        -                            55        (55)      - 
-----------------  -------------  ----------  -------  -------------  -------------  ----------  -----  -------------- 
                             133       (126)        7                           154        (93)     61 
-----------------  -------------  ----------  -------  -------------  -------------  ----------  -----  -------------- 
Balance sheet 
 surplus at 30 
 September               (2,216)       3,216    1,000                       (3,789)       4,636    847 
-----------------  -------------  ----------  -------  -------------  -------------  ----------  -----  -------------- 
                                                               (126)                                             (248) 
-----------------  -------------  ----------  -------  -------------  -------------  ----------  -----  -------------- 
 

In July 2021, the Trustees communicated a Pension Increase Exchange (PIE) exercise to members. A PIE gives members the option to exchange future increases on their pensions for a one-off uplift to their current pension. The exercise is being undertaken in three phases and is due to complete in calendar year 2023. A past service credit of GBP10m has been recognised in the year to 30 September 2022 (2021: GBP5m) in line with member acceptance of the PIE offer by the balance sheet date; the balance of the credit will be recognised next calendar year as the exercise concludes.

The expected contributions and benefit payments for the year ending 30 September 2023 are GBP10m (2022: GBP7m) and GBP118m (2022: GBP115m) respectively.

The Group and Trustee have entered into a contingent security arrangement (the 'Security Arrangement') (note 5.3).

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.9 Retirement benefit obligations continued

Maturity of Scheme liabilities

The estimated maturity period of Scheme obligations on an IAS 19 accounting basis is as follows:

 
 
 

The discounted mean term of the defined benefit obligation at 30 September 2022 is 14 years (2021: 18.5 years).

Scheme assets

In order to meet the obligations of the Scheme, the Trustee invests in a diverse portfolio of assets, with the level and volatility of asset returns being a key factor in the overall investment strategy. The investment portfolio is subject also to a range of risks typical of the types of assets held, such as: equity risk; credit risk on bonds; currency risk; interest rate and inflation risk; and exposure to the property market. The Trustee's investment strategy (including physical assets and derivatives) seeks to reduce the Scheme's exposure to these risks. In managing interest rate and inflation risks, the investment strategy seeks to hold portfolios of matching assets (including derivatives) that enable the Scheme's assets to better match movements in the value of liabilities due to changes in interest rates and inflation.

As at 30 September 2022, the interest rate and inflation rate hedge ratios were 97% and 95% respectively (2021: 95% and 95%) of the obligation when measured on a self-sufficiency basis. This strategy reflects the Scheme's obligation profile and the Trustee's and the Group's attitude to risk. The Trustee monitors the investment objectives and asset allocation policy on a regular basis.

The Trustee's investment strategy involves two main categories of investments:

Matching assets - a range of investments that provide a match to changes in obligation values.

Return seeking assets - a range of investments designed to provide specific, planned and consistent returns.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.9 Retirement benefit obligations continued

The major categories of plan assets for the Scheme, stated at fair value, are as follows:

 
                                          2022                            2021 
----------------------------  -----------------------------  ------------------------------ 
                              Quoted  Unquoted  Total        Quoted  Unquoted   Total 
                                GBPm      GBPm   GBPm     %    GBPm      GBPm    GBPm     % 
----------------------------  ------  --------  -----  ----  ------  --------  ------  ---- 
Bonds 
Fixed government                 350         -    350           894         -     894 
Index-linked government        1,314         -  1,314         1,815         -   1,815 
Global sovereign                  90         2     92           117         4     121 
Corporate and other              781        37    818         1,011        47   1,058 
----------------------------  ------  --------  -----  ----  ------  --------  ------  ---- 
                               2,535        39  2,574   80%   3,837        51   3,888   84% 
Equities(1) 
Global equities                    -       137    137             -       150     150 
Emerging market equities           -        14     14             -        16      16 
UK equities                        -         7      7             -         8       8 
----------------------------  ------  --------  -----  ----  ------  --------  ------  ---- 
                                   -       158    158    5%       -       174     174    4% 
Other 
Secured income alternatives        -       229    229             -       197     197 
Derivatives(2)                     -      (83)   (83)             -         6       6 
Repurchase agreements              -     (803)  (803)             -     (719)   (719) 
Property                           -        59     59             -       122     122 
Alternative credit                 -       645    645             -       597     597 
Infrastructure                     -       194    194             -       161     161 
Cash                               -       243    243             -       209     209 
Equity options                     -         -      -             1         -       1 
----------------------------  ------  --------  -----  ----  ------  --------  ------  ---- 
                                   -       484    484   15%       1       573     574   12% 
----------------------------  ------  --------  -----  ----  ------  --------  ------  ---- 
 
Total Scheme assets            2,535       681  3,216  100%   3,838       798   4,636  100% 
----------------------------  ------  --------  -----  ----  ------  --------  ------  ---- 
 

(1) Equity investments are classified as unquoted reflecting the nature of the funds in which the Scheme invests directly. The underlying investments within those funds are, however, mostly quoted.

(2) Derivative financial instruments are used to modify the profile of the assets of the Scheme to better match the Scheme liabilities. Derivative holdings may lead to increased or decreased exposures to the physical asset categories disclosed above.

At 30 September 2022, the Scheme had employer-related investments within the meaning of Section 40 (2) of the Pensions Act 1995 totalling GBP2m (2021: GBP2m).

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.9 Retirement benefit obligations continued

Actuarial assumptions

The following assumptions were used in arriving at the IAS 19 defined benefit obligation:

 
                                                    2022     2021 
                                                  % p.a.   % p.a. 
-----------------------------------------------  -------  ------- 
Financial assumptions 
Discount rate                                       5.45     2.08 
Inflation (RPI)                                     3.58     3.40 
Inflation (CPI)                                     2.94     2.77 
Career average revalued earnings revaluations: 
Pre 31 March 2012 benefits (RPI)                    3.58     3.40 
Post 31 March 2012 benefits (CPI capped 
 at 5% per annum)                                   2.90     2.73 
Pension increases (capped at 2.5% 
 per annum)                                         2.21     2.16 
Pension increases (capped at 5% per 
 annum)                                             3.37     3.23 
Rate of increase for pensions in deferment          2.91     2.73 
-----------------------------------------------  -------  ------- 
 

Demographic assumptions

 
                                      2022    2021 
                                     Years   Years 
----------------------------------  ------  ------ 
Post-retirement mortality: 
Current pensioners at 60 - male       27.0    27.2 
Current pensioners at 60 - female     29.3    29.4 
Future pensioners at 60 - male        28.0    28.3 
Future pensioners at 60 - female      30.4    30.5 
----------------------------------  ------  ------ 
 
 
 Critical accounting estimates and judgements 
  The value of the Group's defined benefit pension 
  scheme requires management to make several assumptions. 
  The key areas of estimation uncertainty are: 
  discount rate applied: this is set with reference 
  to market yields at the end of the reporting year 
  on high-quality corporate bonds in the currency 
  and with a term consistent with the Scheme's obligations. 
  The average duration of the Scheme's obligations 
  is approximately 20 years. The market for bonds 
  with a similar duration is illiquid and, as a result, 
  significant management judgement is required to 
  determine an appropriate yield curve on which to 
  base the discount rate; 
  inflation assumptions: this is set with reference 
  to market expectations of the RPI measure of inflation 
  for a term consistent with the Scheme's obligations, 
  based on data published by the BoE. Other measures 
  of inflation (such as CPI, or inflation measures 
  subject to an annual cap) are derived from this 
  assumption; and 
  mortality assumptions: the cost of the benefits 
  payable by the Scheme will also depend upon the 
  life expectancy of the members. The assumptions 
  for mortality rates are based on standard mortality 
  tables (as adjusted to reflect the characteristics 
  of Scheme members) which allow for future improvements 
  in life expectancies. 
  The table below sets out the sensitivity and impact 
  on the balance sheet surplus position of the Scheme, 
  the defined benefit obligation and pension cost 
  to changes in the key actuarial assumptions:                              Balance 
                                  sheet              Pension 
                                surplus  Obligation     cost 
  Assumption change                GBPm        GBPm     GBPm 
  ------------------  -------  --------  ----------  ------- 
  Discount rate       +0.25%       (63)        (70)      (7) 
                      -0.25%         64          74        6 
  Inflation           +0.25%         36          43        2 
                      -0.25%       (34)        (43)      (2) 
  Life expectancy     +1 year      (67)          67        4 
                      -1 year        67        (67)      (4) 
  ------------------  -------  --------  ----------  ------- 
 
 
  The above sensitivity analyses are based on a change 
  in an assumption while holding all other assumptions 
  constant. In practice, changes in some of the assumptions 
  may be correlated. 
 

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.10 Customer deposits

 
                                         2022     2021 
                                         GBPm     GBPm 
-------------------------------------  ------  ------- 
Interest bearing demand deposits       46,457   46,839 
Term deposits                          13,951   15,097 
Non-interest bearing demand deposits    4,952    4,936 
-------------------------------------  ------  ------- 
                                       65,360   66,872 
Accrued interest payable                   74       99 
-------------------------------------  ------  ------- 
                                       65,434   66,971 
-------------------------------------  ------  ------- 
 

3.11 Debt securities in issue

 
 Accounting policy 
  Debt securities comprise short and long-term debt 
  issued by the Group including commercial paper, 
  medium-term notes, covered bonds and RMBS notes. 
  Debt securities are initially recognised at fair 
  value, being the issue proceeds, net of transaction 
  costs incurred. These instruments are subsequently 
  measured at amortised cost using the effective interest 
  method resulting in premiums, discounts and associated 
  issue costs being recognised in the income statement 
  over the life of the instrument. 
  Where relevant fair value hedge adjustments have 
  been applied. 
 

The breakdown of debt securities in issue is shown below:

 
                          Medium-term  Subordinated                  Covered 
                                notes          debt  Securitisation    bonds   Total 
                                 GBPm          GBPm            GBPm     GBPm    GBPm 
------------------------  -----------  ------------  --------------  -------  ------ 
2022 
Debt securities                 2,236           899           1,875    3,450   8,460 
Accrued interest payable           13            14               5       17      49 
------------------------  -----------  ------------  --------------  -------  ------ 
                                2,249           913           1,880    3,467   8,509 
------------------------  -----------  ------------  --------------  -------  ------ 
2021 
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 year are shown in the table below (1) .

 
                                   2022                                      2021 
---------------  -----------------------------------------  --------------------------------------- 
                      Issuances            Redemptions          Issuances           Redemptions 
                 --------------------  -------------------  ------------------  ------------------- 
                  Denomination   GBPm  Denomination   GBPm  Denomination  GBPm  Denomination   GBPm 
---------------  -------------  -----  ------------  -----  ------------  ----  ------------  ----- 
Medium-term 
 notes                       -      -             -      -           EUR   432             -      - 
Subordinated 
 debt                        -      -             -      -           GBP   300           GBP     30 
                                                                                        USD, 
                                               USD,                                     EUR, 
Securitisation             GBP    700           GBP  1,264             -     -           GBP  1,543 
Covered                   EUR, 
 bonds                     GBP  1,780             -      -             -     -             -      - 
---------------  -------------  -----  ------------  -----  ------------  ----  ------------  ----- 
                                2,480                1,264                 732                1,573 
 -----------------------------  -----  ------------  -----  ------------  ----  ------------  ----- 
 

(1) Other movements relate to foreign exchange, hedging adjustments and the capitalisation and amortisation of issuance costs.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.11 Debt securities in issue continued

The following tables provide a breakdown of the medium-term notes and subordinated debt by instrument as at 30 September:

Medium-term notes (excluding accrued interest)

 
                                          2022    2021 
                                          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                     444     509 
VM UK 3.375% fixed rate reset callable 
 senior notes due 2026                     317     359 
VM UK 4% fixed rate reset callable 
 senior notes due 2027                     331     390 
VM UK 2.875% fixed rate reset callable 
 senior notes due 2025                     413     424 
VM UK 0.375% fixed rate reset callable 
 senior notes due 2024                     432     428 
---------------------------------------  -----  ------ 
                                         2,236   2,409 
---------------------------------------  -----  ------ 
 

Subordinated debt (excluding accrued interest)

 
                                          2022   2021 
                                          GBPm   GBPm 
---------------------------------------  -----  ----- 
VM UK 7.875% fixed rate reset callable 
 subordinated notes due 2028               249    248 
VM UK 5.125% fixed rate reset callable 
 subordinated notes due 2030               400    458 
VM UK 2.625% fixed rate reset callable 
 subordinated notes due 2031               250    295 
---------------------------------------  -----  ----- 
                                           899  1,001 
---------------------------------------  -----  ----- 
 

Details of securitisation and covered bond issuances are included in note 3.3.

Full details of all notes in issue can be found at https://www.virginmoneyukplc.com/investor -- relations/debt-investors/ .

3.12 Due to other banks

 
                                         2022    2021 
                                         GBPm    GBPm 
--------------------------------------  -----  ------ 
Secured loans                           7,230   5,896 
Securities sold under agreements to 
 repurchase(1)                          1,205       - 
Transaction balances with other banks      17       - 
Deposits from other banks                  50      22 
--------------------------------------  -----  ------ 
                                        8,502   5,918 
--------------------------------------  -----  ------ 
 

(1) The underlying securities sold under agreements to repurchase have a carrying value of GBP1,873m (2021: GBPNil).

Secured loans comprise amounts drawn under the TFSME scheme (including accrued interest). In 2021, secured loans included both TFS and TFSME scheme drawings (including accrued interest).

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.13 Provisions for liabilities and charges

 
 Accounting policy 
  Provisions for liabilities and charges are recognised 
  when a legal or constructive obligation exists as 
  a result of past events, it is probable that an 
  outflow of economic benefits will be necessary to 
  settle the obligation, and the obligation can be 
  reliably estimated. Provisions for liabilities and 
  charges are not discounted to the present value 
  of their expected net future cash flows except where 
  the time value of money is considered material. 
 
 
                         Employee 
                          related    Customer                     Off-balance 
                            costs     related    Property               sheet 
                        provision   provision   provision   ECL provisions(1) 
                             GBPm        GBPm        GBPm                GBPm  Total 
---------------------  ----------  ----------  ----------  ------------------  ----- 
As at 1 October 
 2020                          16         130          26                   -    172 
Transfer of 
 ECL from impairment 
 provisions                     -           -           -                   7      7 
Charge to the 
 income statement              31          78          39                   1    149 
Utilised                     (25)       (189)        (10)                   -  (224) 
---------------------  ----------  ----------  ----------  ------------------  ----- 
As at 30 September 
 2021                          22          19          55                   8    104 
Charge to the 
 income statement               2           8           -                   -     10 
Utilised                     (17)        (14)        (28)                 (5)   (64) 
---------------------  ----------  ----------  ----------  ------------------  ----- 
As at 30 September 
 2022                           7          13          27                   3     50 
---------------------  ----------  ----------  ----------  ------------------  ----- 
 
   (1)   The Group's ECL accounting policy can be found in (note 3.2). 

During the year, the Group has refined its methodology for categorising provisions for liabilities and charges to align with current business operations. There has been no change to the total provisions in the prior year and comparatives have been amended to conform with the current year's presentation.

The change took the original provision categories and analysed this further to align with business operations. The revised prior year categories of PPI redress provision (GBP1m), customer redress and other provisions (GBP28m) and property closure and redundancy provision (GBP67m) is now allocated to employee related costs provision (GBP22m), customer related provision (GBP19m) and property provision (GBP55m). PPI redress provision of GBP1m has been reallocated to customer related provision, GBP10m of customer redress and other provisions has been reallocated in part GBP3m to employee related costs provision and GBP7m to property provision, and restructuring provisions of GBP19m which were previously included within property closure and redundancy provision has been reallocated to employee related costs provision.

Employee related costs provision

This includes provision for staff redundancies and for NIC on equity based compensation. During the year, provisions of GBP2m (2021: GBP31m) were raised relating to staff redundancy costs.

Customer related provision

This relates to customer 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 provision

This includes costs for stores and office closures. During the year, provisions of GBPNil (2021: GBP39m) were raised relating to store and office closures.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.14 Other liabilities

 
 Accounting policy 
  Deferred grants 
  Deferred grants are recognised when there is reasonable 
  assurance that the grant will be received and that 
  any conditions attached to the grant will be complied 
  with. Where the grant relates to costs, it is released 
  to the income statement on a systematic basis in 
  line with the incurring of the related costs. Where 
  the grant relates to the cost of an asset, it is 
  released and recognised directly against the cost 
  of the asset when incurred. 
 
 
                                2022    2021 
                                GBPm    GBPm 
-----------------------------  -----  ------ 
Notes in circulation           1,822   2,104 
Accruals and deferred income      74      76 
Deferred grant                     -      20 
Other                            498     251 
-----------------------------  -----  ------ 
                               2,394   2,451 
-----------------------------  -----  ------ 
 

In 2021, the Group received GBP9m from the Capability and Innovation Fund (as part of the RBS alternative remedies package), which has been utilised under the terms of the grant application during the year. As part of the grant the Group is subject to delivering a number of public commitments. These commitments can be found on Banking Competition Remedies (BCR's) (the awarding body) website. As at 30 September 2022 the Group is currently on track with the delivery of these commitments.

The movement in the deferred grant is shown below:

 
                                     2022   2021 
                                     GBPm   GBPm 
----------------------------------  -----  ----- 
Opening balance                        20     35 
Grants received                         -      9 
Utilised against income statement 
 spend in the year                   (20)   (24) 
----------------------------------  -----  ----- 
Closing balance                         -     20 
----------------------------------  -----  ----- 
 

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.15 Fair value of financial instruments

 
 Accounting policy 
  Fair value is the price that would be received to 
  sell an asset or paid to transfer a liability in 
  an orderly transaction between market participants 
  at the valuation date. 
  When available, the Group measures the fair value 
  of a financial instrument using quoted prices in 
  an active market for that instrument. Where no such 
  active market exists for the particular asset or 
  liability, the Group uses a valuation technique 
  to arrive at the fair value, including the use of 
  transaction prices obtained in recent arm's length 
  transactions where possible, discounted cash flow 
  analysis, option pricing models and other valuation 
  techniques commonly used by market participants. 
  In doing so, fair value is estimated using a valuation 
  technique that makes maximum possible use of market 
  inputs and that places minimal possible reliance 
  upon entity-specific inputs. 
  The best evidence of the fair value of a financial 
  instrument at initial recognition is the transaction 
  price, which represents the fair value of the consideration 
  paid or received, unless the fair value of that 
  instrument is evidenced by comparison with other 
  observable current market transactions in the same 
  instrument (i.e. without modification or repackaging) 
  or based on a valuation technique whose variables 
  include only data from observable markets. When 
  such evidence exists, the Group recognises profits 
  or losses on the transaction date. 
  In certain limited circumstances, the Group applies 
  the fair value measurement option to financial assets 
  including loans and advances where the inherent 
  market risks (principally interest rate and option 
  risk) are individually hedged using appropriate 
  interest rate derivatives. The loan is designated 
  as being carried at FVTPL to offset the movements 
  in the fair value of the derivative within the income 
  statement and therefore avoid an accounting mismatch. 
  When a loan is held at fair value, a statistical-based 
  calculation is used to estimate credit losses attributable 
  to adverse movements in credit risk on the assets 
  held. This adjustment to the credit quality of the 
  asset is then applied to the carrying amount of 
  the loan to arrive at fair value and recognised 
  in the income statement. 
  Analysis of the fair value disclosures uses a hierarchy 
  that reflects the significance of inputs used in 
  measuring fair value. The level in the fair value 
  hierarchy within which a fair value measurement 
  is categorised is determined on the basis of the 
  lowest level input that is significant to the fair 
  value measurement in its entirety. The fair value 
  hierarchy is as follows: 
   *    Level 1 fair value measurements - quoted prices 
        (unadjusted) in active markets for an identical 
        financial asset or liability. 
 
 
   *    Level 2 fair value measurements - inputs other than 
        quoted prices within Level 1 that are observable for 
        the financial asset or liability, either directly (as 
        prices) or indirectly (derived from prices). 
 
 
   *    Level 3 fair value measurements - inputs for the 
        financial asset or liability that are not based on 
        observable market data (unobservable inputs). 
 
 
  For the purpose of reporting movements between levels 
  of the fair value hierarchy, transfers are recognised 
  at the beginning of the reporting year in which 
  they occur. 
 

(a) Fair value of financial instruments recognised on the balance sheet at amortised cost

The tables show a comparison of the carrying amounts of financial assets and liabilities measured at amortised cost, as reported on the balance sheet, and their fair values where these are not approximately equal.

There are various limitations inherent in this fair value disclosure, particularly where prices are derived from unobservable inputs due to some financial instruments not being traded in an active market. The methodologies and assumptions used in the fair value estimates are therefore described in the notes to the tables. The difference between carrying value and fair value is relevant in a trading environment but is not relevant to assets such as loans and advances.

 
                                2022                  2021 
----------------------  --------------------  -------------------- 
                        Carrying              Carrying 
                           value  Fair value     value  Fair value 
                            GBPm        GBPm      GBPm        GBPm 
----------------------  --------  ----------  --------  ---------- 
Financial assets 
Loans and advances 
 to customers(1)          71,751      69,277    71,876      72,229 
 
Financial liabilities 
Customer deposits(2)      65,434      65,069    66,971      67,012 
Debt securities in 
 issue(3)                  8,509       8,515     7,678       8,050 
Due to other banks(2)      8,502       8,485     5,918       5,918 
----------------------  --------  ----------  --------  ---------- 
 

(1) Loans and advances to customers are categorised as Level 3 in the fair value hierarchy with the exception of GBP1,098m (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 GBP3,156m of listed debt (2021: GBP3,704m) which is categorised as Level 1.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.15 Fair value of financial instruments continued

The Group's fair values disclosed for financial instruments at amortised cost are based on the following methodologies and assumptions:

(a) Loans and advances to customers - The fair values of loans and advances are determined by firstly segregating them into portfolios which have similar characteristics. Contractual cash flows are then adjusted for ECLs and expectations of customer behaviour based on observed historic data. The cash flows are then discounted at a weighted average cost of capital (appropriate to the portfolio) to arrive at an estimate of their fair value.

(b) Customer deposits - The fair value of deposits is determined using a replacement cost method which assumes alternative funding is raised in the most advantageous market. The contractual cash flows have been discounted using a funding curve with credit spreads reflecting the tenor of each deposit.

(c) Debt securities in issue - The fair value is taken directly from quoted market prices where available or determined from a discounted cash flow model using current market rates for instruments of similar terms and maturity.

(d) Due to other banks - The fair value is determined from a discounted cash flow model using current market rates for instruments of similar terms and maturity.

(b) Fair value of financial instruments recognised on the balance sheet at fair value

The following tables provide an analysis of financial instruments that are measured subsequent to initial recognition at fair value, using the fair value hierarchy described above:

 
                     Fair value measurement 2022        Fair value measurement 2021 
----------------  ---------------------------------  --------------------------------- 
                    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              5,064        -        -   5,064     4,352       -       -    4,352 
Loans and 
 advances at 
 FVTPL                  -       70        -      70         -     133       -      133 
Other financial 
 assets at 
 FVTPL                  -        4        4       8         -      14       6       20 
Derivative 
 financial 
 assets                 -      342        -     342         -     139       1      140 
----------------  -------  -------  -------  ------  --------  ------  ------  ------- 
Total financial 
 assets at 
 fair value         5,064      416        4   5,484     4,352     286       7    4,645 
----------------  -------  -------  -------  ------  --------  ------  ------  ------- 
 
Financial 
 liabilities 
Derivative 
 financial 
 liabilities            -      327        -     327         -     209       -      209 
----------------  -------  -------  -------  ------  --------  ------  ------  ------- 
Total financial 
 liabilities 
 at fair value          -      327        -     327         -     209       -      209 
----------------  -------  -------  -------  ------  --------  ------  ------  ------- 
 

There were no transfers between Level 1 and 2 in the current or prior year.

The Group's valuations for financial instruments that are measured subsequent to initial recognition at fair value are based on the following methodologies and assumptions:

   (a)   FVOCI - The fair values of listed investments are based on quoted closing market prices. 

(b) Loans and advances to customers (Level 2) - The fair value is derived from data or valuation techniques based upon observable market data and non-observable inputs as appropriate to the nature and type of the underlying instrument.

(c) Other financial assets at FVTPL (Level 2) - Represents GBP4m of Visa Inc. Series A preferred stock received following a conversion event in July 2022. The fair value of the preference shares has been calculated by taking the year end New York Stock Exchange share price for Visa inc. The prior year amount represented GBP14m of an unlisted equity investment that was valued based on an offer of purchase by an independent third party, with the sale concluded in January 2022.

(d) Other financial assets at FVTPL (Level 3) - Partly represents GBP1m (2021: GBP4m) of Visa Inc. Series B preferred stock received as partial consideration for the sale of the Group's share in Visa Europe. The preferred stock is convertible into Visa Inc. common stock or its equivalent at a future date, subject to potential reduction for certain litigation losses that may be incurred by Visa Europe. The fair value of the preference shares has been calculated by taking the year end New York Stock Exchange share price for Visa Inc. and discounting for illiquidity and clawback related to contingent litigation. For other unlisted equity investments, the Group's share of the net asset value or the transaction price respectively is considered the best representation of the exit price and is the Group's best estimate of fair value.

(e) Derivative financial assets and liabilities (Level 2) - The fair values of derivatives, including foreign exchange contracts, interest rate swaps, interest rate and currency option contracts, and currency swaps, are obtained from discounted cash flow models or option pricing models as appropriate.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.15 Fair value of financial instruments continued

Level 3 movement analysis:

 
                                       2022       2022       2021        2021 
-------------------------------  ----------  ---------  ---------  ---------- 
                                 Derivative  Financial  Financial  Derivative 
                                  financial     assets     assets   financial 
                                     assets   at FVTPL   at FVTPL      assets 
                                       GBPm       GBPm       GBPm        GBPm 
-------------------------------  ----------  ---------  ---------  ---------- 
Balance at the beginning of 
 the year                                 1          6          5           - 
Fair value gains recognised(1) 
In profit or loss - unrealised          (1)          -          1           1 
Settlements                               -        (2)          -           - 
-------------------------------  ----------  ---------  ---------  ---------- 
Balance at the end of the year            -          4          6           1 
-------------------------------  ----------  ---------  ---------  ---------- 
 
   (1)   Net gains or losses were recorded in non-interest income. 

Sensitivity of Level 3 fair value measurements to reasonably possible alternative assumptions

The Group has limited exposure to Level 3 fair value measurements. If all risks inherent in the valuations were to crystallise in their entirety, total assets would reduce by GBP4m which would be recognised directly in the income statement.

3.16 Lessee accounting

 
 Accounting policy 
  The Group as lessee 
  The Group leases offices, stores and other premises, 
  and sub-leases certain premises which are no longer 
  occupied by the Group. The Group applies a single 
  lessee accounting model to all lease arrangements 
  it enters into from the date on which the leased 
  asset is available for use, with the exception of 
  low value leases and short-term leases (less than 
  12 months) in respect of which the associated lease 
  payments are expensed in the income statement on 
  a straight line basis over the lease term. 
  Under the single lessee accounting model, the Group 
  recognises a right-of-use asset and a lease liability 
  at the commencement date of the lease. The right-of-use 
  asset is initially measured at cost, comprising 
  the initial amount of the lease liability plus any 
  initial direct costs incurred and any lease payments 
  made at or before the lease commencement date, less 
  any lease incentives received. The right-of-use 
  asset is subsequently depreciated using the straight 
  line method from the commencement date to the earlier 
  of the end of the useful life of the asset or the 
  end of the lease term, subject to review for impairment. 
  The lease liability is initially measured at the 
  present value of the lease payments, discounted 
  using the interest rate implicit in the lease, or 
  if that rate cannot readily be determined (as is 
  the case in the majority of the leasing activities 
  of the Group), the incremental borrowing rate. The 
  liability is remeasured when there is a change in 
  future lease payments arising from a change in an 
  index or a rate or a change in the Group's assessment 
  of whether it will exercise an extension or termination 
  option. When the lease liability is remeasured, 
  a corresponding adjustment is made to the right-of-use 
  asset or is recorded in the income statement if 
  the carrying amount of the right -- of -- use asset 
  has been reduced to zero. 
  Termination options are included in several leases 
  across the Group with a small number of leases having 
  extension options. These terms are used to maximise 
  operational flexibility in terms of managing contracts. 
  In determining judgements on the lease term, management 
  considers all facts and circumstances that create 
  an economic incentive to exercise an extension option, 
  or not exercise a termination option. Periods covered 
  by termination options are only included in the 
  lease term if it is reasonably certain that the 
  lease will not be terminated. The assessment of 
  the lease term is reviewed if a significant event 
  or a significant change in circumstances occurs 
  that is within the control of the Group. 
  The Group as sub-lessor 
  Sub-leases are classified as finance leases if substantially 
  all the risks and rewards incidental to ownership 
  of the underlying asset are transferred, otherwise 
  they are classified as operating leases. Finance 
  sub-leases are recognised in other assets representing 
  the minimum lease payments receivable under the 
  terms of the lease, discounted at the rate of interest 
  implicit in the lease. Interest income is recognised 
  reflecting a constant periodic rate of return. Operating 
  sub-lease income is recognised in the income statement 
  on a straight line basis over the lease term. 
 

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.16 Lessee accounting continued

a) Amounts recognised in the income statement

The income statement includes the following amounts related to leases:

 
                                               2022   2021 
                                               GBPm   GBPm 
--------------------------------------------  -----  ----- 
Interest expense and similar charges 
Interest expense                                (2)    (3) 
Other operating income 
Income from operating sub-leases where 
 the Group is a lessor                            1      1 
Operating and administrative expenses 
Depreciation and impairment of right-of-use 
 assets                                        (26)   (28) 
Expense relating to short-term leases           (1)    (1) 
Expense relating to leases of low-value 
 assets that are not short-term leases          (1)    (1) 
--------------------------------------------  -----  ----- 
Amounts recognised in the income 
 statement                                     (29)   (32) 
--------------------------------------------  -----  ----- 
 

Total leasing cash outflow in the year was GBP28m (2021: GBP29m).

b) Amounts recognised on the balance sheet

Right-of-use assets

 
                               2022   2021 
                               GBPm   GBPm 
----------------------------  -----  ----- 
As at 1 October                 135    161 
Additions                         4      4 
Remeasurements                    1      1 
Disposals                       (1)    (2) 
Depreciation and impairment    (26)   (29) 
----------------------------  -----  ----- 
As at 30 September              113    135 
----------------------------  -----  ----- 
 

All right-of-use assets relate to leases of land and buildings and are presented within property, plant and equipment on the balance sheet.

The Group reviewed its existing surplus estate population for impairment. Where it is expected the Group can sub-lease the property, the recoverable amount was determined based on expected sub-lease income. Where the Group does not expect to be able to generate any cash inflows beyond the closure date, the value-in-use was determined to be GBPNil. It was concluded that 19 properties (2021: 22) should be impaired following a reduction in value-in-use, resulting in an impairment charge of GBP4m (2021: GBP1m). In addition, an impairment of GBP5m was recognised in the current year in relation to right-of-use assets for office estate where no further economic benefit was expected following exit. In the prior year the Group announced the closure of 30 stores leased by the Group and to relocate four stores to more prime locations in existing towns. The right-of-use assets were assessed following the above methodology resulting in an impairment charge of GBP5m.

Sub-leases

Future undiscounted minimum payments receivable in respect of sub-leased assets at 30 September were as follows:

 
                     2022   2021 
                     GBPm   GBPm 
-----------------  ------  ----- 
Operating leases        1      1 
Finance leases          3      5 
-----------------  ------  ----- 
                        4      6 
 ------------------------  ----- 
 

Lease liabilities

 
                        2022   2021 
                        GBPm   GBPm 
---------------------  -----  ----- 
Lease liabilities(1)     132    154 
---------------------  -----  ----- 
 
   (1)   Lease liabilities are presented within other liabilities on the balance sheet. 

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.16 Lessee accounting continued

Future undiscounted minimum payments under lease liabilities at 30 September are as follows:

 
                         2022   2021 
Amounts falling due      GBPm   GBPm 
----------------------  -----  ----- 
Within 1 year              22     26 
Between 1 and 5 years      60     73 
Over 5 years               66     78 
----------------------  -----  ----- 
                          148    177 
----------------------  -----  ----- 
 

c) Lease commitments not recognised on the balance sheet

In addition to the lease liabilities recognised on the balance sheet, the Group also has lease commitments relating to leases which have not yet commenced at the balance sheet date. Future undiscounted minimum payments on leases which are yet to commence were as follows:

 
                         2022   2021 
Amounts falling due      GBPm   GBPm 
----------------------  -----  ----- 
Within 1 year               4      - 
Between 1 and 5 years      22     21 
Over 5 years               99    104 
----------------------  -----  ----- 
                          125    125 
----------------------  -----  ----- 
 

Group financial statements

Notes to the consolidated financial statements

Section 4: Capital

4.1 Equity

 
 Accounting policy 
  Equity 
  The financial instruments issued by the Company 
  are treated as equity (i.e. forming part of shareholders' 
  funds) only to the extent that they meet the following 
  two conditions: 
  (a) They impose no contractual obligations upon 
  the Company to deliver cash or other financial assets 
  or to exchange financial assets or financial liabilities 
  with another party under conditions that are potentially 
  unfavourable to the Group. 
  (b) Where the instrument will or may be settled 
  in the Company's own equity instruments, it is either 
  a non-derivative that includes no obligation to 
  deliver a variable number of the Company's own equity 
  instruments or is a derivative that will be settled 
  by the Company exchanging a fixed amount of cash 
  or other financial assets for a fixed number of 
  its own equity instruments. 
  To the extent that this definition is not met, the 
  proceeds of issue are classified as a financial 
  liability. 
  Incremental costs directly attributable to the issue 
  of new shares or options or to the acquisition of 
  a business are shown in equity as a deduction, net 
  of tax, from the proceeds. 
  Dividends 
  Final dividends on ordinary shares are recognised 
  as a liability and deducted from equity when they 
  are approved by the Company's shareholders. Interim 
  dividends are deducted from equity when they are 
  no longer at the discretion of the Company. 
 

4.1.1 Share capital and share premium

 
                                   2022   2021 
                                   GBPm   GBPm 
--------------------------------  -----  ----- 
Share capital                       141    144 
Share premium                         7      5 
--------------------------------  -----  ----- 
Share capital and share premium     148    149 
--------------------------------  -----  ----- 
 
 
                                   2022            2021 
                                 Number          Number   2022   2021 
                              of shares       of 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                2,982,745       1,418,744      -      - 
Share buyback programme    (34,445,188)               -    (3)      - 
------------------------  -------------  --------------  -----  ----- 
Closing ordinary share 
 capital                  1,408,530,988   1,439,993,431    141    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 30 September 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.

An interim dividend in respect of the year ended 30 September 2022 of 2.5p per ordinary share in the Company, amounting to GBP36m, was paid in June 2022.

The Directors have recommended a final dividend in respect of the year ended 30 September 2022 of 7.5p per ordinary share in the Company to be paid in March 2023. The payment of the final dividend is subject to approval of the shareholders at the 2023 AGM. These financial statements do not reflect the recommended dividend.

On 30 June 2022 the Company announced a share buyback programme, with an initial repurchase of up to GBP75m in aggregate between its ordinary shares of GBP0.10 each listed on the LSE and CDIs, each representing one share, listed on the ASX. Subject to trading liquidity, the Company intends to repurchase shares and CDIs in approximately equal proportions. The buyback commenced on 30 June 2022 and will end no later than 17 December 2022. 34m shares, with a nominal value of GBP3m, were repurchased in the year ended 30 September 2022 for a total consideration of GBP50m (2021: GBPNil). All shares repurchased were cancelled and the nominal value of the share cancellation transferred to the capital redemption reserve with the premium paid deducted from retained earnings.

Group financial statements

Notes to the consolidated financial statements

Section 4: Capital

4.1 Equity continued

On 21 November 2022 the Company announced an extension to the share buyback programme with an intent to repurchase a further GBP50m in aggregate of shares and CDIs. Subject to trading liquidity, the Company again intends to repurchase shares and CDIs in approximately equal proportions. The buyback extension will commence on 21 November 2022 and will end no later than 2 May 2023.

Share premium represents the aggregate of all amounts that have ever been paid above par value to the Company when it has issued ordinary shares.

A description of the other equity categories included within the consolidated statement of changes in equity, and significant movements during the year, is provided below:

4.1.2 Other equity instruments

Other equity instruments comprises AT1 capital which consists 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 GBP73m and optional redemption on 8 December 2022. On 17 June 2022, securities totalling GBP377m (representing 83.86% of the original GBP450m principal amount) were redeemed. On 10 October 2022 it was announced that the remaining securities would be redeemed on the optional redemption date.

   --   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.

   --   Perpetual securities (fixed 8.25% up to the first reset date) issued on 17 June 2022 

with a nominal value of GBP350m and optional redemption on 17 June 2027.

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 GBP7m (2021: GBP15m). AT1 distributions of GBP70m were paid in the year (2021: GBP79m).

4.1.3 Capital reorganisation reserve

The capital reorganisation reserve of GBP839m was recognised on the issuance of the Company's ordinary shares in February 2016 in exchange for the acquisition of the entire share capital of the Group's previous parent company, CYB Investments Limited (CYBI). The reserve reflects the difference between the consideration for the issuance of the Company's shares and CYBI's share capital and share premium.

4.1.4 Merger reserve

A merger reserve of GBP633m was recognised on the issuance of the Company's ordinary shares in February 2016 in exchange for the acquisition of the entire share capital of CYBI. An additional GBP1,495m was recognised on the issuance of the Company's ordinary shares in October 2018 in exchange for the acquisition of the entire share capital of Virgin Money Holdings (UK) Limited. The merger reserve reflects the difference between the consideration for the issuance of the Company's shares and the nominal value of the shares issued.

4.1.5 Other reserves

Own shares held and treasury shares

Virgin Money Holdings (UK) Limited established an EBT in 2011 in connection with the operation of its share plans. On the date of acquisition by the Company, the shares held in the EBT were converted to the Company's shares at a ratio of 1.2125 Company shares for each Virgin Money Holdings (UK) Limited share. The investment in own shares as at 30 September 2022 is GBP0.6m (2021: GBP0.2m). The market value of the shares held in the EBT at 30 September 2022 was GBP0.4m (2021: GBP0.2m).

As part of the buyback programme, the Company has entered a non-discretionary arrangement with Citigroup Global Markets Limited to purchase shares as riskless principal and to make trading decisions independently of the Company. Any purchase of shares pursuant to this engagement will be carried out on the LSE or other recognised investment exchange. This arrangement results in the recognition of a liability (included within due to other banks) and a deduction from retained earnings of GBP11m at 30 September 2022 (2021: GBPNil). The liability will reduce as shares are repurchased and cancelled with the impact on share capital and capital redemption reserve as described elsewhere within this note.

Capital redemption reserve

Under UK companies legislation, when shares are redeemed or purchased wholly or partly out of the company's profits, the amount by which the company's issued share capital is diminished must be transferred to the capital redemption reserve. The capital maintenance provisions of UK companies legislation apply to the capital redemption reserve as if it were part of the company's paid up share capital. The nominal value of the shares repurchased and cancelled under the buyback programme during 2022 has been transferred to the capital redemption reserve.

Deferred shares reserve

The deferred shares reserve comprises shares to be issued in the future relating to employee share plans in regard to the settlement of outstanding Virgin Money Holdings (UK) Limited share awards, which will be settled through the issuance of the Company's shares at a future date in line with the vesting profile of the underlying plans.

Equity based compensation reserve

The Group's equity based compensation reserve records the value of equity settled share based payment benefits provided to the Group's employees as part of their remuneration that has been charged through the income statement and adjusted for deferred tax.

FVOCI reserve

The FVOCI reserve records the unrealised gains and losses arising from changes in the fair value of financial assets at FVOCI. The movements in this reserve are detailed in the consolidated statement of comprehensive income.

Group financial statements

Notes to the consolidated financial statements

Section 4: Capital

4.1 Equity continued

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.

 
                                             2022   2021 
                                             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                 962    127 
Amounts transferred to the income 
 statement                                   (13)    (5) 
Taxation                                    (260)   (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 
------------------------------------------  -----  ----- 
At 30 September                               699     10 
------------------------------------------  -----  ----- 
 

4.2 Equity based compensation

 
 Accounting policy 
  The Group operates a number of equity settled share 
  based compensation plans in respect of services 
  received from certain of its employees. The fair 
  value of the services received is recognised as 
  an expense. The total amount to be expensed is measured 
  by reference to the fair value of the Company's 
  shares, performance options or performance rights 
  granted, including, where relevant, any market performance 
  conditions and any non-vesting conditions. The impacts 
  of any service and non-market performance vesting 
  conditions are not included in the fair value and 
  instead are included in estimating the number of 
  awards or options that are expected to vest. 
  The total expense is recognised over the vesting 
  period, which is the period over which all of the 
  specified vesting conditions are to be satisfied. 
  A corresponding credit is recognised in the equity 
  based compensation reserve, adjusted for deferred 
  tax. In some circumstances, employees may provide 
  services in advance of the grant date and therefore 
  the grant date fair value is estimated for the purposes 
  of recognising the expense during the period between 
  the start of the service period and the grant date. 
  At the end of each reporting year, the Group revises 
  its estimates of the number of shares, performance 
  options and performance rights that are expected 
  to vest based on the non-market and service vesting 
  conditions. The impact of the revision to original 
  estimates, if any, is recognised in the income statement, 
  with a corresponding adjustment to the equity based 
  compensation reserve. 
 

The equity settled share based payment charge for the year is GBP5m (2021: GBP5m).

Virgin Money UK PLC awards

The Group issues awards to employees under the following share plans:

 
Plan    Eligible           Nature of        Vesting conditions(1)   Grant dates(2) 
         employees          award 
------  -----------------  ---------------  ----------------------  -------------- 
DEP(3)  Selected           Conditional      Continuing employment   2017, 2018, 
         employees          rights to        or leaving in certain   2019, 2020 
                            shares           limited circumstances   and 2021 
------  -----------------  ---------------  ----------------------  -------------- 
LTIP    Selected           Conditional      Continuing employment   2017, 2018, 
         senior employees   rights to        or leaving in certain   2019, 2020 
                            shares           limited circumstances   and 2021 
                                             and achievement 
                                             of delivery of 
                                             the Group's strategic 
                                             goals 
                                             and growth in 
                                             shareholder value 
------  -----------------  ---------------  ----------------------  -------------- 
SIP     All employees      Non-conditional  Continuing employment   2016, 2017 
                            share award                              and 2019 
------  -----------------  ---------------  ----------------------  -------------- 
 
   (1)   All awards are subject to vesting conditions and therefore may or may not vest. 
   (2)   The year in which grants have been made under the relevant plan. 

(3) Grants made under the DEP are made the year following the financial year to which they relate.

Group financial statements

Notes to the consolidated financial statements

Section 4: Capital

4.2 Equity based compensation continued

Further detail on each plan is provided below:

DEP

Under the plan, employees are awarded conditional rights to Virgin Money UK PLC shares. The shares are subject to forfeiture conditions including forfeiture as a result of resignation, termination by the Group or failure to meet compliance requirements. Awards include:

-- the upfront and deferred elements of bonus awards where required to comply with the PRA Remuneration Code or the Group's deferral policy; and

   --   buyout of equity from previous employment. 

LTIP

Under the plan, employees are awarded conditional rights to Virgin Money UK PLC shares. The shares are subject to forfeiture conditions including forfeiture as a result of resignation, termination by the Group or failure to meet compliance requirements. The performance conditions of the plan must be met over a three-year performance period. The measures reflect a balanced approach between financial and non-financial performance and are aligned to the Group's strategic goals. Measures, relative weightings and the quantum for assessing performance are outlined in the Directors' remuneration report contained in the Group's Annual Report & Accounts.

SIP

At the date of the awards, eligible employees are awarded Group shares which are held in the SIP Trust. Awards are not subject to performance conditions and participants are the beneficial owners of the shares granted to them, but not the registered owners. Voting rights over the shares are normally exercised by the registered owner at the direction of the participants.

Awards/rights made during the year

 
                                                                                         Average 
                          Number                                              Number        fair 
                     outstanding                                         outstanding       value 
                              at                                                  at   of awards 
                       1 October     Number       Number       Number   30 September    at grant 
Plan                        2021    awarded    forfeited     released           2022       pence 
------------------  ------------  ---------  -----------  -----------  -------------  ---------- 
DEP 
2016 Commencement          2,620          -            -      (1,310)          1,310      266.03 
2017 Bonus                49,909          -            -     (47,789)          2,120      313.20 
2018 Bonus               170,649          -            -     (34,129)        136,520      192.35 
2019 Bonus                85,544          -            -      (6,384)         79,160      174.50 
2019 Commencement         19,843          -            -     (11,797)          8,046      174.50 
2020 Commencement         19,570          -            -      (9,970)          9,600      135.40 
2021 Bonus                     -    590,513     (10,536)    (579,977)              -      172.65 
2021 Commencement              -    107,747            -            -        107,747      142.70 
------------------  ------------  ---------  -----------  -----------  -------------  ---------- 
LTIP 
2017 LTIP                380,924          -            -    (111,295)        269,629      313.20 
2018 LTIP              4,751,736          -  (1,906,079)    (845,346)      2,000,311      190.47 
2019 LTIP              7,680,636          -    (739,329)            -      6,941,307      174.50 
2020 LTIP             10,379,519          -  (2,019,760)            -      8,359,759      135.40 
2021 LTIP                      -  6,761,290    (273,467)            -      6,487,823      172.65 
------------------  ------------  ---------  -----------  -----------  -------------  ---------- 
SIP(1) 
2015 Demerger            629,169          -            -    (629,169)              -      194.67 
2017 Free 
 Share                   564,118          -            -    (564,118)              -      313.20 
2019 Free 
 Share                 1,684,854          -     (58,794)  (1,626,060)              -      202.53 
------------------  ------------  ---------  -----------  -----------  -------------  ---------- 
 

(1) Shares awarded under the SIP do not have a release date but become available to award holders without restriction following the completion of relevant service conditions. The service conditions applicable to each of the awards in the table above has now been completed and, since no ongoing charge is taken in respect of these awards, the values in the table reflect that all awards have now fully vested and are available to award holders without restriction, with no awards still to vest as at 30 September 2022.

Determination of grant date fair values

The grant date fair value of the awards has been taken as the market value of the Company's ordinary shares at the grant date. Where awards are subject to non-market performance conditions, an estimate is made of the number of awards expected to vest in order to determine the overall share based payment charge to be recognised over the vesting period. Awards were granted under the LTIP and DEP on 9 December 2021, based on the middle market share price on the day immediately preceding the grant (172.65p).

The Group has not issued awards under any plan with market performance conditions.

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes

5.1 Contingent liabilities and commitments

 
 Accounting policy 
  Financial guarantees 
  The Group provides guarantees in the normal course 
  of business on behalf of its customers. Guarantees 
  written are conditional commitments issued by the 
  Group to guarantee the performance of a customer 
  to a third party and are primarily issued to support 
  direct financial obligations such as commercial 
  bills or other debt instruments issued by a counterparty. 
  The rating of the Group as a guarantee provider 
  enhances the marketability of the paper issued by 
  the counterparty in these circumstances. 
  The ECL requirements as described in note 3.2 apply 
  to loan commitments and financial guarantee contracts, 
  with the ECL allowance held as part of the provision 
  for liabilities and charges balance (note 3.13). 
  Contingent liabilities 
  Contingent liabilities are possible obligations 
  whose existence will be confirmed only by uncertain 
  future events or present obligations where the transfer 
  of economic benefit is uncertain or cannot be reliably 
  measured. Contingent liabilities are not recognised 
  on the balance sheet but are disclosed unless they 
  are remote. 
 

The table below sets out the amounts of financial guarantees and commitments which are not recorded on the balance sheet. Financial guarantees and commitments are credit-related instruments which include acceptances, letters of credit, guarantees and commitments to extend credit. The amounts do not represent the amounts at risk at the balance sheet date but the amounts that would be at risk should the contracts be fully drawn upon and the 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.

Financial guarantees

 
                                                2022    2021 
                                                GBPm    GBPm 
--------------------------------------------  ------  ------ 
Guarantees and assets pledged as collateral 
 security: 
   Due in less than 3 months                      33      20 
   Due between 3 months and 1 year                23      21 
   Due between 1 year and 3 years                  9      13 
   Due between 3 years and 5 years                 3       2 
   Due after 5 years                              44      45 
--------------------------------------------  ------  ------ 
                                                 112     101 
--------------------------------------------  ------  ------ 
Other credit commitments 
Undrawn formal standby facilities, 
 credit lines and other commitments 
 to lend at call                              19,247  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 30 September 2022 (2021: GBP4m). Further detail on UTM can be found in the JVs and associates section of note 5.3.

The Group had future capital expenditure which had been contracted for, but not provided for, at 30 September 2022 of GBP0.4m (2021: GBP0.2m).

Other contingent liabilities

Conduct risk related matters

There continues to be uncertainty with judgement required in determining the quantum of conduct risk related liabilities, with note 3.13 reflecting the Group's current position where a provision can be reliably estimated. Until all matters are resolved 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.

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes

5.2 Notes to the statement of cash flows

 
                                               2022     2021 
                                               GBPm     GBPm 
------------------------------------------  -------  ------- 
Adjustments included in the profit 
 before tax 
Interest receivable                         (2,217)  (1,910) 
Interest payable                                641      553 
Depreciation, amortisation and impairment 
 (note 2.4)                                     179      191 
Derivative financial instruments fair 
 value movements                                 17        5 
Impairment losses/(credit) on credit 
 exposures (note 3.2)                            52    (131) 
Equity based compensation (note 4.2)              4        5 
Gain on disposal of FVOCI assets (note 
 2.3)                                           (4)        - 
Other non-cash movements                          2       62 
------------------------------------------  -------  ------- 
                                            (1,326)  (1,225) 
------------------------------------------  -------  ------- 
Changes in operating assets 
Net (increase)/decrease in: 
   Balances with supervisory central 
    banks                                       (3)     (38) 
   Derivative financial instruments           1,847      269 
   Financial assets at FVTPL                     57       30 
   Loans and advances to customers            (713)      491 
   Defined benefit pension assets               (7)     (61) 
   Other assets                                  31      141 
------------------------------------------  -------  ------- 
                                              1,212      832 
------------------------------------------  -------  ------- 
Changes in operating liabilities 
Net increase/(decrease) in: 
   Due to other banks                         1,235     (50) 
   Derivative financial instruments             119     (41) 
   Customer deposits                        (1,510)    (644) 
   Provisions for liabilities and charges      (50)     (72) 
   Other liabilities                           (32)    (219) 
------------------------------------------  -------  ------- 
                                              (238)  (1,026) 
------------------------------------------  -------  ------- 
 

For the purposes of the statement of cash flows, cash and cash equivalents comprise the following balances with less than three months maturity from the date of acquisition. This includes cash and liquid assets and amounts due to other banks (to the extent less than 90 days).

 
                                          2022    2021 
                                          GBPm    GBPm 
--------------------------------------  ------  ------ 
Cash and balances with central banks 
 (less mandatory deposits)              11,955   9,453 
Due from other banks (less than three 
 months)                                   656     800 
--------------------------------------  ------  ------ 
                                        12,611  10,253 
--------------------------------------  ------  ------ 
 

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes

5.3 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 Group provides banking services to the Scheme, with customer deposits of GBP12m (2021: GBP40m). Pension contributions of GBP7m were made to the Scheme in the year (2021: GBP61m).

The Group and the Trustee to the Scheme (note 3.9) have entered into a contingent Security Arrangement which provides additional support to the Scheme by underpinning recovery plan contributions and some additional investment risk. The security is in the form of a pre-agreed maximum level of assets that are set aside for the benefit of the Pension Scheme in certain trigger events. These assets are held by Red Grey Square Funding LLP, an insolvency remote consolidated structured entity.

Joint ventures and associates

The Group holds investments in JVs of GBP10m (2021: GBP10m). The total share of loss for the year was GBP4m (2021: GBP5m). In addition, the Group had the following transactions with JV entities during the period:

-- Salary Finance - the Group provides Salary Finance with a revolving credit facility funding line, of which the current gross lending balance was GBP318m (2021: GBP223m) and the undrawn facility was GBP32m (2021: GBP37m). The facility is held under Stage 2 for credit risk purposes (2021: Stage 1), with an ECL allowance of GBP19m (2021: GBPNil) held against the lending; further detail on the ECL allowance is provided in the credit risk section within this results announcement. Additionally, the Group received GBP10m (2021: GBP6m) of interest income from Salary Finance in the year. Board approval is in place for this facility up until March 2023 with GBP400m being the approved limit.

-- UTM - the Group provides banking services to UTM which has resulted in amounts due of GBP4m (2021: GBP3m). Additionally, the Group received GBP7m of recharge income in the year (2021: GBP7m) from UTM in accordance with a Service Level Agreement in respect of resourcing, infrastructure and marketing. During the year, the Group provided GBP4m of additional funding to UTM (2021: GBP12m).

Other related party transactions with Virgin Group

The Group has related party transactions with other Virgin Group companies (1) :

-- Licence fees due to Virgin Enterprises Limited for the use of the Virgin Money brand trademark resulted in an amount payable of GBP5m (2021: GBP4m), with expenses incurred in the year of GBP15m (2021: GBP14m).

-- The Group incurs credit card commissions and air mile charges with Virgin Atlantic Airways Limited (VAA) in respect of an agreement between the two parties. Amounts payable to VAA totalled GBP1m (2021: GBP2m) and expenses of GBP16m were incurred in the year (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 PCA portfolio. Amounts receivable from Virgin Red totalled GBP0.1m (2021: GBPNil), amounts payable totalled GBP1m (2021: GBPNil) and during the year this resulted in expenses of GBP3m (2021: GBP0.8m) along with income of GBP0.5m (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 year this resulted in expenses of GBP0.5m (2021: GBP0.1m).

   --   The Group paid GBP7m (2021: GBPNil) of ordinary dividends to Virgin Group Holdings Limited. 

(1) All companies were incorporated in England and Wales with the exception of Virgin Group Holdings Limited, which was incorporated in the British Virgin Islands.

Charities

The Group provides banking services to The Virgin Money Foundation which has resulted in customer deposits of GBP1m (2021: GBP1m). The Group has made donations of GBP1m in the year (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 year was GBP0.4m (2021: GBP0.4m).

Compensation of key management personnel (KMP)

KMP comprises Directors of the Company and members of the Executive Leadership Team.

 
                                    2022   2021 
                                    GBPm   GBPm 
---------------------------------  -----  ----- 
Salaries and short-term benefits       9      9 
Equity based compensation(1)           3      3 
---------------------------------  -----  ----- 
                                      12     12 
---------------------------------  -----  ----- 
 

(1) The expense recognised in the year is in accordance with IFRS 2 'Equity based compensations', including associated employers' NIC.

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes

5.3 Related party transactions continued

The following information regarding Directors' remuneration is presented in accordance with the Companies Act 2006.

 
                              2022   2021 
                              GBPm   GBPm 
--------------------------  ------  ----- 
Aggregate remuneration(1)        5      3 
--------------------------  ------  ----- 
 

(1) Aggregate remuneration includes amounts paid for the 2022 year and amounts paid under the LTIPs in relation to the 2018 LTIP award. LTIP figures in the single figure table for Executive Directors' 2022 remuneration in the Remuneration report contained in the Group's Annual Report & Accounts relate to the 2019 LTIP award in respect of the 2020-2022 LTIP performance period cycle.

None of the Directors were members of the Group's defined contribution or defined benefit pension schemes during 2022 (2021: none).

None of the Directors hold share options and none were exercised during the year (2021: none).

Transactions with KMP

KMP, their close family members, and any entities controlled or significantly influenced by the KMP have undertaken the following transactions with the Group in the normal course of business. The transactions were made on the same terms and conditions as applicable to other Group employees, or on normal commercial terms:

 
                       2022   2021 
                       GBPm   GBPm 
-------------------  ------  ----- 
Loans and advances        1      3 
Deposits                  1      2 
-------------------  ------  ----- 
 

No provisions have been recognised in respect of loans provided to the KMP (2021: GBPNil). There were no debts written off or forgiven during the year to 30 September 2022 (2021: GBPNil). Included in the above are five (2021: six) loans totalling GBP0.3m (2021: GBP0.3m) made to Directors. In addition to the above, there are guarantees of GBPNil (2021: GBPNil) made to Directors and their related parties.

5.4 Pillar 3 disclosures

UK Capital Requirements Regulation

Pillar 3 disclosure requirements are set out within the Disclosure (CRR) part of the PRA rulebook. The disclosures required under the PRA framework are substantially equivalent to those required by Part Eight of the EU CRR. The consolidated disclosures of the Group, for the 2022 financial year, will be issued concurrently with the Annual Report and Accounts and can be found at www.virginmoneyukplc.com/investor-relations/results-and-reporting/annual-reports/ .

5.5 Post balance sheet events

On 21 November 2022 the Company announced an extension to the share buyback programme with an intent to repurchase a further GBP50m in aggregate of shares and CDIs. Subject to trading liquidity, the Company again intends to repurchase shares and CDIs in approximately equal proportions. The buyback extension will commence on 21 November 2022 and will end no later than 2 May 2023.

Additional information

Measuring the Group's performance

As highlighted within the Strategic report, Financial results, Directors' remuneration report, and Risk report, all contained in the Group's Annual Report & Accounts, a range of metrics are considered that measure and track the Group's performance. Some of these metrics will be the Group's KPIs, which are a set of quantifiable measurements used to gauge the Group's overall long-term performance. Others are not referred to as KPIs, but are still useful metrics for the Group to reflect on and are disclosed to aid comparisons with peers.

These metrics fall into two main categories:

   --   Financial - which are further split into: 

o IFRS based - meaning the basis of the calculation is derived from a measure that can be found and is directly required under generally accepted accounting principles (GAAP); and

o Non-IFRS based - these are also referred to as APMs and can be derived from non-GAAP measures.

-- Non-Financial - being those that are not directly linked to the Group's financial performance, but more in relation to other external factors.

Non-IFRS based financial performance metrics can be calculated on either a statutory or an 'underlying' basis; with further detail on how the underlying measure is arrived at, along with management's reasoning for excluding the impact of certain items from the Group's current underlying performance rationale, can be found on page 134, directly following this section.

Financial performance metrics

Profitability:

 
Metric       KPI  LTIP  LTIP   Basis     Definition/formula                                                                           Why it matters? 
                         Year 
-----------  ---  ----  -----  --------  ------------------------------------------------------------------------------------------  --------------------------- 
Gross        Yes  No    N/a    Non-IFRS  Annualised gross cost savings benefits                                                       It provides an 
annualised                                driven from the Group's efficiency                                                          annualised progress 
cost                                      programmes.                                                                                 indicator for the 
savings                                                                                                                               Group's accelerated 
                                                                                                                                      digital strategy 
                                                                                                                                      and stated target 
                                                                                                                                      of delivering 
                                                                                                                                      approximately 
                                                                                                                                      GBP175m of additional 
                                                                                                                                      cost savings by 
                                                                                                                                      FY24, enabled by 
                                                                                                                                      GBP275m of restructuring 
                                                                                                                                      investment. 
-----------  ---  ----  -----  --------  ------------------------------------------------------------------------------------------  --------------------------- 
Statutory    Yes  Yes   2022   Non-IFRS  Statutory profit after tax attributable                                                      It's an indicator 
return                                    to ordinary equity holders as a                                                             of the Group's 
on tangible                               percentage of average tangible                                                              profitability and 
equity                                    equity (average total equity less                                                           gives the return 
(RoTE)                                    intangible assets and AT1) for                                                              generated for shareholders 
                                          a given year.                                   2022       2021       2020                  as a percentage 
                                                                                                                                      of the Group's 
                                                                                                                                      tangible equity. 
                         2021             ----------------------------  ---------  ---------  --------- 
                         2020             Statutory profit after tax 
                         2019              attributable to ordinary 
                                           equity holders (a)             GBP467m    GBP395m  GBP(220)m 
                                          Average tangible equity (b)   GBP4,539m  GBP3,875m  GBP3,554m 
                                          Statutory RoTE (a)/(b)            10.3%      10.2%     (6.2)% 
                                          ----------------------------  ---------  ---------  --------- 
-----------  ---  ----  -----  --------  ------------------------------------------------------------------------------------------  --------------------------- 
Underlying   Yes  Yes   2021   Non-IFRS  Underlying operating and administrative                                                      It's a measure 
 cost:ratio                               expenses as a percentage of underlying                                                       of efficiency in 
 (CIR)                                    total operating income for a given                                                           terms of how total 
                                          year.                                    2022       2021       2020                          operating expenses 
                                                                                                                                       compare to total 
                                                                                                                                       operating income 
                                                                                                                                       on an underlying 
                                                                                                                                       basis. 
                         2020             -----------------------------  ---------  ---------  --------- 
                         2019             Underlying operating and 
                                           administrative expenses (a)     GBP914m    GBP902m    GBP917m 
                                          Underlying total operating 
                                           income (b)                    GBP1,755m  GBP1,572m  GBP1,542m 
                                          Underlying CIR (a)/(b)             52.1%      57.4%      59.5% 
                                          -----------------------------  ---------  ---------  --------- 
-----------  ---  ----  -----  --------  ------------------------------------------------------------------------------------------  --------------------------- 
Net          No   No    N/a    Non-IFRS  Underlying NII as a percentage                                                               It's an indicator 
interest                                  of average interest earning assets                                                           of the Group's 
margin                                    (which is adjusted to exclude short-term                                                     profitability by 
(NIM)                                     repos used for liquidity management                                                          showing the difference 
                                          purposes) for a given year.                                  2022        2021        2020    between how much 
                                          --------------------------  ----------  ----------  ----------                               the Group is earning 
                                          Underlying NII (a)           GBP1,592m   GBP1,412m   GBP1,351m                               in interest on 
                                          Average interest earning                                                                     its loans compared 
                                           assets (b)                 GBP86,275m  GBP86,947m  GBP86,826m                               to how much it 
                                          Short-term repos used for                                                                    is paying out in 
                                           liquidity management (c)       GBP12m      GBP16m      GBP16m                               interest on deposits. 
                                          NIM (a)/((b)-(c))                1.85%       1.62%       1.56% 
                                          --------------------------  ----------  ----------  ---------- 
-----------  ---  ----  -----  --------  ------------------------------------------------------------------------------------------  --------------------------- 
 

Additional information

Measuring the Group's performance

Financial performance metrics continued

Profitability continued:

 
Metric      KPI  LTIP  LTIP  Basis     Definition/formula                                                                     Why it 
                       Year                                                                                                   matters? 
----------  ---  ----  ----  --------  ------------------------------------------------------------------------------------  -------------- 
Statutory   No   No    N/a   IFRS                  Statutory profit after tax attributable                                    It's an 
basic                                               to ordinary equity shareholders,                                          indicator 
earnings                                            divided by the weighted average                                           of the 
per share                                           number of ordinary shares in issue                                        Group's 
(EPS)                                               for a given year (which includes                                          profitability 
                                                    deferred shares and excludes own                                          on 
                                                    shares held or contingently returnable                                    a statutory 
                                                    shares).                                     2022     2021       2020     basis. 
                                                    --------------------------------  -------  -------  --------- 
                                                    Statutory profit/(loss) after 
                                                     tax attributable to ordinary 
                                                     equity shareholders (a)          GBP467m  GBP395m  GBP(220)m 
                                                    Weighted average number of 
                                                     ordinary shares in issue 
                                                     (b)                               1,441m   1,442m     1,440m 
                                                    Statutory basic earnings/(loss) 
                                                     per share (a)/(b)                  32.4p    27.3p    (15.3)p 
                                                    --------------------------------  -------  -------  --------- 
----------  ---  ----  ----  --------  ------------------------------------------------------------------------------------  -------------- 
Statutory   No   No    N/a   Non-IFRS  Statutory operating and administrative                                                 It's a 
 CIR                                    expenses as a percentage of statutory                                                 measure 
                                        total operating income for a given                                                    of efficiency 
                                        year.                                              2022       2021       2020         in 
                                        ---------------------------------------  ---------  ---------  ---------              terms of how 
                                        Statutory operating and administrative                                                total 
                                         expenses (a)                            GBP1,069m  GBP1,203m  GBP1,104m              operating 
                                        Statutory total operating                                                             expenses 
                                         income (b)                              GBP1,716m  GBP1,489m  GBP1,443m              compare to 
                                        Statutory CIR (a)/(b)                        62.3%      80.8%      76.5%              total 
                                        ---------------------------------------  ---------  ---------  ---------              operating 
                                                                                                                              income 
                                                                                                                              on a 
                                                                                                                              statutory 
                                                                                                                              basis. 
----------  ---  ----  ----  --------  ------------------------------------------------------------------------------------  -------------- 
Statutory   No   No    N/a   Non-IFRS  Statutory profit after tax as a                                                        It's an 
 return                                 percentage of average total assets                                                    indicator 
 on assets                              for a given year.                                      2022        2021        2020   of the 
                                        ------------------------------  ----------  ----------  ----------                    Group's 
                                        Statutory profit/(loss) after                                                         profitability 
                                         tax (a)                           GBP537m     GBP474m   GBP(141)m                    on 
                                        Average total assets (b)        GBP89,504m  GBP90,537m  GBP90,522m                    a statutory 
                                        Statutory return on assets                                                            basis. 
                                         (a)/(b)                             0.60%       0.52%     (0.16)%                    Underlying 
                                        ------------------------------  ----------  ----------  ----------                    return 
                                                                                                                              on assets is 
                                                                                                                              no 
                                                                                                                              longer 
                                                                                                                              considered 
                                                                                                                              to be a 
                                                                                                                              performance 
                                                                                                                              measure, with 
                                                                                                                              the 
                                                                                                                              focus being 
                                                                                                                              on 
                                                                                                                              the statutory 
                                                                                                                              measure. 
----------  ---  ----  ----  --------  ------------------------------------------------------------------------------------  -------------- 
Underlying  No   No    N/a   Non-IFRS  Underlying profit after tax attributable                                               It's an 
 basic EPS                              to ordinary equity shareholders,                                                      indicator 
                                        divided by the weighted average                                                       of the 
                                        number of ordinary shares in issue                                                    Group's 
                                        for a given year (which includes                                                      profitability 
                                        deferred shares and excludes own                                                      on 
                                        shares held or contingently returnable                                                an underlying 
                                        shares).                                 2022     2021    2020                        basis. 
                                        ----------------------------  -------  ------- 
                                        Underlying profit after tax 
                                         attributable to ordinary 
                                         equity shareholders (a)      GBP612m  GBP691m  GBP20m 
                                        Weighted average number of 
                                         ordinary shares in issue 
                                         (b)                           1,441m   1,442m  1,440m 
                                        Underlying basic earnings 
                                         per share (a)/(b)              42.4p    47.9p    1.4p 
                                        ----------------------------  -------  -------  ------ 
----------  ---  ----  ----  --------  ------------------------------------------------------------------------------------  -------------- 
 

Additional information

Measuring the Group's performance

Financial performance metrics continued

Profitability continued:

 
Metric        KPI  LTIP  LTIP  Basis     Definition/formula                                                                               Why it 
                         Year                                                                                                             matters? 
------------  ---  ----  ----  --------  ----------------------------------------------------------------------------------------------  -------------- 
Underlying    No   No    N/a   Non-IFRS  Statutory profit before tax plus                                                                 It's an 
profit                                    total underlying adjustments to                                                                 indicator 
before                                    the statutory view of performance.                                   2022     2021       2020   of the 
tax                                       ------------------------------  -------  -------  ---------                                     Group's 
                                          Statutory profit/(loss) before                                                                  profitability 
                                           tax (a)                        GBP595m  GBP417m  GBP(168)m                                     on 
                                          Restructuring charges (b)        GBP82m  GBP146m    GBP139m                                     an underlying 
                                          Acquisition accounting unwinds                                                                  basis. 
                                           (c)                             GBP35m   GBP88m    GBP113m 
                                          Legacy conduct (d)                GBP8m   GBP76m     GBP26m 
                                          Other (e)                        GBP69m   GBP74m     GBP14m 
                                          Underlying profit before 
                                           tax (a) + (b) + (c) + (d) 
                                           + (e)                          GBP789m  GBP801m    GBP124m 
                                          ------------------------------  -------  -------  --------- 
------------  ---  ----  ----  --------  ----------------------------------------------------------------------------------------------  -------------- 
Underlying    No   No    N/a   Non-IFRS  Underlying profit before tax less                                                                It's an 
profit after                              underlying tax charge, less AT1                                                                 indicator 
tax                                       distributions. The underlying tax                                                               of the 
attributable                              charge (or credit) is the difference                                                            Group's 
to ordinary                               between the statutory tax charge                                                                profitability 
equity                                    (or credit) and the tax attributable                                                            on 
shareholders                              to exceptional items.                                2022     2021     2020                     an underlying 
                                          ---------------------------  -------  -------  -------                                          basis. 
                                          Underlying profit before 
                                           tax (a)                     GBP789m  GBP801m  GBP124m 
                                          Underlying tax charge (b)    GBP107m   GBP31m   GBP25m 
                                          AT1 distributions (c)         GBP70m   GBP79m   GBP79m 
                                          Underlying profit after tax 
                                           attributable to ordinary 
                                           equity shareholders (a) - 
                                           (b) - (c)                   GBP612m  GBP691m   GBP20m 
                                          ---------------------------  -------  -------  ------- 
------------  ---  ----  ----  --------  ----------------------------------------------------------------------------------------------  -------------- 
Underlying    No   No    N/a   Non-IFRS  Underlying profit after tax attributable                                                         It's an 
 RoTE                                     to ordinary equity holders as a                                                                 indicator 
                                          percentage of average tangible                                                                  of the 
                                          equity (average total equity less                                                               Group's 
                                          intangible assets and AT1) for                                                                  profitability 
                                          a given year.                                   2022       2021       2020                      on 
                                          ----------------------------  ---------  ---------  ---------                                   an underlying 
                                          Underlying profit after tax                                                                     basis 
                                           attributable to ordinary                                                                       and gives the 
                                           equity holders (a)             GBP612m    GBP691m     GBP20m                                   return 
                                          Average tangible equity (b)   GBP4,539m  GBP3,875m  GBP3,554m                                   generated for 
                                          Underlying RoTE (a)/(b)           13.5%      17.8%       0.6%                                   shareholders 
                                          ----------------------------  ---------  ---------  ---------                                   as a 
                                                                                                                                          percentage 
                                                                                                                                          of the 
                                                                                                                                          Group's 
                                                                                                                                          tangible 
                                                                                                                                          equity. 
------------  ---  ----  ----  --------  ----------------------------------------------------------------------------------------------  -------------- 
 

Additional information

Measuring the Group's performance

Lending (Basis - non-IFRS):

 
Metric        KPI  LTIP  LTIP   Definition and formula (where applicable)                                                  Why it matters? 
                          Year 
------------  ---  ----  -----  ----------------------------------------------------------------------------------------  ------------------------ 
Target        Yes  No    N/a    Target lending segment asset growth                                                        It's an indicator 
lending                          over the year. Target lending is                                                          of how well the 
segment                          defined as Unsecured and BAU Business                                                     Group is performing 
asset growth                     lending (excluding Government lending                                                     against its 'pioneering 
                                 schemes noting these are closed                                                           growth' strategic 
                                 and in run off.                                            2022        2021        2020   priority. 
                                 ------------------------------------  ----------  ----------  ---------- 
                                 Total lending - current year 
                                  (a)                                  GBP13,448m  GBP12,573m  GBP13,006m 
                                 Total lending - prior year 
                                  (b)                                   GBP12,573  GBP13,006m  GBP12,900m 
                                 Target lending growth ((a)-(b))/(b)         7.0%      (3.3)%        0.8% 
                                 ------------------------------------  ----------  ----------  ---------- 
------------  ---  ----  -----  ----------------------------------------------------------------------------------------  ------------------------ 
Relationship  No   Yes   2021   Relationship deposit growth over                                                           It's an indicator 
 deposits                        the year.                                    2022        2021        2020                 of how well the 
 growth                                                                                                                    Group is performing 
                                                                                                                           against its 'pioneering 
                                                                                                                           growth' strategic 
                                                                                                                           priority. 
                          2020   ----------------------------  ----------  ----------  ---------- 
                                 Total relationship deposits 
                                  - current year (a)           GBP34,649m  GBP30,596m  GBP25,675m 
                                 Total relationship deposits 
                                  - prior year (b)             GBP30,596m  GBP25,675m  GBP21,347m 
                                 Relationship deposit growth 
                                  ((a)-(b))/(b)                     13.2%       19.2%       20.3% 
                                 ----------------------------  ----------  ----------  ---------- 
------------  ---  ----  -----  ----------------------------------------------------------------------------------------  ------------------------ 
 

Additional information

Measuring the Group's performance

Asset quality (Basis - non-IFRS):

 
Metric      KPI  LTIP  LTIP  Definition/formula                                                                             Why it 
                       Year                                                                                                 matters? 
----------  ---  ----  ----  --------------------------------------------------------------------------------------------  ----------- 
Impairment  No   No    N/a   Impairment losses on credit exposures                                                          It's an 
charge to                     as a percentage of average customer                                                           indicator 
average                       loans (defined as loans and advances                                                          of the 
customer                      to customers, other financial assets                                                          asset 
loans                         at fair value and due from customers                                                          quality 
(cost of                      on acceptances).                                   2022        2021        2020               of the 
risk)                         ---------------------------  ----------  ----------  ----------                               Group's 
                              Impairment charge/(credit)                                                                    lending 
                               (a)                             GBP52m   GBP(131)m     GBP501m                               portfolio. 
                              Average customer loans (b)   GBP71,989m  GBP72,447m  GBP73,403m 
                              Cost of risk (a)/(b)              0.07%     (0.18)%       0.68% 
                              ---------------------------  ----------  ----------  ---------- 
----------  ---  ----  ----  --------------------------------------------------------------------------------------------  ----------- 
% of loans  No   No    N/a   Stage 2 loans as a percentage of                                                               It allows 
in Stage 2                    gross loans and advances.                                      2022        2021        2020   period 
                              ------------------------------  ----------  ----------  ----------                            on period 
                              Stage 2 loans (a)                GBP5,736m  GBP10,178m  GBP12,844m                            comparison 
                              Gross loans and advances                                                                      of 
                               (b)                            GBP73,146m  GBP72,551m  GBP72,925m                            stage 2 
                              % of loans in stage 2 (a)/(b)         7.8%       14.1%       17.7%                            loans 
                              ------------------------------  ----------  ----------  ----------                            as a 
                                                                                                                            percentage 
                                                                                                                            of overall 
                                                                                                                            gross 
                                                                                                                            loans and 
                                                                                                                            advances 
                                                                                                                            and 
                                                                                                                            therefore 
                                                                                                                            provides 
                                                                                                                            insight 
                                                                                                                            into the 
                                                                                                                            asset 
                                                                                                                            quality of 
                                                                                                                            the 
                                                                                                                            Group's 
                                                                                                                            lending 
                                                                                                                            portfolio 
                                                                                                                            over 
                                                                                                                            time. 
----------  ---  ----  ----  --------------------------------------------------------------------------------------------  ----------- 
% of loans  No   No    N/a   Stage 3 loans as a percentage of                                                               It allows 
in Stage 3                    gross loans and advances.                                      2022        2021        2020   period 
                              ------------------------------  ----------  ----------  ----------                            on period 
                              Stage 3 loans (a)                GBP1,038m     GBP957m     GBP862m                            comparison 
                              Gross loans and advances                                                                      of 
                               (b)                            GBP73,146m  GBP72,551m  GBP72,925m                            stage 3 
                              % of loans in stage 3 (a)/(b)         1.4%        1.3%        1.2%                            loans 
                              ------------------------------  ----------  ----------  ----------                            as a 
                                                                                                                            percentage 
                                                                                                                            of overall 
                                                                                                                            gross 
                                                                                                                            loans and 
                                                                                                                            advances 
                                                                                                                            and 
                                                                                                                            therefore 
                                                                                                                            provides 
                                                                                                                            insight 
                                                                                                                            into the 
                                                                                                                            asset 
                                                                                                                            quality of 
                                                                                                                            the 
                                                                                                                            Group's 
                                                                                                                            lending 
                                                                                                                            portfolio 
                                                                                                                            over 
                                                                                                                            time. 
----------  ---  ----  ----  --------------------------------------------------------------------------------------------  ----------- 
Total book  No   No    N/a   Total impairment provisions on                                                                 It 
 coverage                     credit exposures as a percentage                                                              provides a 
                              of total customer loans.                                    2022        2021        2020      measure 
                              ----------------------------  ----------  ----------  ----------                              of the 
                              Impairment provisions on                                                                      level of 
                               credit exposures (a)            GBP457m     GBP504m     GBP735m                              provision 
                              Gross loans and advances                                                                      the Group 
                               (b)                          GBP73,146m  GBP72,551m  GBP72,925m                              holds for 
                              Total book coverage (a)/(b)        0.62%       0.70%       1.03%                              the total 
                              ----------------------------  ----------  ----------  ----------                              lending 
                                                                                                                            portfolio. 
----------  ---  ----  ----  --------------------------------------------------------------------------------------------  ----------- 
Stage 2     No   No    N/a   Stage 2 impairment provisions as                                                               It 
coverage                      a percentage of stage 2 gross loans                                                           provides a 
                              and advances.                                        2022        2021        2020             measure 
                              ---------------------------------  ---------  ----------  ----------                          of the 
                              Stage 2 impairment provisions                                                                 level of 
                               on credit exposures (a)             GBP268m     GBP302m     GBP465m                          provision 
                              Stage 2 gross loans and advances                                                              the Group 
                               (b)                               GBP5,736m  GBP10,178m  GBP12,844m                          holds for 
                              Total stage 2 book coverage                                                                   the 
                               (a)/(b)                               4.72%       3.02%       3.66%                          lifetime 
                              ---------------------------------  ---------  ----------  ----------                          of the 
                                                                                                                            Stage 2 
                                                                                                                            lending 
                                                                                                                            portfolio. 
----------  ---  ----  ----  --------------------------------------------------------------------------------------------  ----------- 
 

Additional information

Measuring the Group's performance

Asset quality continued (Basis - non-IFRS):

 
Metric     KPI  LTIP  LTIP   Definition/formula                                                             Why it 
                       Year                                                                                 matters? 
---------  ---  ----  -----  ----------------------------------------------------------------------------  ----------- 
Stage 3    No   No    N/a    Stage 3 impairment provisions as                                               It 
 coverage                     a percentage of stage 3 gross loans                                           provides a 
                              and advances.                                        2022     2021     2020   measure 
                              ---------------------------------  ---------  -------  -------                of the 
                              Stage 3 impairment provisions                                                 level of 
                               on credit exposures (a)             GBP104m   GBP91m  GBP134m                provision 
                              Stage 3 gross loans and advances                                              the Group 
                               (b)                               GBP1,038m  GBP957m  GBP862m                holds for 
                              Total stage 3 book coverage                                                   the 
                               (a)/(b)                              11.24%    9.59%   15.73%                lifetime 
                              ---------------------------------  ---------  -------  -------                of the 
                                                                                                            Stage 3 
                                                                                                            lending 
                                                                                                            portfolio. 
---------  ---  ----  -----  ----------------------------------------------------------------------------  ----------- 
 

Additional information

Measuring the Group's performance

Capital (Basis - non-IFRS):

 
Metric         KPI  LTIP  LTIP  Definition/formula                                                                            Why it 
                          Year                                                                                                matters? 
-------------  ---  ----  ----  -------------------------------------------------------------------------------------------  -------------- 
Announced      Yes  No    N/a   Dividends announced for the year                                                              It shows how 
shareholder                      plus buybacks as a percentage of                                                             much 
distributions                    statutory profit after tax attributable                                                      of our 
                                 to ordinary shareholders.                                         2022     2021       2020   profits 
                                 ------------------------------------  -------  -------  ---------                            after tax and 
                                 Interim dividend (a)                   GBP36m      n/a        n/a                            distributions 
                                 Final dividend (b)                    GBP106m   GBP14m        n/a                            we are paying 
                                 Buybacks (c)                          GBP125m      n/a        n/a                            out 
                                 Statutory profit after tax                                                                   to our 
                                  attributable to ordinary                                                                    shareholders. 
                                  equity holders (d)                   GBP467m  GBP395m  GBP(220)m 
                                 Announced shareholder distributions 
                                  ((a)+(b)+(c))/(d)                        57%       4%        n/a 
                                 ------------------------------------  -------  -------  --------- 
-------------  ---  ----  ----  -------------------------------------------------------------------------------------------  -------------- 
Common Equity  No   No    N/a   CET1 capital as a percentage of                                                               It's an 
Tier 1 (CET1)                    RWAs, on an IFRS 9 transitional                                                              indicator 
ratio (IFRS                      basis.                                           2022        2021        2020                of bank 
9                                -----------------------------------  ----------  ----------  ----------                      solvency 
transitional)                    CET1 capital (IFRS 9 transitional)                                                           that gauges 
                                  (a)                                  GBP3,633m   GBP3,616m   GBP3,271m                      the 
                                 RWA (IFRS 9 transitional)                                                                    strength of 
                                  (b)                                 GBP24,148m  GBP24,232m  GBP24,399m                      the 
                                 CET1 ratio (IFRS 9 transitional)                                                             Group's CET1 
                                  (a)/(b)                                  15.0%       14.9%       13.4%                      capital 
                                 -----------------------------------  ----------  ----------  ----------                      relative to 
                                                                                                                              risk 
                                                                                                                              weighted 
                                                                                                                              assets. 
-------------  ---  ----  ----  -------------------------------------------------------------------------------------------  -------------- 
CET1 ratio     No   No    N/a               CET1 capital as a percentage of                                                   It's an 
(IFRS 9 fully                                RWAs, on an IFRS 9 fully loaded                                                  indicator 
loaded)                                      basis.                                   2022        2021        2020            of bank 
                                             ---------------------------  ----------  ----------  ----------                  solvency 
                                             CET1 capital (IFRS 9 fully                                                       that gauges 
                                              loaded) (a)                  GBP3,519m   GBP3,482m   GBP2,961m                  the 
                                             RWA (IFRS 9 fully loaded)                                                        strength of 
                                              (b)                         GBP24,056m  GBP24,156m  GBP24,246m                  the 
                                             CET1 ratio (IFRS 9 fully                                                         Group's CET1 
                                              loaded) (a)/(b)                  14.6%       14.4%       12.2%                  capital 
                                             ---------------------------  ----------  ----------  ----------                  without 
                                                                                                                              adjusting 
                                                                                                                              for temporary 
                                                                                                                              IFRS 
                                                                                                                              9 relief. 
-------------  ---  ----  ----  -------------------------------------------------------------------------------------------  -------------- 
Tier 1 ratio   No   No    N/a   Tier 1 capital as a percentage                                                                It's an 
                                 of RWAs.                                                                                     indicator 
                                                              2022        2021        2020                                    of bank 
                                 ---------------------  ----------  ----------  ----------                                    solvency 
                                 Tier 1 capital (a)      GBP4,299m   GBP4,313m   GBP4,186m                                    that gauges 
                                 RWA (b)                GBP24,148m  GBP24,232m  GBP24,399m                                    the 
                                 Tier 1 ratio (a)/(b)        17.8%       17.8%       17.2%                                    strength of 
                                 ---------------------  ----------  ----------  ----------                                    the 
                                                                                                                              Group's Tier 
                                                                                                                              1 
                                                                                                                              capital 
                                                                                                                              relative 
                                                                                                                              to risk 
                                                                                                                              weighted 
                                                                                                                              assets. 
-------------  ---  ----  ----  -------------------------------------------------------------------------------------------  -------------- 
 

Additional information

Measuring the Group's performance

Capital continued (Basis - non-IFRS):

 
Metric       KPI  LTIP  LTIP  Definition/formula                                                                 Why it 
                        Year                                                                                     matters? 
-----------  ---  ----  ----  --------------------------------------------------------------------------------  -------------- 
Total        No   No    N/a   Total capital resources as a percentage                                            It's an 
capital                        of RWAs.                                                                          indicator 
ratio                                                              2022        2021        2020                  of bank 
                               ----------------------------  ----------  ----------  ----------                  solvency 
                               Total capital (a)              GBP5,319m   GBP5,332m   GBP4,935m                  that gauges 
                               RWA (b)                       GBP24,148m  GBP24,232m  GBP24,399m                  the 
                               Total capital ratio (a)/(b)        22.0%       22.0%       20.2%                  strength of 
                               ----------------------------  ----------  ----------  ----------                  the 
                                                                                                                 Group's total 
                                                                                                                 capital 
                                                                                                                 relative to 
                                                                                                                 risk 
                                                                                                                 weighted 
                                                                                                                 assets. 
-----------  ---  ----  ----  --------------------------------------------------------------------------------  -------------- 
Tangible     No   No    N/a   Tangible equity (total equity less                                                 It represents 
net asset                      intangible assets and AT1) divided                                                the 
value                          by the number of ordinary shares                                                  value per 
(TNAV)                         in issue at the year end (which                                                   share 
per share                      includes deferred shares and excludes                                             of the Group 
                               own shares held).                                    2022       2021       2020   based 
                               -----------------------------  ---------  ---------  ---------                    on the 
                               Tangible equity (a)            GBP5,407m  GBP4,185m  GBP3,526m                    Group's 
                               Number of ordinary shares                                                         tangible net 
                                in issue (b)                     1,409m     1,440m     1,439m                    assets 
                               Deferred shares (c)                   3m         5m         6m                    and can be 
                               Own shares held (d)                 0.3m       0.1m       0.2m                    used 
                               Tangible net asset value                                                          as a 
                                per share (a)/((b)+(c)-(d))      383.0p     289.8p     244.2p                    comparison 
                               -----------------------------  ---------  ---------  ---------                    against the 
                                                                                                                 current 
                                                                                                                 market share 
                                                                                                                 price. 
-----------  ---  ----  ----  --------------------------------------------------------------------------------  -------------- 
Total        No   Yes   2022  Share price at the end of the financial                                            The use of 
shareholder                    period, less the share price at                                                   total 
return                         the start of the financial period                                                 shareholder 
(TSR)                          including dividends received over                                                 return 
                               the period, divided by the share                                                  enables us to 
                               price at the start of the financial                                               target 
                               period.                                                                           a measure 
                                                                      2022    2021     2020                      that 
                               ----------------------------------  -------  ------  -------                      is directly 
                               Share price at the end of                                                         linked 
                                the financial period (a)            124.3p  204.4p    73.0p                      to an 
                               Share price at the start                                                          investor's 
                                of the financial period (b)         204.4p   73.0p   114.9p                      total return 
                               Dividends (assuming reinvestment)                                                 on 
                                (c)                                   3.2p     n/a      n/a                      a share, 
                               Total shareholder return                                                          incorporating 
                                ((a)-(b)+(c))/(b)                  (37.6)%  180.1%  (36.5)%                      both share 
                               ----------------------------------  -------  ------  -------                      price 
                                                                                                                 movement and 
                                                                                                                 dividends 
                                                                                                                 paid. 
-----------  ---  ----  ----  --------------------------------------------------------------------------------  -------------- 
 

Additional information

Measuring the Group's performance

Non-financial performance metrics:

 
Metric           KPI  LTIP  LTIP   Definition and formula (where applicable)                Why it matters? 
                             Year 
---------------  ---  ----  -----  ------------------------------------------------------  --------------------------- 
Colleague        Yes  No    N/a    Outcomes from the MyVoice colleague                      Measures our understanding 
 engagement                         engagement survey preceding the                          of employee sentiment 
                                    end of the financial year.                               noting our Purpose 
                                                                                             of Making you happier 
                                                                                             about money extends 
                                                                                             to our colleagues 
                                                                                             and ensures our 
                                                                                             customers will 
                                                                                             be supported by 
                                                                                             delighted colleagues 
                                                                                             working in a healthy, 
                                                                                             flexible, digitally-led 
                                                                                             environment. 
---------------  ---  ----  -----  ------------------------------------------------------  --------------------------- 
Customer         Yes  No    N/a    In line with FCA regulations, number                     Provides a measure 
 complaints                         of complaints per thousand accounts                      to benchmark against 
 per 1,000                          calculated asTotal number of complaints received         peers and drives 
 accounts                            in 6 month period to reporting date                     accountability 
                                    ----------------------------------------                 within the Group 
                                    Total number of accounts as at reporting                 to improve customer 
                                     date                                     x 1,000        service and ensure 
                                                                                             we are making our 
                                                                                             customers happier 
                                    Currently excludes complaints relating                   about money 
                                    to Insurance and Pure Protection 
                                    FCA reporting group given historically 
                                    skewed influence of legacy PPI 
---------------  ---  ----  -----  ------------------------------------------------------  --------------------------- 
Digital primacy  Yes  No    N/a    It measures the proportion of active                     Measures the level 
                                    PCA and Card customers who are digital                   of digitisation 
                                    only in their engagement with Virgin                     across our customer 
                                    Money. To qualify, each customer                         journeys whilst 
                                    must:                                                    demonstrating the 
                                    1. be digitally adopted and active                       realisation of 
                                    (successfully logged in to the mobile                    our ambition 'to 
                                    app in the past 90 days);                                be the UK's best 
                                    2. signed up to our paperless proposition;               digital bank.' 
                                    3. not transacted in stores within 
                                    the last 90 days; and 
                                    4. have not completed an authenticated 
                                    call with contact centres in the 
                                    past 90 days. 
---------------  ---  ----  -----  ------------------------------------------------------  --------------------------- 
Group            Yes  No    N/a    % of interactions scored as a 'Smile'.                   It's a score that 
 Smile                              A 'Smile' is determined by our customers                 is used to supplement 
 score                              and only counted as a 'Smile' if                         NPS however we 
                                    they score the following three aspects                   use the Smile scores 
                                    at the highest ranking:                                  as our key customer 
                                     *    Whether the customer got what they wanted on an    experience metric 
                                          interaction.                                       given its ability 
                                                                                             to capture the 
                                                                                             role of emotion 
                                     *    How easy the interaction was.                      in customer advocacy. 
 
 
                                     *    How the interaction made them feel. 
---------------  ---  ----  -----  ------------------------------------------------------  --------------------------- 
Total active     Yes  No    N/a    Active PCA, BCA and Card customer                        It's an indicator 
 relationship                       accounts where active is defined                         of how well the 
 customer                           as > GBP0 balance for Cards; transaction                 Group is performing 
 accounts                           in the last 12 months for PCA and                        against its 'pioneering 
                                    BCA customer accounts.                                   growth' strategic 
                                                                                             priority. 
---------------  ---  ----  -----  ------------------------------------------------------  --------------------------- 
 

Additional information

Measuring the Group's performance

Non-financial performance metrics:

 
Metric          KPI  LTIP  LTIP   Definition and formula (where applicable)       Why it matters? 
                            Year 
--------------  ---  ----  -----  ---------------------------------------------  --------------------------- 
ESG scorecard   No   Yes   2022   Demonstrating progress against the              Our ESG scorecard 
                                   Group's short, medium and long term             tracks our progress 
                                   targets for:                                    in creating a sustainable 
                                   1. Senior colleague gender representation       future and the 
                                   (1) ;                                           inclusion of an 
                                   2. Senior colleague ethnic minority             ESG scorecard within 
                                   representation (1) ;                            our LTIP ensures 
                                   3. Group-wide ethnic minority representation    that Executive 
                                   (1) ;                                           Director remuneration 
                                   4. Carbon emissions, Scope 1 and                is aligned with 
                                   2;                                              the Group's aspiration 
                                   5. Net zero plan delivery (financed             to drive positive 
                                   emissions reduction); and                       social and environmental 
                                   6. Colleague engagement.                        impact through 
                                                                                   everything we do. 
                                   (1) As a percentage of the population 
                                   declared. 
--------------  ---  ----  -----  ---------------------------------------------  --------------------------- 
Risk scorecard  No   Yes   2022   Demonstrating progress against the              Our Risk scorecard 
                                   Group's targets for customer complaints,        demonstrates our 
                                   operational risk losses, cost of                commitment to, 
                                   risk, Group risk profile and Group              and monitoring 
                                   risk appetite.                                  of, prudent risk 
                                                                                   management within 
                                                                                   the business, and 
                                                                                   its inclusion within 
                                                                                   our LTIP ensures 
                                                                                   Executive Director 
                                                                                   remuneration is 
                                                                                   aligned with the 
                                                                                   Group's aspirations 
                                                                                   to deliver exceptional 
                                                                                   customer experience 
                                                                                   and ensure operations 
                                                                                   and processes drive 
                                                                                   resilience and 
                                                                                   positive customer 
                                                                                   outcomes. 
--------------  ---  ----  -----  ---------------------------------------------  --------------------------- 
 

Additional information

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.

 
Item                             2022     2021      Reason for exclusion from the Group's current underlying 
                                  GBPm     GBPm     performance 
-----------------------------  -------  -------  --------------------------------------------------------------------- 
Restructuring charges            (82)     (146)     The current period costs relate to the Group's Digital-First 
                                                    strategy. 
                                                    The Group expects to incur c.GBP275m of restructuring charges 
                                                    across 
                                                    FY22-24. 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 accounting           (35)     (88)      This consists principally of the unwind of the IFRS 3 fair value 
 unwinds                                            adjustments 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. 
-----------------------------  -------  -------  --------------------------------------------------------------------- 
Legacy conduct                   (8)      (76)      These costs are historical in nature and are not indicative of the 
                                                     Group's current practices. 
-----------------------------  -------  -------  --------------------------------------------------------------------- 
Other: 
   SME transformation            -        (1)       These costs related to the transformation of the Group's Business 
                                                    banking proposition and mainly comprised costs associated with the 
                                                    RBS incentivised switching scheme. 
   UTM transition costs          (9)      (6)       These costs relate to UTM's transformation costs principally for 
                                                     the build of a new platform for administration and servicing. 
   VISA Shares                   2        1         A one-off gain on conversion of Visa B Preference shares to Series 
                                                     A preference shares. 
   Internally developed          (62)     (68)      These costs relate to the write-off of WIP and intangible asset 
    software adjustments                             balances held on the balance sheet as a result of a reassessment 
                                                     of the Group's practices on capitalisation against the backdrop 
                                                     of the move to an Agile project delivery. 
Total other                      (69)     (74) 
-----------------------------  -------  -------  --------------------------------------------------------------------- 
Total underlying adjustments     (194)    (384) 
-----------------------------  -------  -------  --------------------------------------------------------------------- 
 

Additional information

Glossary

 
Term                        Definition 
-------------------------  ----------------------------------------------------------------- 
Additional Tier             Securities that are considered AT1 capital in the context 
 1 (AT1)                     of CRD IV. 
-------------------------  ----------------------------------------------------------------- 
Agile                       Agile working is about bringing people, processes, connectivity 
                             and technology, time and place together to find the 
                             most appropriate and effective way of working. 
-------------------------  ----------------------------------------------------------------- 
arrears                     A customer is in arrears (or in a state of delinquency) 
                             when they fail to adhere to their contractual payment 
                             obligations resulting in an outstanding loan that is 
                             unpaid or overdue. When a customer is in arrears, the 
                             total outstanding loans on which payments are overdue 
                             are said to be delinquent. 
-------------------------  ----------------------------------------------------------------- 
average assets              Represents the average of assets over the year adjusted 
                             for any disposed operations. 
-------------------------  ----------------------------------------------------------------- 
Bank                        Clydesdale Bank PLC. 
-------------------------  ----------------------------------------------------------------- 
Basel II                    The capital adequacy framework issued by the Basel Committee 
                             on Banking Supervision (BCBS) in June 2004. 
-------------------------  ----------------------------------------------------------------- 
Basel III                   Reforms issued by the BCBS in December 2017 with subsequent 
                             revisions. 
-------------------------  ----------------------------------------------------------------- 
basis points (bps)          One hundredth of a percent (0.01%); meaning that 100 
                             basis points is equal to 1%. This term is commonly used 
                             in describing interest rate movements. 
-------------------------  ----------------------------------------------------------------- 
Board                       Refers to the Virgin Money UK PLC Board or the Clydesdale 
                             Bank PLC Board as appropriate. 
-------------------------  ----------------------------------------------------------------- 
Bounce back loan            A scheme implemented by the UK Government to provide 
 scheme                      financial support to businesses across the UK that were 
                             losing revenue, and seeing their cash flow disrupted 
                             as a result of COVID-19, enabling them to benefit from 
                             GBP50,000 or less in finance. 
-------------------------  ----------------------------------------------------------------- 
Business lending            Lending to non-retail customers, including overdrafts, 
                             asset and lease financing, term lending, bill acceptances, 
                             foreign currency loans, international and trade finance, 
                             securitisation and specialised finance. 
-------------------------  ----------------------------------------------------------------- 
carbon related assets       Assets tied to the energy and utilities sectors under 
                             the Global Industry Classification Standard (mapped 
                             to internal industry classifications), excluding water 
                             utilities and independent power and renewable electricity 
                             producer industries. 
-------------------------  ----------------------------------------------------------------- 
carrying value (also        The value of an asset or a liability in the balance 
 referred to as carrying     sheet based on either amortised cost or fair value principles. 
 amount) 
-------------------------  ----------------------------------------------------------------- 
cash and cash equivalents   For the purposes of the statement of cash flows, cash 
                             and cash equivalents comprise cash and non-mandatory 
                             deposits with central banks and amounts due from other 
                             banks with a maturity of less than three months. 
-------------------------  ----------------------------------------------------------------- 
Code                        The 2018 UK Corporate Governance Code. 
-------------------------  ----------------------------------------------------------------- 
collateral                  The assets of a borrower that are used as security against 
                             a loan facility. 
-------------------------  ----------------------------------------------------------------- 
commercial paper            An unsecured promissory note issued to finance short-term 
                             credit requirements. These instruments have a specified 
                             maturity date and stipulate the face amount to be paid 
                             to the investor on that date. 
-------------------------  ----------------------------------------------------------------- 
Common Equity Tier          The highest quality form of regulatory capital that 
 1 capital (CET1)            comprises total shareholders' equity, less goodwill 
                             and intangible assets and certain other regulatory adjustments. 
-------------------------  ----------------------------------------------------------------- 
Company                     Virgin Money UK PLC. 
-------------------------  ----------------------------------------------------------------- 
Coronavirus business        A scheme implemented by the UK Government to provide 
 interruption loan           financial support to smaller businesses across the UK 
 scheme                      that were losing revenue, and seeing their cash flow 
                             disrupted, as a result of COVID-19. 
-------------------------  ----------------------------------------------------------------- 
Coronavirus large           A scheme implemented by the UK Government to provide 
 business interruption       financial support to mid-sized and larger businesses 
 loan scheme                 across the UK that were suffering disruption to their 
                             cash flow due to lost or deferred revenues as a result 
                             of COVID-19. 
-------------------------  ----------------------------------------------------------------- 
counterparty                The other party that participates in a financial transaction, 
                             with every transaction requiring a counterparty in order 
                             for the transaction to complete. 
-------------------------  ----------------------------------------------------------------- 
Coverage ratio              Impairment allowance as at the year end shown as a percentage 
                             of gross loans and advances as at the year end. 
-------------------------  ----------------------------------------------------------------- 
covered bonds               A corporate bond with primary recourse to the institution 
                             and secondary recourse to a pool of assets that act 
                             as security for the bonds on issuer default. Covered 
                             bonds remain on the issuer's balance sheet and are a 
                             source of term funding for the Group. 
-------------------------  ----------------------------------------------------------------- 
CRD IV                      European legislation to implement Basel III. It replaces 
                             earlier European CRDs with a revised package consisting 
                             of a new CRD and a new CRR. CRD IV sets out capital 
                             and liquidity requirements for European banks and harmonises 
                             the European framework for bank supervision. See also 
                             'Basel III'. 
-------------------------  ----------------------------------------------------------------- 
credit conversion           CCFs are used in determining the EAD in relation to 
 factor (CCF)                a credit risk exposure. The CCF is an estimate of the 
                             proportion of undrawn and off-balance sheet commitments 
                             expected to be drawn down at the point of default. 
-------------------------  ----------------------------------------------------------------- 
Credit impaired             A financial asset that is in default or has an individually 
 financial asset             assessed provision. This is also referred to as a 'Stage 
                             3' impairment loss and subject to a lifetime ECL calculation. 
                             The Group considers 90 DPD as a backstop in determining 
                             whether a financial asset is credit impaired. 
-------------------------  ----------------------------------------------------------------- 
Credit risk mitigation      Techniques to reduce the potential loss in the event 
                             that a customer (borrower or counterparty) becomes unable 
                             to meet its obligations. This may include the taking 
                             of financial or physical security, the assignment of 
                             receivables or the use of credit derivatives, guarantees, 
                             credit insurance, set-off or netting. 
-------------------------  ----------------------------------------------------------------- 
CRR II                      Capital Requirements Regulation (EU) 575/2013 and Directive 
                             (EU) 2013/36, revised by Regulation (EU) 2019/876 and 
                             Directive (EU) 2019/878, as implemented in the UK by 
                             PRA Policy Statement 22/21 and incorporated into the 
                             PRA Rulebook from 1 January 2022. 
-------------------------  ----------------------------------------------------------------- 
customer deposits           Money deposited by individuals or corporate entities 
                             that are not credit institutions, and can be either 
                             interest bearing, non-interest bearing or term deposits. 
-------------------------  ----------------------------------------------------------------- 
days past due (DPD)         The number of days a facility has borrowing in excess 
                             of an agreed or expired limit or, where facilities are 
                             subject to a regular repayment schedule, contractual 
                             payments are not fully up to date. 
-------------------------  ----------------------------------------------------------------- 
 

Additional information

Glossary

 
Term                       Definition 
------------------------  --------------------------------------------------------------- 
default                    A customer is in default when either they are more than 
                            90 DPD on a credit obligation to the Group, or are considered 
                            unlikely to pay their credit obligations in full without 
                            recourse to actions such as realisation of security 
                            (if held). 
------------------------  --------------------------------------------------------------- 
delinquency                See 'arrears'. 
------------------------  --------------------------------------------------------------- 
Demerger                   The demerger of the Group from NAB which took effect 
                            on 8 February 2016 pursuant to which all of the issued 
                            share capital of CYB Investments Limited was transferred 
                            to the Company (formerly CYBG PLC) by NAB in consideration 
                            for the issue and transfer of the Company (formerly 
                            CYBG PLC) shares to NAB in part for the benefit of NAB 
                            (which NAB subsequently sold pursuant to the Company's 
                            IPO) and in part for the benefit of NAB shareholders 
                            under a scheme of arrangement under part 5.1 of the 
                            Australian Corporations Act. 
------------------------  --------------------------------------------------------------- 
derivative                 A financial instrument that is a contract or agreement 
                            whose value is related to the value of an underlying 
                            instrument, reference rate or index. 
------------------------  --------------------------------------------------------------- 
effective interest         The rate used to calculate interest income or expense 
 rate (EIR)                 under the effective interest method. 
------------------------  --------------------------------------------------------------- 
encumbered assets          Assets that have been pledged as security, collateral 
                            or legally 'ring-fenced' in some other way which prevents 
                            those assets being transferred, pledged, sold or otherwise 
                            disposed. 
------------------------  --------------------------------------------------------------- 
exposure                   A claim, contingent claim or position which carries 
                            a risk of financial loss. 
------------------------  --------------------------------------------------------------- 
exposure at default        The estimate of the amount that the customer will owe 
 (EAD)                      at the time of default. 
------------------------  --------------------------------------------------------------- 
fair value                 The price that would be received to sell an asset or 
                            paid to transfer a liability in an orderly transaction 
                            in the principal (or most advantageous) market at the 
                            measurement date under current market conditions. 
------------------------  --------------------------------------------------------------- 
forbearance                The term generally applied to the facilities provided 
                            or changes to facilities provided to assist borrowers, 
                            who are experiencing, or are about to experience, a 
                            period of financial stress. 
------------------------  --------------------------------------------------------------- 
Gen Z                      The current generation of young people born between 
                            the mid to late 1990s and the early 2010s. 
------------------------  --------------------------------------------------------------- 
Group                      Virgin Money UK PLC and its controlled entities. 
------------------------  --------------------------------------------------------------- 
hedge ineffectiveness      Represents the extent to which the income statement 
                            is impacted by changes in fair value or cash flows of 
                            hedging instruments not being fully offset by changes 
                            in fair value or cash flows of hedged items. 
------------------------  --------------------------------------------------------------- 
IFRS 9                     The financial instrument accounting standard which was 
                            adopted by the Group with effect from 1 October 2018. 
------------------------  --------------------------------------------------------------- 
IFRS 9 transitional        That part of the transitional adjustments on regulatory 
 adjustments - dynamic      capital arising from the increase in impairment provisions 
                            (on non-credit impaired exposures) from the date of 
                            initial adoption of IFRS 9 to the reporting date. 
------------------------  --------------------------------------------------------------- 
IFRS 9 transitional        That part of the transitional adjustments on regulatory 
 adjustments - static       capital arising from the increase in impairment provisions 
                            on initial adoption of IFRS 9 from those calculated 
                            under IAS 39. 
------------------------  --------------------------------------------------------------- 
impairment allowances      An ECL provision held on the balance sheet for financial 
                            assets calculated in accordance with IFRS 9. The impairment 
                            allowance is calculated as either a 12-month or a lifetime 
                            ECL. 
------------------------  --------------------------------------------------------------- 
impairment losses          The ECL calculated in accordance with IFRS 9 and recognised 
                            in the income statement with the carrying value of the 
                            financial asset reduced by creating an impairment allowance. 
                            Impairment losses are calculated as either a 12-month 
                            or lifetime ECL. 
------------------------  --------------------------------------------------------------- 
Internal Capital           The Group's assessment of the levels of capital that 
 Adequacy Assessment        it needs to hold through an examination of its risk 
 Process (ICAAP)            profile from regulatory and economic capital viewpoints. 
------------------------  --------------------------------------------------------------- 
Internal Liquidity         The Group's assessment and management of balance sheet 
 Adequacy Assessment        risks relating to funding and liquidity. 
 Process (ILAAP) 
------------------------  --------------------------------------------------------------- 
Internal Ratings-Based     A method of calculating credit risk capital requirements 
 approach (IRB)             using internal, rather than supervisory, estimates of 
                            risk parameters. 
------------------------  --------------------------------------------------------------- 
investment grade           The highest possible range of credit ratings, from 'AAA' 
                            to 'BBB', as measured by external credit rating agencies. 
------------------------  --------------------------------------------------------------- 
Level 1 fair value         Financial instruments whose fair value is derived from 
 measurements               unadjusted quoted prices for identical instruments in 
                            active markets. 
------------------------  --------------------------------------------------------------- 
Level 2 fair value         Financial instruments whose fair value is derived from 
 measurements               quoted prices for similar instruments in active markets 
                            and financial instruments valued using models where 
                            all significant inputs are observable. 
------------------------  --------------------------------------------------------------- 
Level 3 fair value         Financial instruments whose fair value is derived from 
 measurements               valuation techniques where one or more significant inputs 
                            are unobservable. 
------------------------  --------------------------------------------------------------- 
lifetime ECL               The ECL calculation performed on financial assets where 
                            a SICR since origination has been identified. This can 
                            be either a 'Stage 2' or 'Stage 3' impairment loss depending 
                            on whether the financial asset is credit impaired. 
------------------------  --------------------------------------------------------------- 
Listing Rules              Regulations applicable to any company listed on a UK 
                            stock exchange, subject to the oversight of the UK Listing 
                            Authority (UKLA). The Listing Rules set out mandatory 
                            standards for any company wishing to list its shares 
                            or securities for sale to the public. 
------------------------  --------------------------------------------------------------- 
loan to value ratio        A ratio that expresses the amount of a loan as a percentage 
 (LTV)                      of the value of the property on which it is secured. 
------------------------  --------------------------------------------------------------- 
location-based emissions   Calculated using the average emissions intensity of 
                            the grids on which energy consumption occurs, using 
                            mostly grid-average emission factor data. 
------------------------  --------------------------------------------------------------- 
loss-absorbing capacity    The required level of MREL resources that the Group 
 (LAC) requirement          is required to hold to meet its MREL requirement and 
                            applicable capital buffers set by the BoE. 
------------------------  --------------------------------------------------------------- 
loss given default         The estimate of the loss that the Group will suffer 
 (LGD)                      if the customer defaults (incorporating the effect of 
                            any collateral held). 
------------------------  --------------------------------------------------------------- 
market-based emissions     Calculated as the electricity that companies have purposefully 
                            chosen to purchase. It derives emission factors from 
                            contractual instruments, which include any type of contract 
                            between two parties for the sale and purchase of energy 
                            bundled with attributes about the energy generation, 
                            or for unbundled attribute claims. 
------------------------  --------------------------------------------------------------- 
 

Additional information

Glossary

 
Term                          Definition 
---------------------------  ---------------------------------------------------------------- 
medium-term notes             Debt instruments issued by corporates, including financial 
                               institutions, across a range of maturities. 
---------------------------  ---------------------------------------------------------------- 
Minimum Requirement           A minimum requirement for institutions to maintain equity 
 for Own Funds and             and eligible debt liabilities, to help ensure that if 
 Eligible Liabilities          an institution fails the resolution authority can use 
 (MREL)                        these financial resources to absorb losses and recapitalise 
                               the continuing business. 
---------------------------  ---------------------------------------------------------------- 
National Databank             The National Databank provides free mobile data, texts 
                               and calls to people in need via Good Things Foundation's 
                               network of local community partners. 
---------------------------  ---------------------------------------------------------------- 
net interest income           The amount of interest received or receivable on assets, 
 (NII)                         net of interest paid or payable on liabilities. 
---------------------------  ---------------------------------------------------------------- 
Net Promoter Score            This is an externally collated customer loyalty metric 
 (NPS)                         that measures loyalty between a provider, who in this 
                               context is the Group, and a consumer. 
---------------------------  ---------------------------------------------------------------- 
Paris Climate Agreement       Legally binding international treaty to limit global 
                               warming to below 2 degrees Celsius, and preferably to 
                               1.5 degrees Celsius above pre-industrial levels. 
---------------------------  ---------------------------------------------------------------- 
Personal lending              Lending to individuals rather than institutions excluding 
                               mortgage lending which is reported separately. 
---------------------------  ---------------------------------------------------------------- 
probability of default        The probability that a customer will default over either 
 (PD)                          the next 12 months or lifetime of the account. 
---------------------------  ---------------------------------------------------------------- 
Recovery loan scheme          A scheme implemented by the UK Government to provide 
 (RLS)                         financial support to small and medium sized businesses 
                               across the UK to promote growth and investment following 
                               the disruption caused by COVID-19. 
---------------------------  ---------------------------------------------------------------- 
regulatory capital            The capital which the Group holds, determined in accordance 
                               with rules established by the PRA. 
---------------------------  ---------------------------------------------------------------- 
relationship deposits         Current account and linked savings balances. 
---------------------------  ---------------------------------------------------------------- 
residential mortgage-backed   Securities that represent interests in groups or pools 
 securities (RMBS)             of underlying mortgages. Investors in these securities 
                               have the right to cash received from future mortgage 
                               payments (interest and principal). 
---------------------------  ---------------------------------------------------------------- 
ring-fencing                  A regime of rules which require banks to change the 
                               way that they are structured by separating retail banking 
                               services from investment and international banking. 
                               This is to ensure the economy and taxpayers are protected 
                               in the event of any future financial crises. 
---------------------------  ---------------------------------------------------------------- 
risk appetite                 The level and types of risk the Group is willing to 
                               assume within the boundaries of its risk capacity to 
                               achieve its strategic objectives. 
---------------------------  ---------------------------------------------------------------- 
risk-weighted asset           On and off-balance sheet assets of the Group are allocated 
 (RWA)                         a risk weighting based on the amount of capital required 
                               to support the asset. 
---------------------------  ---------------------------------------------------------------- 
sale and repurchase           A short-term funding agreement that allows a borrower 
 agreement (repo)              to create a collateralised loan by selling a financial 
                               asset to a lender. As part of the agreement, the borrower 
                               commits to repurchase the security at a date in the 
                               future repaying the proceeds of the loan. For the counterparty 
                               (buying the security and agreeing to sell in the future) 
                               it is a reverse repurchase agreement or a reverse repo. 
---------------------------  ---------------------------------------------------------------- 
Scheme                        The Group's defined benefit pension scheme, the Yorkshire 
                               and Clydesdale Bank Pension Scheme. 
---------------------------  ---------------------------------------------------------------- 
Science based targets         Science based targets provide a clearly defined pathway 
                               for companies and financial institutions to reduce GHG 
                               emissions, helping prevent the worst impacts of climate 
                               change and future-proof business growth. 
                               Targets are considered 'science based' if they are in 
                               line with what the latest climate science deems necessary 
                               to meet the goals of the Paris Agreement - limiting 
                               global warming to 1.5degC above pre-industrial levels. 
---------------------------  ---------------------------------------------------------------- 
Scope 1/2/3 emissions         Scope 1, 2, and 3 emissions are a way of categorising 
                               business emissions, accounting for both direct and indirect 
                               emitted GHGs. Scope 1 emissions are GHGs released directly 
                               from a business. Scope 2 emissions are indirect GHGs 
                               released from the energy purchased by an organisation. 
                               Scope 3 emissions are also indirect GHG emissions, accounting 
                               for upstream and downstream emissions of a product or 
                               service, and emissions across a business's value chain. 
---------------------------  ---------------------------------------------------------------- 
secured lending               Lending in which the borrower pledges some asset (e.g. 
                               property) as collateral for the lending. 
---------------------------  ---------------------------------------------------------------- 
securitisation                The practice of pooling similar types of contractual 
                               debt and packaging the cash flows from the financial 
                               asset into securities that can be sold to institutional 
                               investors in debt capital markets. It provides the Group 
                               with a source of secured funding that can achieve a 
                               reduction in funding costs by offering typically 'AAA' 
                               rated securities secured by the underlying financial 
                               asset. 
---------------------------  ---------------------------------------------------------------- 
significant increase          The assessment performed on financial assets at the 
 in credit risk (SICR)         reporting date to determine whether a 12-month or lifetime 
                               ECL calculation is required. Qualitative and quantitative 
                               triggers are assessed in determining whether there has 
                               been a SICR since origination. The Group considers 30 
                               DPD as a backstop in determining whether a SICR since 
                               origination has occurred. 
---------------------------  ---------------------------------------------------------------- 
standardised approach         In relation to credit risk, a method for calculating 
                               credit risk capital requirements using External Credit 
                               Assessment Institutions ratings and supervisory risk 
                               weights. In relation to operational risk, a method of 
                               calculating the operational capital requirement by the 
                               application of a supervisory defined percentage charge 
                               to the gross income of eight specified business lines. 
---------------------------  ---------------------------------------------------------------- 
stress testing                The term used to describe techniques where plausible 
                               events are considered as vulnerabilities to ascertain 
                               how this will impact the own funds or liquidity which 
                               a bank holds. 
---------------------------  ---------------------------------------------------------------- 
structured entity             An entity created to accomplish a narrow well-defined 
                               objective (e.g. securitisation of financial assets). 
                               An SE may take the form of a corporation, trust, partnership 
                               or unincorporated entity. SEs are often created with 
                               legal arrangements that impose strict limits on the 
                               activities of the SE. May also be referred to as an 
                               SPV. 
---------------------------  ---------------------------------------------------------------- 
subordinated debt             Liabilities which rank after the claims of other creditors 
                               of the issuer in the event of insolvency or liquidation. 
---------------------------  ---------------------------------------------------------------- 
Term Funding Scheme           A scheme launched in 2016 by the BoE to allow banks 
 (TFS)                         and building societies to borrow from the BoE at rates 
                               close to base rate. This is designed to increase lending 
                               to businesses by lowering interest rates and increasing 
                               access to credit. 
---------------------------  ---------------------------------------------------------------- 
Tier 1 capital                A measure of a bank's financial strength defined by 
                               CRD IV. It captures CET1 capital plus other Tier 1 securities 
                               (as defined by CRD IV) in issue, subject to deductions. 
---------------------------  ---------------------------------------------------------------- 
 

Additional information

Glossary

 
Term                  Definition 
-------------------  -------------------------------------------------------------- 
Tier 2 capital        A component of regulatory capital, including qualifying 
                       subordinated debt, eligible collective impairment allowances 
                       and other Tier 2 securities as defined by CRD IV. 
-------------------  -------------------------------------------------------------- 
unsecured lending     Lending in which the borrower pledges no assets as collateral 
                       for the lending (such as credit cards and current account 
                       overdrafts). 
-------------------  -------------------------------------------------------------- 
value at risk (VaR)   A measure of the loss that could occur on risk positions 
                       as a result of adverse movements in market risk factors 
                       (e.g. rates, prices, volatilities) over a specified 
                       time horizon and to a given level of confidence. 
-------------------  -------------------------------------------------------------- 
 

Additional information

Abbreviations

 
AFD      Approaching financial difficulty 
------  ---------------------------------- 
AGM      Annual General Meeting 
------  ---------------------------------- 
ALCO     Asset and Liability Committee 
------  ---------------------------------- 
APM      Alternative Performance 
          Measure 
------  ---------------------------------- 
ASX      Australian Securities Exchange 
------  ---------------------------------- 
AT1      Additional Tier 1 
------  ---------------------------------- 
ATM      Automated teller machine 
------  ---------------------------------- 
BCA      Business current account 
------  ---------------------------------- 
BCBS     Basel Committee on Banking 
          Supervision 
------  ---------------------------------- 
BCR      Banking Competition Remedies 
------  ---------------------------------- 
BNPL     Buy now, pay later 
------  ---------------------------------- 
BoE      Bank of England 
------  ---------------------------------- 
bps      Basis points 
------  ---------------------------------- 
BTL      Buy-to-let 
------  ---------------------------------- 
CBES     Climate Biennial Exploratory 
          Scenario 
------  ---------------------------------- 
CBI      Confederation of British 
          Industry 
------  ---------------------------------- 
CCF      Credit conversion factor 
------  ---------------------------------- 
CCyB     Countercyclical Capital 
          Buffer 
------  ---------------------------------- 
CDI      CHESS Depositary Interest 
------  ---------------------------------- 
CDP      Carbon Disclosure Project 
------  ---------------------------------- 
CER      Certified Emissions Reduction 
------  ---------------------------------- 
CET1     Common Equity Tier 1 Capital 
------  ---------------------------------- 
CIR      Cost to income ratio 
------  ---------------------------------- 
CMA      Competition and Markets 
          Authority 
------  ---------------------------------- 
CPI      Consumer Price Index 
------  ---------------------------------- 
CRD      Capital Requirements Directive 
------  ---------------------------------- 
CRR      Capital Requirements Regulation 
------  ---------------------------------- 
CSRBB    Credit spread risk in the 
          banking book 
------  ---------------------------------- 
CYBI     CYB Investments Limited 
------  ---------------------------------- 
DEP      Deferred Equity Plan 
------  ---------------------------------- 
DPD      Days past due 
------  ---------------------------------- 
DTR      Disclosure Guidance and 
          Transparency Rules 
------  ---------------------------------- 
EAD      Exposure at default 
------  ---------------------------------- 
EBA      European Banking Authority 
------  ---------------------------------- 
EBT      Employee benefit trust 
------  ---------------------------------- 
ECL      Expected credit loss 
------  ---------------------------------- 
EIR      Effective interest rate 
------  ---------------------------------- 
EPC      Energy performance certificate 
------  ---------------------------------- 
EPS      Earnings per share 
------  ---------------------------------- 
ESG      Environmental, social and 
          governance 
------  ---------------------------------- 
FCA      Financial Conduct Authority 
------  ---------------------------------- 
FIRB     Foundation internal ratings-based 
------  ---------------------------------- 
FPC      Financial Policy Committee 
------  ---------------------------------- 
FRC      Financial Reporting Council 
------  ---------------------------------- 
FTE      Full time equivalent 
------  ---------------------------------- 
FVOCI    Fair value through other 
          comprehensive income 
------  ---------------------------------- 
FVTPL    Fair value through profit 
          or loss 
------  ---------------------------------- 
GAAP     Generally Accepted Accounting 
          Principles 
------  ---------------------------------- 
GDIA     Group Director Internal 
          Audit 
------  ---------------------------------- 
GDP      Gross Domestic Product 
------  ---------------------------------- 
GDPR     General Data Protection 
          Regulation 
------  ---------------------------------- 
GHG      Greenhouse Gases 
------  ---------------------------------- 
G-SII    Global Systemically Important 
          Institution 
------  ---------------------------------- 
HMRC     Her Majesty's Revenue and 
          Customs 
------  ---------------------------------- 
HPI      House Price Index 
------  ---------------------------------- 
HQLA     High Quality Liquid Asset 
------  ---------------------------------- 
IAS      International Accounting 
          Standard 
------  ---------------------------------- 
IASB     International Accounting 
          Standards Board 
------  ---------------------------------- 
IBOR     Interbank Offered Rate 
------  ---------------------------------- 
ICAAP    Internal Capital Adequacy 
          Assessment Process 
------  ---------------------------------- 
IFRS     International Financial 
          Reporting Standard 
------  ---------------------------------- 
ILAAP    Internal Liquidity Adequacy 
          Assessment Process 
------  ---------------------------------- 
IPO      Initial Public Offering 
------  ---------------------------------- 
IRB      Internal ratings-based 
------  ---------------------------------- 
IRRBB    Interest rate risk in the 
          banking book 
------  ---------------------------------- 
ISA      International Standards 
          on Auditing 
------  ---------------------------------- 
ISDA     International Swaps and 
          Derivatives Association 
------  ---------------------------------- 
ISSB     International Sustainability 
          Standards Board 
------  ---------------------------------- 
JV       Joint venture 
------  ---------------------------------- 
KMP      Key management personnel 
------  ---------------------------------- 
KPI      Key Performance Indicator 
------  ---------------------------------- 
LAC      Loss-absorbing capacity 
------  ---------------------------------- 
LCR      Liquidity coverage ratio 
------  ---------------------------------- 
LDR      Loan to deposit ratio 
------  ---------------------------------- 
LGBTQ+   Lesbian, gay, bisexual, 
          transgender, queer (or 
          questioning) plus 
------  ---------------------------------- 
LGD      Loss Given Default 
------  ---------------------------------- 
LIBOR    London Interbank Offered 
          Rate 
------  ---------------------------------- 
LSE      London Stock Exchange 
------  ---------------------------------- 
LTIP     Long-term incentive plan 
------  ---------------------------------- 
LTV      Loan to value 
------  ---------------------------------- 
MGC      Model Governance Committee 
------  ---------------------------------- 
MREL     Minimum Requirement for 
          Own Funds and Eligible 
          Liabilities 
------  ---------------------------------- 
MRT      Material Risk Takers 
------  ---------------------------------- 
NAB      National Australia Bank 
          Limited 
------  ---------------------------------- 
NII      Net interest income 
------  ---------------------------------- 
NIM      Net interest margin 
------  ---------------------------------- 
NPS      Net promoter score 
------  ---------------------------------- 
NSFR     Net stable funding ratio 
------  ---------------------------------- 
NZBA     Net-Zero Banking Alliance 
------  ---------------------------------- 
PBT      Profit before tax 
------  ---------------------------------- 
PCA      Personal current accounts 
------  ---------------------------------- 
PCAF     Partnership for Carbon 
          Accounting Financials 
------  ---------------------------------- 
 

Additional information

Abbreviations

 
PD       Probability of Default 
------  --------------------------------- 
PIE      Pension Increase Exchange 
------  --------------------------------- 
PMA      Post model adjustment 
------  --------------------------------- 
POCI     Purchased or originated 
          credit impaired 
------  --------------------------------- 
PPI      Payment protection insurance 
------  --------------------------------- 
PRA      Prudential Regulation Authority 
------  --------------------------------- 
RAF      Risk Appetite Framework 
------  --------------------------------- 
RAS      Risk Appetite Statement 
------  --------------------------------- 
RLS      Recovery Loan Scheme 
------  --------------------------------- 
RMBS     Residential mortgage-backed 
          securities 
------  --------------------------------- 
RMF      Risk Management Framework 
------  --------------------------------- 
RoTE     Return on Tangible Equity 
------  --------------------------------- 
RPI      Retail Price Index 
------  --------------------------------- 
RWA      Risk-weighted asset 
------  --------------------------------- 
SASB     Sustainability Accounting 
          Standards Board 
------  --------------------------------- 
SAYE     Save As You Earn 
------  --------------------------------- 
SDG      Sustainable Development 
          Goal 
------  --------------------------------- 
SICR     Significant increase in 
          credit risk 
------  --------------------------------- 
SIP      Share Incentive Plan 
------  --------------------------------- 
SME      Small or medium-sized enterprise 
------  --------------------------------- 
SMF      Sterling Monetary Framework 
------  --------------------------------- 
SONIA    Sterling Overnight Index 
          Average 
------  --------------------------------- 
SST      Solvency Stress Test 
------  --------------------------------- 
STEM     Science, Technology, Engineering 
          and Maths 
------  --------------------------------- 
STIP     Short-term Incentive Plan 
------  --------------------------------- 
TCFD     Task Force on Climate-related 
          Financial Disclosures 
------  --------------------------------- 
TFS      Term Funding Scheme 
------  --------------------------------- 
TFSME    Term Funding Scheme with 
          additional incentives for 
          SMEs 
------  --------------------------------- 
TNAV     Tangible net asset value 
------  --------------------------------- 
TNFD     Taskforce on Nature-related 
          Financial Disclosures 
------  --------------------------------- 
UN PRB   United Nations' Principles 
          for Responsible Banking 
------  --------------------------------- 
UNEPFI   United Nations Environment 
          Programme Finance Initiative 
------  --------------------------------- 
UTM      Virgin Money Unit Trust 
          Managers Limited 
------  --------------------------------- 
VAA      Virgin Atlantic Airways 
          Limited 
------  --------------------------------- 
VaR      Value at risk 
------  --------------------------------- 
VIU      Value-in-use 
------  --------------------------------- 
WIP      Work-in-progress 
------  --------------------------------- 
YBHL     Yorkshire Bank Home Loans 
          Limited 
------  --------------------------------- 
YoY      Year-on-year 
------  --------------------------------- 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Additional information

Country by country reporting

The Capital Requirements (Country by Country Reporting) Regulations 2013 came into effect on 1 January 2014 and place certain reporting obligations on financial institutions that are within the scope of the European Union's CRD IV. The purpose of the Regulations is to provide clarity on the source of the Group's income and the locations of its operations.

The vast majority of entities that are consolidated within the Group's financial statements are UK registered entities. The activities of the Group are described in the Strategic report contained in the Group's Annual Report & Accounts.

 
                                    2022 
                                      UK 
---------------------------------  ----- 
Average FTE employees (number)     6,866 
Total operating income (GBPm)      1,716 
Profit before tax (GBPm)             595 
Corporation tax paid (GBPm)           59 
Public subsidies received (GBPm)       - 
                                   ----- 
 

The only other non-UK registered entity of the Group is a Trustee company that is part of the Group's securitisation vehicles (Lanark and Lannraig). Lannraig Trustees Limited is registered in Jersey. This entity plays a part in the overall securitisation process by having the beneficial interest in certain mortgage assets assigned to it. This entity has no assets or liabilities recognised in its financial statements with the securitisation activity taking place in other UK registered entities of the structures. This entity does not undertake any external economic activity and has no employees. The results of this entity as well as those of the entire Lanark and Lannraig securitisation structures are consolidated in the financial statements of the Group.

Additional information

Other information

The financial information included in this results announcement does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 30 September 2022 were approved by the directors on 20 November 2022 and will be delivered to the Registrar of Companies following publication in December 2022. The auditor's report on those accounts was unqualified and did not include a statement under sections 498(2) (accounting records or returns inadequate or accounts not agreeing with records and returns) or 498(3) (failure to obtain necessary information and explanations) of the Companies Act 2006.

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END

FR DZMZMGGZGZZZ

(END) Dow Jones Newswires

November 21, 2022 02:00 ET (07:00 GMT)

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