Source - LSE Regulatory
RNS Number : 0365M
Virgin Money UK PLC
06 May 2020
 

 

 

 

 

 

 

 

 

 

 

 

 

VIRGIN MONEY UK PLC

INTERIM FINANCIAL REPORT

SIX MONTHS TO 31 MARCH 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Virgin Money UK PLC is registered in England and Wales (company number: 09595911) and as a foreign company in Australia (ARBN 609 948 281) and has its registered office at Jubilee House, Gosforth, Newcastle upon Tyne, NE3 4PL.

 

 

 

BASIS OF PRESENTATION

Virgin Money UK PLC ('Virgin Money' or 'the Company'), together with its subsidiary undertakings (which together comprise the 'Group'), operate under the Clydesdale Bank, Yorkshire Bank, B and Virgin Money brands. It offers a range of banking services for both retail and business customers through retail branches, lounges, business banking centres, direct and online channels, and brokers. This release covers the results of the Group for the six months ended 31 March 2020.

Statutory basis: Statutory information is set out on page 18 and within the interim condensed consolidated financial statements.

Pro forma comparative results: On 15 October 2018, the Company acquired all the voting rights in Virgin Money Holdings (UK) PLC by means of a scheme of arrangement under Part 26 of the UK Companies Act 2006, with the transaction being accounted for as an acquisition of Virgin Money Holdings (UK) PLC. We believe that it is helpful to provide additional information which is more readily comparable with the current year results of the combined businesses. Therefore we have prepared pro forma comparative results for the Group as if Virgin Money UK PLC and Virgin Money Holdings (UK) PLC had always been a combined group, in order to assist in explaining trends in financial performance. A reconciliation between the results on a comparative pro forma basis and a statutory basis is included on page 17. The pro forma comparative results are also presented on an underlying basis as there were a number of factors which had a significant effect on the comparability of the Group's financial position and results. Any reference to pro forma results relates to the prior period only as the pro forma basis is not applicable in the current period due to the combined group being in operation for the entire six months to 31 March 2020.

Underlying basis: The results are adjusted to remove certain items that do not promote an understanding of historical or future trends of earnings or cash flows, and therefore allows a more meaningful comparison of the Group's underlying performance. A reconciliation from the underlying results to the statutory basis is shown on page 17 and management's rationale for the adjustments is shown on page 80.

Alternative performance measures: the financial key performance indicators (KPIs) used by management in monitoring the Group's performance and reflected throughout this report are determined on a combination of bases (including statutory, regulatory and alternative performance measures), as detailed at 'Measuring financial performance - glossary' on pages 278 to 279 of the Group Annual Report and Accounts for the year ended 30 September 2019. 

Certain figures contained in this document, including financial information, may have been subject to rounding adjustments and foreign exchange conversions. Accordingly, in certain instances, the sum or percentage change of the numbers contained in this document may not conform exactly to the total figure given.

 

FORWARD-LOOKING STATEMENTS

The information in this document may include forward-looking statements, which are based on assumptions, expectations, valuations, targets, estimates, forecasts and projections about future events. These can be identified by the use of words such as 'expects', 'aims', 'targets', 'seeks', 'anticipates', 'plans', 'intends', 'prospects', 'outlooks', 'projects', 'forecasts', 'believes', 'estimates', 'potential', 'possible', and similar words or phrases. These forward-looking statements, as well as those included in any other material discussed at any presentation, are subject to risks, uncertainties and assumptions about the Group and its securities, investments and the environment in which it operates, including, among other things, the development of its business and strategy, any acquisitions, combinations, disposals or other corporate activity undertaken by the Group (including but not limited to the integration of the business of Virgin Money Holdings (UK) PLC) and its subsidiaries into the Group, trends in its operating industry, changes to customer behaviours and covenant, macro-economic and/or geopolitical factors, the repercussions of the outbreak of coronavirus (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, changes in the liquidity, capital, funding and/or asset position and/or credit ratings of the Group and future capital expenditures and acquisitions.

In light of these risks, uncertainties and assumptions, the events in the forward-looking statements may not occur. Forward-looking statements involve inherent risks and uncertainties. Other events not taken into account may occur and may significantly affect the analysis of the forward-looking statements. No member of the Group or their respective directors, officers, employees, agents, advisers or affiliates gives any assurance that any such projections or estimates will be realised or that actual returns or other results will not be materially lower than those set out in this document and/or discussed at any presentation. All forward- looking statements should be viewed as hypothetical. No representation or warranty is made that any forward-looking statement will come to pass. No member of the Group or their respective directors, officers, employees, agents, advisers or affiliates undertakes any obligation to update or revise any such forward- looking statement following the publication of this document nor accepts any responsibility, liability or duty of care whatsoever for (whether in contract, tort or otherwise) or makes any representation or warranty, express or implied, as to the truth, fullness, fairness, merchantability, accuracy, sufficiency or completeness of, the information in this document.

The information, statements and opinions contained in this document do not constitute or form part of, and should not be construed as, any public offer under any applicable legislation or an offer to sell or solicitation of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.
 

 

 

 

 

 

 

Interim financial report

 

For the six months ended 31 March 2020

 

Contents

 

Virgin Money UK PLC Interim Results 2020  1

Business and financial review   3

Risk management 19

Statement of Directors' responsibilities  48

Independent review report to Virgin Money UK PLC   49

Financial statements  50

Interim condensed consolidated income statement 50

Interim condensed consolidated statement of comprehensive income  51

Interim condensed consolidated balance sheet 52

Interim condensed consolidated statement of changes in equity  53

Interim condensed consolidated statement of cash flows  54

Notes to the interim condensed consolidated financial statements  55

Additional information  80

 

 

 

 

 

 

 

 

 

 

 

Virgin Money UK PLC Interim Results 2020

 

David Duffy, Chief Executive Officer:

 

"The COVID-19 outbreak and its impact on the nation's businesses and consumers has markedly changed the operating environment, driving an increased impairment charge of £232m against future loan losses and a reduction in underlying profitability. While we delivered a resilient performance and continued to make good progress on our self-help strategy in the first half of the year, our primary objective now is safeguarding the health and well-being of our colleagues, customers and communities while also protecting the bank.

 

We enter this period from a position of strength, with a defensive loan book and resilient capital position, meaning we are well-placed to help our customers and colleagues through the crisis. We have rapidly adapted our operations, products and services and I am extremely proud of how our colleagues have risen to the challenge and continued to provide the very best support and advice to our customers. To date we've directly supported over 100,000 retail customers and around 4,500 businesses. We continue to work closely with Government, regulators and the industry to ensure we maximise our support to customers and the UK economy.

 

Amid the uncertainty, it is clear that the pandemic will have long-lasting and wide-ranging effects on how companies do business and on what customers will expect from the organisations they choose to interact with. Although the full impacts from the COVID-19 outbreak will take time to emerge, I'm confident that our agility, digital capabilities and focus on disrupting the status quo will make us stronger and well-equipped to support changing customer needs and play our part in the UK's economic recovery."

 

H1 financial highlights

·      Balance sheet mix optimisation continued with loan growth of 0.3% to £73.2bn and deposit growth of 1.4% to £64.7bn:

Business lending growth of 5.7% in H1 to £8.3bn and Personal lending growth of 6.2% to £5.3bn

Mortgage lending declined 0.9% to £59.5bn as we maintained our disciplined approach to margin management

Relationship deposits grew 4.3% to £22.3bn as we successfully implemented our strategy

·      Pre-provision operating profit of £352m is 3% lower year-on-year due to the expected NIM compression:

H1 NIM of 1.62% within guidance range (Q2: 1.63%); asset mix benefits more than offset mortgage impact in H1

Non-interest income stable; £16m gilts sale gain offset absence of investment fee income now recorded in ASI JV

Operating costs of £465m down 3% YoY; cost:income ratio of 57%; £76m of net run-rate cost savings now delivered

·      Total impairment charge of £232m (63bps cost of risk); pre-COVID-19 credit quality robust at 23bps cost of risk

COVID-19 balance sheet impairment provision of £164m derived through three-stage approach: (1) re-weighted our IFRS 9 models 100% to existing multi-year "severe downside" scenario; (2) applied expert credit risk judgement overlays; (3) modelled a "pandemic shock" scenario for Business & Credit Card portfolios incorporating a 10% GDP decline and peak unemployment of 9.7%

COVID-19 impairment provision divisional split of: £110m Business, £39m Personal and £15m Mortgages

Considerable on balance sheet provision reserves of £542m; coverage ratio of 75bps

·      Underlying profit of £120m (H119: £286m) is down 58% YoY primarily due to the COVID-19 impairment charge

·      Statutory profit after tax of £22m reflects £127m of exceptional items, including £61m of integration & transformation costs

·      Good progress on PPI processing with no provision required in the period; current uphold rates much lower than planned

·      CET1 ratio of 13.0% reduced 0.3%pts primarily due to higher RWAs from a planned mortgage model change

COVID-19 impairment P&L charge was fully absorbed with no CET1 capital impact due to an offset against the Group's existing Excess Expected Loss (EEL) capital deduction of c.£90m and IFRS 9 transitional relief

·      Guidance: FY20 NIM of 155-160bps and costs of <£920m reflecting lower interest rate environment and COVID-19 impacts

 

Supporting our customers, colleagues & communities

·      Working with Government, regulators and the industry to introduce new measures to support customers impacted by COVID-19, while implementing additional flexibility and product changes to bring further relief to customers in need:

Supported c.4.5k businesses with lending support facilities including c.£135m of CBILS loans approved to date

c.40k Personal lending payment holidays granted to date; <2% of our cards customers & c.6% of personal loans

Mortgage payment holidays granted to c.60k customers; c.15% of our mortgage customers

·      Re-phasing of Transformation programmes helps ensure we can maximise support for our customers; Virgin Money re-launch, re-branding and customer proposition developments delayed to maximise impact and defer associated costs

·      No colleagues furloughed and no plans to do so; previously announced redundancies now on hold

·      c.6k of our c.9k colleagues enabled to work from home, with support available for caring responsibilities and well-being

·      >£850k being distributed to local charities supporting the COVID-19 effort by the Virgin Money Foundation; Virgin Money covering the Virgin Money Giving platform fee until the end of the current lockdown period

 

Well positioned for an uncertain outlook

·    Defensive loan book: 82% in high-quality mortgages, 11% in diversified Business lending with no material exposures to the more immediately impacted sectors and 7% Personal lending, primarily in prime, high-quality credit cards

·      Resilient capital base heading into an uncertain environment: CET1 ratio of 13.0% with c.£800m of management buffer:

Additional RWA optimisation initiatives include credit card IRB accreditation, hybrid mortgage models and Business improvements; c.5-10% reduction in current RWAs potentially available (excluding impact of future RWA migration)

Further capital resilience levers with deferred integration & transformation costs and potential PPI provision surplus

·      Strong liquidity: LCR of 139% and high-quality liquid asset portfolio comprised mainly of cash and gilts.

·      Prudent funding: no wholesale funding requirement for 9-12 months if required and no short-term wholesale funding reliance

 

Contact details

 

For further information, please contact:

 

 

Investors and Analysts

 

Andrew Downey

Head of Investor Relations

+44 7823 443150

andrew.downey@virginmoneyukplc.com

 

 

Richard Smith

Senior Manager, Investor Relations

+44 7483 399 303

richard.smith@virginmoneyukplc.com

 

 

Martin Pollard

Investor Relations Manager

+44 7894 814 195

martin.pollard@virginmoneyukplc.com

 

 

Media (UK)

 

Matt Magee

+44 7411 299477

Head of Media Relations

matthew.magee@virginmoneyukplc.com

 

 

Christina Kelly

+44 7484 905 358

Senior Media Relations Manager

christina.kelly@virginmoneyukplc.com

 

 

Simon Hall

+44 7855 257 081

Senior Media Relations Manager

simon.hall@virginmoney.com

 

 

Press Office

+44 800 066 5998

 

press.office@virginmoneyukplc.com

 

 

Powerscourt

 

Victoria Palmer-Moore

+44 7725 565 545

Andy Smith

+44 7872 604 889

 

 

Media (Australia)

 

Citadel Magnus

 

James Strong

Peter Brookes

+61 448 881 174

+61 407 911 389

 

 

 

 

 

Virgin Money UK PLC will today be hosting a presentation for analysts and investors covering the 2020 interim financial results starting at 08:30 BST (17:30 AEST) and this will be webcast live and is available at:

 

https://webcast.openbriefing.com/virginmoney-ir/

 

 

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/

 

 

 

 

 

Business and financial review

Financial Performance - underlying basis

 

Summary income statement - underlying basis

 

 

 

 

Pro forma

                

 

 

 

 

 

 

6 months to

6 months to

 

 

6 months to

 

 

 

 

31 Mar 2020

31 Mar 2019

Change

 

30 Sep 2019

Change

 

 

 

£m

 

£m

%

 

 

£m

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying net interest income

 

 

702

 

728

(4)

 

 

705

-

Underlying non-interest income

 

 

115

 

115

-

 

 

91

26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total underlying operating income

 

 

817

 

843

(3)

 

 

796

3

Underlying operating and administrative expenses

 

 

(465)

 

(480)

(3)

 

 

(467)

-

Underlying operating profit before impairment losses

 

 

352

 

363

(3)

 

 

329

7

Impairment losses on credit exposures (pre COVID-19)

 

 

(86)

 

(77)

12

 

 

(76)

13

Impairment charge for COVID-19

 

 

(146)

 

-

 

 

 

-

 

Total impairment losses on credit exposures

 

 

(232)

 

(77)

201

 

 

(76)

205

Underlying profit on ordinary activities before tax

 

 

120

 

286

(58)

 

 

253

(53)

  -  Integration and transformation costs

 

 

(61)

 

(45)

36

 

 

(111)

(45)

  -  Acquisition accounting unwinds

 

 

(57)

 

(67)

(15)

 

 

(20)

185

  -  Legacy conduct costs

 

 

-

 

(33)

(100)

 

 

(400)

(100)

  -  Other items

 

 

(9)

 

(132)

(93)

 

 

4

(325)

Statutory/pro forma (loss)/profit on ordinary activities before tax

 

 

(7)

 

9

n/a

 

 

(274)

(97)

Tax credit

 

 

29

 

-

 

 

 

58

(50)

Statutory/pro forma profit/(loss) after tax

 

 

22

 

9

144

 

 

(216)

n/a

                                 

 

 

Key performance indicators(1)

 

 

 

 

 

Pro forma

 

 

 

 

 

 

 

 

6 months to

6 months to

 

6 months to

 

 

 

 

 

 

31 Mar 2020

31 Mar 2019

Change

30 Sep 2019

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profitability:

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

1.62%

1.71%

(9)bps

1.61%

1bps

 

Underlying return on tangible equity (RoTE)

 

 

4.6%

10.4%

(5.8)%pts

11.2%

(6.6)%pts

 

Underlying cost to income ratio (CIR)

 

 

57%

57%

-

59%

(2)%pts

 

Underlying return on assets

 

 

 

0.25%

0.49%

(24)bps

0.54%

(29)bps

 

Underlying earnings per share (EPS)

5.7p

13.4p

(7.7)p

14.7p

(9.0)p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)    For a definition of each of the KPIs, refer to 'Measuring financial performance - glossary' on pages 278 to 279 of the Group Annual Report and Accounts for the year ended 30 September 2019. The KPIs include statutory, regulatory and alternative performance measures. Where applicable certain KPIs are calculated on an annualised basis for the periods to 31 March.

 

 

 

Business and financial review

Financial Performance - underlying basis

 

Key performance indicators (continued)

 

 

 

 

 

 

 

 

 

 

As at:

 

 

 

31 Mar 2020

31 Mar 2019

Change

30 Sep 2019

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset quality

 

 

 

 

 

 

 

 

 

Cost of risk pre COVID-19(1)

0.23%

0.21%

2bps

0.21%

2bps

 

Cost of risk post COVID-19(1)

0.63%

n/a

n/a

n/a

n/a

 

Total provision to customer loans pre COVID-19

0.55%

0.52%

3bps

0.53%

2bps

 

Total provision to customer loans post COVID-19

0.75%

n/a

n/a

n/a

n/a

 

Indexed loan to value ratio (LTV) of mortgage portfolio(2)

57.1%

58.2%

(1.1)%pts

57.2%

(0.1)%pts

 

Regulatory Capital:

 

 

 

 

 

 

 

 

 

Common equity tier 1 (CET1) ratio

 

 

13.0%

14.5%

(1.5)%pts

13.3%

(0.3)%pts

 

Tier 1 ratio

 

 

 

16.6%

18.6%

(2)%pts

17.1%

(0.5)%pts

 

Total capital ratio

 

 

 

19.5%

21.9%

(2.4)%pts

20.1%

(0.6)%pts

 

Minimum requirement for own funds and eligible liabilities (MREL) ratio

25.6%

25.2%

0.4%pts

26.6%

(1.0)%pts

 

Capital Requirement Directive IV (CRD IV) leverage ratio

4.4%

4.7%

(0.3)%pts

4.3%

0.1%pts

 

UK leverage ratio

 

 

 

4.9%

5.3%

(0.4)%pts

4.9%

-%pts

 

Tangible net asset value (TNAV) per share

252.5p

260.1p

(7.6)p

249.2p

3.3p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funding and Liquidity:

 

 

 

 

 

 

 

 

 

Loan to deposit ratio (LDR)

 

 

 

113%

118%

(5)%pts

114%

(1)%pts

 

Liquidity coverage ratio (LCR)

 

 

139%

158%

(19)%pts

152%

(13)%pts

 

Net stable funding ratio (NSFR)

 

 

129%

125%

4%pts

128%

1%pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Cost of risk is calculated on an annualised basis.

(2)

LTV of the mortgage portfolio is defined as mortgage portfolio weighted by balance. The Clydesdale Bank PLC portfolio is indexed using the MIAC Acadametrics indices at a given date, while the Virgin Money portfolio is indexed using the Markit indices. 

 

 

                           

Summary balance sheet

 

 

 

 

 

 

 

 

                    As at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 Mar 2020

30 Sep 2019

Change

 

 

 

 

 

 

 

 

 

£m

 

£m

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer loans

 

 

 

 

 

 

 

 

73,183

 

72,979

0.3

   of which Mortgages

 

 

 

 

 

 

 

 

59,521

 

60,079

(0.9)

   of which Business

 

 

 

 

 

 

 

 

8,327

 

7,876

5.7

   of which Personal

 

 

 

 

 

 

 

 

5,335

 

5,024

6.2

Other financial assets

 

 

 

 

 

 

 

 

14,868

 

16,391

(9.3)

Other non-financial assets

 

 

 

 

 

 

 

2,003

 

1,629

23.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

 

90,054

 

90,999

(1.0)

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer deposits

 

 

 

 

 

 

 

 

64,652

 

63,787

1.4

   of which relationship deposits(1)

 

 

 

 

 

 

 

 

22,268

 

21,347

4.3

   of which non-linked savings

 

 

 

 

 

 

 

 

20,270

 

20,197

0.4

   of which term deposits

 

 

 

 

 

 

 

 

22,114

 

22,243

(0.6)

Wholesale funding

 

 

 

 

 

 

 

 

16,835

 

18,506

(9.0)

Other liabilities

 

 

 

 

 

 

 

 

3,493

 

3,685

(5.2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

 

 

 

 

 

84,980

 

85,978

(1.2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Ordinary shareholders' equity

 

 

 

 

 

 

 

 

          4,159

 

4,106

1.3

Additional Tier 1 (AT1) equity

 

 

 

 

 

 

 

 

             915

 

915

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

5,074

 

5,021

1.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

 

 

 

 

 

 

 

90,054

 

90,999

(1.0)

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Weighted Assets (RWAs)

 

 

 

 

 

 

 

 

25,173

 

24,046

4.7

(1)

Current account and linked savings balances.

 

 

 

                               

 

 

 

 

Business and financial review

Chief Executive Officer's statement

"We delivered a resilient performance and continued to make good progress on our self-help strategy in the first half of the year. Our primary objective now is to safeguard the health and well-being of our customers, colleagues and communities while also protecting the bank."

 

In these unprecedented times I want to first extend my best wishes to all our customers, colleagues and investors in remaining safe and well. Our overriding priorities are the health and economic well-being of our customers, colleagues and communities while protecting our bank. Our current expectation is for a sharp shock to the UK economy before a gradual recovery, but the timing and macro-economic assumptions are still very uncertain. However, we enter this period from a position of strength with a defensive loan book, resilient capital, liquidity and funding, and experienced management and colleagues, meaning we are well placed to deliver the right outcomes for all our stakeholders to best support them through this current crisis. Undoubtedly COVID-19 will have significant implications for us and the wider economy; however, I feel confident that our agility, digital capabilities and focus on disrupting the status quo will equip us to best support changing customer needs and play our part in the UK's economic recovery longer-term.

 

Resilient H1 operating performance

We are pleased to report a resilient first half performance and the dynamics were as anticipated with the continued delivery of our strategic self-help actions bearing fruit. We have continued with our balance sheet mix optimisation strategy by selectively growing in Business and Personal lending, both up c.6% in the half and remaining disciplined in Mortgages which were 1% lower. As expected, our margin stabilised in Q1 and then slightly expanded in Q2, rising 2bps to 1.62% for H1 2020, but overall income of £817m was 3% lower year-on-year due to the expected NIM compression relative to H1 2019. Costs were down 3% year-on-year to £465m, giving a stable 57% cost:income ratio, and our Transformation programme delivered further net run-rate cost savings, reaching a total of £76m to date. Asset quality remained strong in H1 with £86m of pre-COVID-19 impairments equivalent to a 23bps cost of risk. However, given the uncertain environment and likelihood of higher impairments in the future, this was supplemented by a COVID-19 impairment P&L charge of £146m for a total impairment P&L charge of £232m (63bps cost of risk). We have therefore delivered underlying profit before tax of £120m with an underlying return on tangible equity of 4.6%, both impacted by the scale of the impairment provision. Statutory profit after tax of £22m was improved on 2019 with lower exceptional item charges of £127m and no PPI or other conduct charges, and a tax credit from statutory corporation tax rate changes.

 

Supporting our Customers

Our immediate focus is on supporting our customers through what will be a challenging period for many. As at the end of April, we've already directly supported over 100k customers across the bank and continue to actively engage with any customers who may face COVID-19-related difficulties. Close coordination between the Government, regulators, central bank and the industry will continue to be important in delivering the best outcomes for customers and the UK economy; we recognise the important role banks play in this environment and we are committed to supporting our customers in these tough times.

 

In our Mortgage division we are supporting both homeowners and buy-to-let landlords. We've processed c60k applications for mortgage payment holidays to date, equivalent to c.15% of our mortgage customers. Although lockdown has significantly impacted the house purchase market given the inability to conduct physical valuations, we have expanded our use of desktop valuations to support our existing customers looking to transfer their products along with some prudent new-to-bank customer remortgage activity. We are also extending the length of mortgage offers for those part-way through transactions. As market restrictions loosen in time, we will be ready to resume our full mortgage offering.

 

Within our Personal division, we have seen debit card activity reduce by c.30% since pre-COVID-19 and Virgin Money retail credit card activity reduce c.40% over the same period. Our £5.3bn Personal lending book comprises our £4.2bn high-quality and affluent customer targeted credit card portfolio and our small £1.1bn prime personal loans portfolio. Both books continued to perform well in the first half, but we have granted c.32k payment holidays in credit cards (<2% of customers) and c.8k in personal loans (c.6% of customers). We had already, ahead of the FCA's announcement, implemented the regulatory requirements now in place for impacted unsecured lending such as the offer of £500 interest free overdrafts and the fair treatment of customers in distress, and we remain committed to delivering the right outcomes for our customers.

 

In our Business division, our focus is on supporting existing customers and extending facilities to ensure, wherever possible, viable businesses are supported through a period of cash flow challenges. A combination of proactive, early engagement and delegated responsibility to enable our specialist Relationship Managers to agree speedy support for businesses has been key in delivering this. Our book remains well diversified with limited exposure to the more immediately impacted sectors and around two thirds is either fully or partially collateralised. To date, we have supported businesses with c.4.5k of lending facilities, overdrafts and capital repayment holidays, including c.£135m of support via the Government's CBILS scheme. We are also committed to supporting the Government's Bounce Back and CLBILS lending initiatives.

 

Finally, in our deposit-raising businesses, we've seen limited requests to withdraw substantial deposits to date, but we remain ready to allow customers in difficulty to access funds penalty-free where necessary. During the month of April, we have seen increased deposit inflows as customers spend less during lockdown, but it is not clear whether this is just a temporary impact.

 

Business and financial review

Chief Executive Officer's statement

 

On top of providing targeted financial support, we have been helping customers manage their money and businesses while social restrictions are in place by enabling them to bank safely from home using mobile or web and being there for them when they need to speak to us. We have consistently maintained branch services with >95% of our locations currently open, and although contact centres have inevitably had to reduce their opening hours, they are functioning well with waiting times still near pre-COVID-19 levels.

 

With so much uncertainty right now, we recognise that consumers and business owners sometimes just need to speak to someone they trust about financial matters in general which is why we've launched a new 'Money on your Mind' service. Customers and non-customers alike can post these broader questions and get answers to them from our helpful and knowledgeable 'Red Team'. 

 

Supporting our Colleagues

I've been incredibly proud of the response of our colleagues to the current uncertainty as they continued to support our customers with their usual diligence, passion and professionalism. In return, we are doing everything we can to support and keep them safe. We have not furloughed any colleagues and have no plans to do so. Where possible, we have ensured colleagues are able to work remotely, and currently have c.6k of our 9k colleagues working from home. For those colleagues classified as critical workers who are still coming into our branches or offices to serve customers, we have social distancing measures in place, increased cleaning and are covering the costs of these colleagues' lunches and commutes.

 

During the first half we announced a series of branch closures and redundancies as part of our ongoing Transformation programme, but it is right that we pause those for now to give our colleagues across the Group greater certainty in this unprecedented situation.

 

While we remain committed to our Transformation programme, it's right to pause these activities and allow greater focus on delivering for our customers. The higher digital adoption we've seen from customers, with digital enrolments up 40% in April and 50% of customers previously inactive online now active and using the service, has been supported by our strong digital infrastructure and capabilities. These changing preferences will provide us with new opportunities to accelerate our digital transformation in the future.

 

Supporting our Communities

Virgin Money's strong heritage of community support positions us well to extend this support during the current crisis and has enabled us to act quickly and direct help to where it's needed most. The Virgin Money Foundation has made >£850k of funding available for local charities responding to the COVID-19 pandemic and is running virtual webinars to share expertise and advice.

 

Meanwhile, Virgin Money Giving - the not-for-profit digital fundraising platform owned by Virgin Money - stepped in quickly to assist charities who found many of their usual fundraising methods impossible during the government lockdown. It launched a virtual fundraising hub, a competition for fundraisers to win money for their charity and enabled the public to donate old books and games to charity from their doorstep. Virgin Money Giving has never sought to make a profit from the service it provides, meaning that more money goes to good causes. It charges a small platform fee to cover the costs of running a safe, secure and user-friendly service and we have committed to Virgin Money covering this fee until the end of the current lockdown period. By doing this we hope that the efforts of donors and fundraisers go that little bit further to help charities that are reliant on their support in this challenging time.

 

In support of parents across the country who are home-schooling during lockdown, we have launched a digital version of our successful school entrepreneurship programme, Make £5 Grow. It's completely free and offers easy-to-follow learning modules that take children through the steps of setting up and running a mini-business. Our colleagues are also passionate about supporting their communities and we are helping them do so with new remote volunteering opportunities and easy ways to donate, enabling them to support the causes closest to their hearts.

 

Protecting our Bank

Since the IPO, we have been very focused on building a defensive and diversified balance sheet. In our Business division in particular this has seen us take very deliberate actions to reduce our previous exposures in areas such as large corporates, oil and gas, high street retail and speculative development commercial real estate, and to not originate new lending in these sectors. In addition, we have significantly strengthened our credit risk function over the past few years, as evidenced by the regulator's approval of our IRB application. Across all of our portfolios, we have strong teams with experience of managing through past downturns.

 

Our defensive balance sheet comprises 82% of high-quality Mortgages, 11% of well diversified relationship-driven Business lending with no material exposures to the more immediately impacted sectors and 7% of Personal lending primarily in a prime credit card book of affluent customers.

 

We retain a resilient capital base with a CET1 ratio of 13.0% providing c.£800m of CET1 management buffer and with further capital resilience levers at our disposal. We also maintain a strong liquidity position with an LCR of 139% and are prudently funded with a 113% loan-to-deposit ratio. This strong funding position means we have no reliance on short-term wholesale funding and always position ourselves to be able to manage 9-12 months without accessing wholesale funding markets if necessary.

 

We are therefore well positioned going into this period of economic stress.

 

Business and financial review

Chief Executive Officer's statement

 

Board succession

We are very pleased to have announced the appointment of David Bennett as our new Chairman effective 6 May 2020. This follows our announcement in January that Jim Pettigrew had confirmed his intention to retire from the Board once a successor was found. David has been Deputy Chairman and a Non-Executive Director of the Company since October 2015 and Senior Independent Director since January 2017. I am very pleased that someone with David's extensive banking experience and deep understanding of our business will succeed Jim as Chairman. I would also like to thank Jim for his tremendous leadership of the Board and stewardship of the business and for the support he has provided to me, the Board and executive team during that time. We all wish him well for the future.

 

Outlook

While the outlook remains very uncertain and the range of potential outcomes is wide, Virgin Money enters this period of turbulence from a position of strength. Though the full effects of COVID-19 are far from clear at present, over the coming six months we anticipate limited customer demand for lending and an increase in the number of customers facing financial challenges.

 

In the short-term our focus will remain on supporting our existing customers first rather than new customer acquisition. In Mortgages, the market remains severely disrupted, limiting new mortgage activity. Personal lending is already seeing a slowdown, as customers focus on essentials. Our focus in the Business division is on delivering the right support to our existing customers to enable as many viable businesses as possible survive the impacts of the COVID-19 pandemic.

 

Given the environment, we have decided to delay our non-mandatory Transformation programmes, the Virgin Money re-launch and re-branding campaigns, as well as the other customer proposition launches we had planned for the second half of 2020. We do however see these as temporary delays and plan to continue with these in time.

 

In the medium-term, our self-help strategy remains appropriate; however, the significant and far-reaching behavioural changes imposed by the virus outbreak present new opportunities for us to meet the different emerging needs and wants of colleagues and customers. The rapid adoption by customers of digital solutions reinforces our digital transformation strategy and proven operational ability for flexible working gives Virgin Money new opportunities to provide colleagues with choice, flexibility and digital enablement to support a diverse and engaged workforce. We are a smaller and more agile bank than some of our competitors and our strong digital capability means there is an opportunity for us to leverage the industry-shaping forces that COVID-19 has unleashed - we expect to be able to accelerate our existing plan to fully digitise our bank as soon as the environment stabilises. The Board and my Leadership Team will be exploring these and other opportunities over the coming months, but at this stage it remains too early to determine what, if any, impact the implications of COVID-19 may have on our 2022 targets.

 

In the near term it is critical our focus remains on supporting our customers, colleagues and communities, while protecting the bank through this uncertain period. If we deliver on that then we have the opportunity to come out of this with our reputation enhanced in the eyes of all of our stakeholders and a business that is ready to thrive in the new operating environment.

 

 

 

David Duffy, Chief Executive Officer - 5 May 2020

 

 

  

 

Business and financial review

Chief Financial Officer's review

 

Resilient H1 operational performance

In a tough external environment, the first half of 2020 has seen us deliver a resilient operational performance. This included a Net Interest Margin (NIM) of 1.62% (H1 2019: 1.71%), in line with our guidance as NIM stabilised at the end of 2019 and improved slightly in the second quarter to 1.63%, albeit remaining at lower levels than in H1 2019. Non-interest income was flat in the period, leaving total income down 3% on H1 2019. Operating costs of £465m were 3% lower on the prior year, leading to a stable cost:income ratio of 57% and a 3% reduction in pre-provision profit. We reported a pre-COVID-19 impairment cost of risk of 23bps; however, given the unprecedented environment we have prudently determined the requirement for a COVID-19-related impairment provision of £164m, with a consequential P&L charge of £146m, giving total impairments of £232m in H1. This primarily explains the 58% reduction in year-on-year underlying profit to £120m compared to H1 2019 (£286m). Statutory profit after tax was £22m after exceptional costs of £127m including £61m of integration and transformation costs and £57m of acquisition accounting unwind, as well as a £29m tax credit. Importantly, no further PPI or other conduct provisions were required in the period and our PPI processing uphold rate experience is currently tracking favourably versus our provisioning assumptions. Our CET1 ratio remains resilient at 13.0%, but declined 30bps in the period primarily due to higher RWAs from the implementation of planned Mortgage model changes.

 

Balance sheet strength

While the extent of the COVID-19 implications is not yet clear, it is expected they will lead to higher impairments in time. However, it is important to consider how we have deliberately constructed our loan portfolios conservatively. The following table and commentary explains the asset quality of our portfolios and how we have prudently determined our COVID-19 impairment provision.

 

Key portfolio metrics

 

Mortgages

Business

Personal

 

Customer lending balances

£59.5bn

£8.3bn

£5.3bn

 

Proportion of customer lending

82%

11%

7%

 

Collateral levels

57% LTV

c.65% full or partial

n/a

 

Arrears (90 DPD)

0.4%

0.5%

Cards(1): 1.2%

 Loans: 0.7%

 

Gross cost of risk (pre-COVID-19)

2bps

45bps

300bps

 

Balance sheet credit provision (post-COVID-19)

£50m

£261m

£231m

 

Coverage ratio (post-COVID-19)

9bps

323bps

440bps

 

IRB status

Advanced-IRB

Foundation-IRB

Standardised

 

Average risk weight density

14%

73%

75%

 

(1)

Credit cards arrears methodology is 2 cycles past due

           

Mortgages (82% of Group lending, £59.5bn)

A geographically diversified book with 76% owner-occupied loans and 24% of loans in low LTV, non-professional buy-to-let. House price rises and a prudent LTV origination profile see an average stock LTV of just 57%, with only 17% of balances with an LTV over 75%. Current arrears remain low at only 0.4% of the book >90 days past due (DPD), nearly half the UK Finance industry average. Given refinancing activity over the past few years, much of the underwriting has been done under stricter Mortgage Market Review (MMR) rules introduced in April 2014. To date we have granted c.60k Mortgage payment holidays related to COVID-19, around 15% of customers.

 

Business (11% of Group lending, £8.3bn)

Our Business lending portfolio has seen a significant improvement in asset quality over recent years thanks to conscious decisions to reduce exposures and avoid new lending to higher risk areas like large corporates, oil and gas, high street retail and speculative development CRE. The loan book is focused on small and mid-sized SMEs with c.96% of balances lent to businesses with a turnover typically >£2m, and biased towards defensive sectors where we have specialist expertise. The cash flows generated by larger SMEs are typically stronger and these businesses have more resources and support available in times of stress. Smaller and micro SME businesses are typically more exposed in times of stress and can lack the resources to manage severe downturns; our book has only a small lending balance to these customers (c.4% or £0.3bn).

 

The Business lending portfolio is well diversified from a sector and customer number perspective, with no material single-name exposures. It also has minimal exposure to the sectors more immediately impacted by the current situation such as oil & gas, airlines, travel, leisure and high street retail, with no exposure to speculative development CRE. We have undertaken a sector by sector assessment of the portfolio to assess vulnerabilities and the risk of PD migration (which helped to inform our impairment provision). Broadly, for a stress of this nature, our book can be split into four key risk categories with c.55% of the book deemed least exposed (including Agriculture, Food & Drink and Health & Social Housing), c.22% is lower-impacted (including Specialist Hotels & Real Estate and Manufacturing), c.14% is more exposed (including some Business Services and our legacy property portfolio) while c.9% is in likely higher-impacted sectors (such as Retail Trade, Legacy Hospitality and Entertainment). Pre-COVID-19, arrears on the Business portfolio remained low and stable on prior years with just 0.5% of balances >90 DPD and the portfolio PD has been stable over recent years. So far, we have supported businesses with c4.5k lending facilities, overdrafts and capital repayment holidays, with c.£135m of lending approved through the Government's CBILS initiative and a commitment to support the Bounce Back and CLBILS initiatives.

 

Business and financial review

Chief Financial Officer's review

 

Personal (7% of Group lending, £5.3bn)

Personal lending comprises a £4.2bn high-quality credit card book focused on prime, affluent customers and a small £1.1bn book of prime personal loans. As a consequence of our conservative underwriting standards our credit card portfolio has a stronger risk profile with customers who are typically over 40 years old, homeowners and have above average income. Our customer base has stronger than industry average credit profiles and lower indebtedness, and only c.10% of customers are self-employed. This prudent underwriting and careful construction of the book has been maintained through the last few years with c.80% of the book originated post-2015. In addition, c.62% of credit card balances are held on balance transfer cards with correspondingly lower debt service requirements. As we enter this period of stress, only 16% of those on promotional periods will roll-off during the next 6 months. Pre-COVID-19, arrears on the cards portfolio of 1.2% were less than half of the industry average of 2.3%. In addition, balance transfer customers and customers with the higher affluence levels typical of our portfolio both saw relatively lower delinquencies through the last crisis. The personal loans book is also a prime book and currently has a low level of arrears with just 0.7% of loans currently >90 DPD. Of our c.130k personal loan customers there is a mix of existing current account customers where we have good knowledge of their credit record and balances underwritten on our revamped digital proposition launched in 2018, which features strict underwriting criteria. To date we have supported customers with c.40k payment holidays granted, with c.32k in credit cards equivalent to <2% of customers, and c.8k in personal loans or 6% of customers.

 

COVID-19 impairment provision

Given the amount of economic uncertainty, and that IFRS 9 models are not necessarily calibrated to deliver reliable outputs for a discontinuity event such as COVID-19, we have undertaken a comprehensive three-stage process to estimate the impact of COVID-19. This comprised (1) weighting the existing IFRS 9 models 100% to our existing multi-year "severe downside" scenario to assume a slower and longer path to recovery with five-year average unemployment of c.6% and peak-to-trough house price declines of c.30%; (2) applying additional expert credit risk judgment via additional provisions in relation to the individual portfolios based on customer insights and behaviour; and (3) modelling a "pandemic" scenario for our largest at risk portfolios of business and credit cards. The "pandemic" shock scenario embeds a further economic overlay for these portfolios that includes a sharp 10% GDP fall in 2020 and unemployment peaking at 9.7% in Q1 2021.

 

This process determined the requirement for an incremental provision of £164m which is split £110m in Business, £39m in Personal and £15m in Mortgages. The additional expert credit risk judgement included insights from our ICAAP and ACS-related stress testing work, as well as an assessment of expected credit performance at a sector and customer level in the Business portfolio, with a focus on those sectors more impacted by the current situation. In Mortgages and Personal we have used expert judgement and experience data to determine what proportion of customers on payment holidays may develop into future credit losses. The Group therefore now holds considerable on balance sheet provision reserves of £542m equating to a total coverage ratio of 75bps. The divisional split is £261m of provisions in Business (323bps coverage ratio), £231m in Personal (440bps) and £50m in Mortgages (9bps).

 

The COVID-19 impairment provision translates into a £146m impairment P&L charge after reallocating some of the Group's existing provision for economic uncertainty. There is no net CET1 impact of the additional after-tax P&L charge due to an offset against the Group's existing Excess Expected Loss (EEL) capital deduction of c.£90m and IFRS 9 transitional relief on the remainder.

 

Key capital, funding and liquidity metrics

 

CET1 ratio %

CRD IV Minimum CET1 requirement %

CET1 management buffer over reg min

Total capital ratio %

MREL ratio %

UK leverage ratio %

LCR %

LDR %

Debt securities <3 months

13.0%

9.9%

c.£800m

19.5%

25.6%

4.9%

139%

113%

£0.4bn or 4%

 

Resilient capital base and prudent funding & liquidity position

While the long-term impact of COVID-19 remains uncertain it is likely to create downward pressure on capital in the near term, however the Group retains a resilient capital position today with a CET1 ratio of 13.0% and Total Capital ratio of 19.5%. The recent decision by the BoE to cut the countercyclical buffer by 1% to 0% leaves the Group with a significant CET1 management buffer of c.£800m over our CRD IV minimum CET1 requirement, in addition to the £542m of on balance sheet credit provisions. In terms of RWAs, our model approaches limit the scale of near-term RWA migration in FY20 under a stress scenario. Our Business banking book remains primarily a F-IRB portfolio, Personal is Standardised and only Mortgages are on the more sensitive A-IRB approach.

 

The Group has several levers at its disposal to increase its capital resilience further, including tempering asset growth and re-phasing transformation and re-brand spending plans. Over time, we also expect a material benefit from RWA optimisation opportunities including moving our credit card portfolio from the Standardised approach to IRB, the transition to Hybrid risk-weight models for Mortgages and other model refinements in Business. In aggregate, and prior to any RWA future migration, these opportunities could reduce RWAs by c.5-10%. However, these opportunities remain subject to regulatory review and approval.

 

The Group also continues to retain a strong liquidity position with an LCR of 139%. Our prudent funding approach ensures we have no reliance on short-term wholesale funding and are positioned to withstand a 9-12 months closure of the wholesale funding markets if required, with no help from central bank funding schemes assumed in this assessment.

 

Business and financial review

Chief Financial Officer's review

Review of current period results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying income

 

 

 

Pro forma

 

 

 

 

 

 

 

 

6 months to

6 months to

 

 

6 months to

 

 

 

 

31 Mar 2020

31 Mar 2019

 

 

30 Sep 2019

 

 

 

 

£m

 

£m

Change

 

 

£m

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying net interest income

 

 

702

 

728

(4)%

 

 

705

-

Non-interest income

 

 

115

 

115

-

 

 

91

26%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total underlying operating income

 

 

817

 

843

(3)%

 

 

796

3%

Net interest margin (NIM)

 

 

1.62%

 

1.71%

(9)bps

 

 

1.61%

1bps

Average interest-earning assets

 

 

86,847

 

85,628

1%

 

 

87,092

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                       

 

Income was 3% lower than H1 2019 at £817m, although it increased by 3% compared to H2 2019. NII was the key driver falling 4% versus H1 2019 at £702m, although remaining in line with H2 2019. Net interest margin was 9bps lower YoY at 1.62% and as expected this was primarily driven by front versus back book mortgage compression and higher deposit costs following the base rate rise. However, NIM improved 2bps compared to Q4 2019 as the Group continued to optimise the balance sheet mix.

 

 

Net interest income

 

 

 

Pro forma

 

6 months ended 31 March 2020

 

6 months ended 31 March 2019

 

Average
balance

Interest income/ (expense)

Average
yield/ (rate)(1)

 

Average
balance

Interest income/ (expense)

Average
yield/ (rate)(1)

Average balance sheet

£m

£m

%

 

£m

£m

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

Mortgages

59,823

742

2.48

 

59,991

783

2.62

Business lending(2)

7,963

162

4.08

 

7,500

156

4.17

Personal lending

5,344

219

8.19

 

4,506

172

7.65

Liquid assets

11,982

48

0.80

 

11,984

49

0.82

Due from other banks

1,730

4

0.44

 

1,647

6

0.74

Swap income/other

-

(20)

n/a

 

-

(6)

n/a

Other interest earning assets

5

-

n/a

 

-

-

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average interest-earning assets

86,847

1,155

2.66

 

85,628

1,160

2.72

Total average non-interest-earning assets

3,416

 

 

 

3,243

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average assets

90,263

 

 

 

88,871

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

Current accounts

11,748

(9)

(0.16)

 

11,581

(9)

(0.16)

Savings accounts

27,221

(128)

(0.94)

 

23,352

(99)

(0.85)

Term deposits

22,151

(178)

(1.61)

 

23,213

(185)

(1.60)

Wholesale funding

17,172

(136)

(1.59)

 

19,100

(139)

(1.46)

Other interest earning liabilities

179

(2)

n/a

 

-

-

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average interest-bearing liabilities

78,471

(453)

(1.16)

 

77,246

(432)

(1.12)

Total average non-interest-bearing liabilities

6,986

 

 

 

6,522

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average liabilities

85,457

 

 

 

83,768

 

 

Total average equity

4,806

 

 

 

5,103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average liabilities and average equity

90,263

 

 

 

88,871

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

702

1.62

 

 

728

1.71 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Average yield is calculated by annualising the interest income/expense for the period.

(2)

Includes loans designated at fair value through profit or loss.

                 

 

 

 

 

Business and financial review

Chief Financial Officer's review

 

Net interest income (continued)

 

Asset yields fell 6bps in the year with mortgage pricing remaining the key pressure. As expected, we continued to see pressure from front book pricing being below average back book rates, leading to an average reduction in yield of 14bps compared to H1 2019, while balances also declined slightly during the half. We have remained selective in terms of participation in the market, in line with our strategy to optimise for value. In Business, a 9bp reduction in yields was primarily due to lower LIBOR, while strong balance sheet growth more than offset the lower yield to drive a modest increase in net interest income. In Personal, strong growth in average balances drove a significant NII improvement while yields expanded 54bps due to the seasoning of the credit card book which performed favourably against our prudent EIR assumptions.

 

Liability costs increased 4bps relative to H1 2019, with higher savings account costs and a reduction in lower cost wholesale funding the key drivers. Our customer deposit base saw stable and low rate current account balances. While savings deposit costs increased 9bps due to the base rate rise, the Group's overall cost of deposits saw a benefit from reducing our utilisation of term deposits. Lower-cost relationship deposits grew 4.3% in the half to £22.3bn while non-linked customer deposits were stable. The Group has also undertaken repricing on c.£5bn of customer deposits which resulted in low attrition and these rate reductions will provide a benefit into the second half of the year.

 

Wholesale funding costs increased 13bps primarily due to rate increases and the full impact of additional MREL issuance in 2019, albeit overall average balances declined 10% as the Group reduced repo funding, thus reducing the overall cost. The Group entered the year with excess liquidity following the completion of the FSMA Part VII transfer process and given the significant market volatility we have continued to hold prudently higher balances.

 

The Group manages the risk to its earnings from movements in interest rates, by hedging assets, liabilities and equity which are less sensitive to movements in rates. Consistent with this investment objective, structural products are hedged on a 5-year rolling basis, with the weighted average life of the hedge unchanged at 2.5 years (H2 2019: 2.5 years). The average hedge balance was broadly stable over the half at £23.9bn (H2 2019: £24.3bn), generating net interest income of £111m (H2 2019: £118m) or a yield of 0.9% (H2 2019: 1.0%).

 

Non-interest income

Non-interest income was broadly stable YoY at £115m with a £16m gain on gilt sales more than offsetting the absence of fee income earned from the Investments business that was transferred into a JV with Aberdeen Standard Investments (ASI). On an underlying basis Business and Mortgages-related fee income were stable while Personal was £7m lower primarily reflecting lower overdraft and credit card fees. In addition, during the first half the Group reclassified the fair value unwind related to legacy Virgin Money hedges as an exceptional item within acquisition accounting unwind. This equated to a charge of £15m in the first half of 2020 and the remaining unwind is expected to be c.£55m over a period of c.4 years.

 

 

Costs

 

 

 

 

Pro forma

 

 

 

 

 

 

 

 

6 months to

6 months to

 

 

6 months to

 

 

 

 

31 Mar 2020

31 Mar 2019

 

 

30 Sep 2019

 

Operating and administrative expenses

 

 

£m

 

£m

Change

 

 

£m

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total underlying operating and administrative expenses

 

 

465

 

480

(3)%

 

 

467

-

Underlying CIR

 

 

57%

 

57%

-

 

 

59%

(2)%pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying operating expenses reduced 3% year-on-year to £465m leaving the cost:income ratio of 57% stable compared to last year. Much of the cost reduction came from lower personnel costs following the initial headcount rationalisation conducted in 2019.

 

The Group continued to deliver its Transformation and Integration programme with additional net run-rate cost savings of £23m realised in the first half through the branch and headcount reduction programmes announced in late September 2019. Total net run-rate cost savings of £76m have been realised to date, good progress on the path to the Group's target for c.£200m of net run-rate cost savings.

 

Given the backdrop, we are now delaying the majority of the Transformation programmes in 2020 and allowing our colleagues to focus on delivering support to customers during COVID-19. This includes the decision to pause the implementation of a programme of branch closures and redundancies announced in February, with the decision taken to protect our colleagues at this challenging time. The expected cost savings to be delivered in 2020 will therefore be lower and as a result we now expect 2020 costs to be <£920m.

 

 

 

Business and financial review

Chief Financial Officer's review

 

Impairments post COVID-19 basis

 

 

Pro forma

 

6 months ended 31 March 2020

 

 

 

 

6 months ended 31 March 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgages

Personal

Business

Total

 

Mortgages

Personal

Business

Total

Impairment

 

 

 

 

 

 

 

 

 

Pre-COVID-19 gross cost of risk (bps)(1)

2

300

45

28

 

1

317

55

26

Impairment charge for COVID-19

4

120

253

40

 

-

-

-

-

Post-COVID-19 gross cost of risk (bps)(1)

6

420

298

68

 

1

317

55

26

Specific provision releases and recoveries (bps)

 

 

 

(5)

 

 

 

 

            (5)

Net cost of risk post-COVID-19 (bps)(1)

 

 

 

63

 

 

 

 

21

(1)

Cost of risk is calculated on an annualised basis.

 

                       

 

The Group recorded total impairments of £232m (63bps cost of risk) including a COVID-19 related impairment P&L charge of £146m which is explained in detail on page 9. Pre-COVID-19 asset quality remained robust with an impairment charge of £86m (23bps net cost of risk). 

 

Pre-COVID-19 Mortgages remained stable at 2bps, slightly up on H1 2019 but flat on H2 2019, with no signs of asset quality stress in the portfolio.

 

Pre-COVID-19 Business cost of risk of 45bps was down 10bps compared to H1 2019, but remained stable on the FY19 level. After a depressed impairment in H2 2019 with no material one-off credit losses, H1 2020 represented a return to a more normalised level pre-COVID-19. While we continue to monitor the portfolio closely given the potential impacts of COVID-19, there were no evident sector or segment concerns in H1 2020, with the pre-COVID-19 provision recognition driven by individual customer circumstances. 

 

Pre-COVID-19 Personal cost of risk of 300bps reduced 17bps relative to H1 2019 and was 61bps lower than an elevated H2 2019 driven by the dilution effect of strong growth in good quality assets all provisioned in Stage 1, as well as a one-off model recalibration in H2 last year. Credit quality remained robust in the period and continues to be underpinned by a focus on growth in affluent segments where arrears levels have remained low compared to industry averages, currently standing at just 1.2% on cards and 0.7% on loans.

 

Looking forward, given the high level of uncertainty at present, we have made the decision to prioritise capacity to deal with increased customer forbearance using both internal and external resource to ensure we are appropriately positioned should the lockdown measures be in place for an extended period of time.

 

 

Exceptional items and statutory profit

 

 

 

 

 

 

 

6 months to

 

 

 

 

 

 

 

 

31 Mar 2020

Pro forma

31 Mar 2019

 

30 Sep 2019

 

 

 

 

 

 

 

£m

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying profit on ordinary activities before tax

120

 

286

 

253

 

 

 

 

 

 

 

 

 

 

 

 

Exceptional items

 

 

 

 

 

 

(127)

 

(277)

 

(527)

  -  Integration and transformation costs

 

 

 

 

 

 

(61)

 

(45)

 

(111)

  -  Acquisition accounting unwinds

 

 

 

 

 

 

(57)

 

(67)

 

(20)

  -  Legacy conduct costs

 

 

 

 

 

 

-

 

(33)

 

(400)

  -  Other items

 

 

 

 

 

 

(9)

 

(132)

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/profit on ordinary activities before tax

 

 

 

(7)

 

9

 

(274)

Add Virgin Money Holdings (UK) PLC pre-acquisition loss

 

 

 

-

 

33

 

-

Statutory (loss)/profit on ordinary activities before tax

 

 

 

(7)

 

42

 

(274)

Tax credit/(expense)

 

 

 

29

 

(5)

 

58

Statutory profit/(loss) after tax

 

 

 

22

 

37

 

(216)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Group made a statutory profit after tax of £22m, reflecting £127m of exceptional costs incurred during the half, which have been excluded from the underlying performance of the business, as well as a tax credit of £29m. The exceptional item charges incurred in H1 2020 were significantly lower than in the prior year due to the non-recurrence of significant one-off acquisition costs and legacy conduct charges, as well as lower restructuring costs as the Group paused some elements of integration and transformation activity due to the impact of COVID-19.

 

Business and financial review

Chief Financial Officer's review

 

Integration and transformation costs

Due to the impact of COVID-19, the Group is re-phasing some of its planned restructuring activity, which has led to a lower than planned spend of £61m during the first half of 2020. Certain rebranding and IT-related activities which have now been paused had already incurred costs in the first half and we now anticipate lower integration and transformation costs for the remainder of FY20 as only mandatory projects continue. Overall the programme is still expected to incur c.£360m of total spend by the end of 2021 with £217m spent to date.

 

Acquisition accounting unwinds

The Group recognised fair value acquisition net accounting adjustments of c.£270m at the time of the acquisition that would be unwound through the income statement over the remaining life of the related assets and liabilities (c.5 years). £87m was charged in 2019 and a further £57m was incurred in H1 2020. In addition, during the first half the Group reclassified the fair value unwind related to legacy Virgin Money hedges which had previously been recognised in underlying non-interest income. This totalled £15m in H1 2020 and a further c.£55m of charges is expected over the next 4 years.

 

Legacy conduct

No further legacy conduct provisions were recognised in H1 2020. The Group has made great progress in processing its outstanding PPI complaints and Information Requests (IRs) with only c.8k IRs left to be processed. The Group has observed a slightly higher IR-to-complaint conversion rate over the past six months, resulting in c.100k complaints, of which c.25k have been dealt with. However, the complaint uphold rate of c.25% has been much lower than the provision assumption of c.40%. If this run-rate continues then the Group could expect a potential provision surplus, but it is too early to conclude the final outcome at this stage.

 

Other items

The Group incurred £9m of other one-off exceptional costs during the year, primarily reflecting the growth opportunity projects relating to the RBS switching scheme and initial set up costs relating to the Aberdeen Standard Investments JV.

 

Taxation

On a statutory basis, the Group tax credit was £29m. The key driver of the credit was £26m related to changes in the corporation tax rate, and a further £8m credit related to tax on AT1 distributions now reflected via the income statement (in prior periods tax related to AT1 distributions was recorded via changes in equity), partially offset by non-deductible expenditure and prior period adjustments.

 

On an underlying basis, the Group tax credit was £2m on underlying profits of £120m. In addition to £23m of corporation tax on underlying profit, the key driver was a £25m credit, comprising the changes in the corporate tax rate on underlying items, the credit related to tax on AT1, partially offset by non-deductible expenditure and prior period adjustments.  

 

 

Returns and TNAV

 

 

 

 

Pro forma

 

 

 

 

 

 

 

 

6 months to

6 months to

 

 

6 months to

 

 

 

 

31 Mar 2020

31 Mar 2019

Change

 

30 Sep 2019

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying RoTE

 

 

4.6%

 

10.4%

(5.8)%pts

 

 

11.2%

(6.6)%pts

TNAV per share

 

 

252.5p

 

260.1p

(7.6)p

 

 

249.2p

3.3p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                       

 

Underlying RoTE of 4.6% was 5.8% lower than the prior year, primarily due to the COVID-19 impairment charge. TNAV per share of 252.5p increased 3.3p relative to 30 Sep 2019, with TNAV build of 17.2p from underlying profit after tax (pre-COVID-19 impairment charge) and a gain of 8.9p from pensions actuarial gains. This was partially offset by the COVID-19 impairment charge of 9.3p, exceptional costs and AT1 distributions of 9.1p and other movements primarily related to reserves of 4.4p.

 

 

Business and financial review

Chief Financial Officer's review

Balance sheet

 

 

 

 

 

 

 

 

                    As at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 Mar 2020

30 Sep 2019

 

 

 

 

 

 

 

 

 

 

£m

 

£m

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgages

 

 

 

 

 

 

 

 

59,521

 

60,079

(0.9)%

Business

 

 

 

 

 

 

 

 

8,327

 

7,876

5.7%

Personal

 

 

 

 

 

 

 

5,335

 

5,024

6.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total customer lending

 

 

 

 

 

 

 

 

73,183

 

72,979

0.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

Relationship deposits(1)

 

 

 

 

 

 

 

 

22,268

 

21,347

4.3%

Non-linked savings

 

 

 

 

 

 

 

 

20,270

 

20,197

0.4%

Term deposits

 

 

 

 

 

 

 

 

22,114

 

22,243

(0.6)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total customer deposits

 

 

 

 

 

 

 

 

64,652

 

63,787

1.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale funding

 

 

 

 

 

 

 

16,835

 

18,506

(9.0)%

    of which Term Funding Scheme (TFS)

 

 

 

 

 

 

 

7,142

 

7,342

(2.7)%

Loan to Deposit Ratio (LDR)

 

 

 

 

 

 

 

 

113%

 

114%

(1)%pts

Liquidity Coverage Ratio (LCR)

 

 

 

 

 

 

 

139%

 

152%

(13)%pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Current account and linked savings balances.

 

 

 

                               

Continued customer balance growth

The Group's balance sheet optimisation strategy continued in the first half with strong growth in Business and Personal lending, and more selective participation in Mortgages given competitive pressures. On the deposit side our strategy to increase relationship deposits and reduce more expensive term deposits continued.

 

Business lending increased 5.7% to £8.3bn with c1.5% of growth coming from the RBS switching scheme and the remainder from our strong relationship manager proposition which continued to resonate with SMEs. We do however expect the pace of new-to-bank originations to fall in H2 2020 as we focus on supporting our existing customers, but would expect some organic growth as we extend lines to existing customers.

 

Growth in Personal lending of 6.2% to £5.3bn was mainly focused on our high-quality credit card business where we continued our long-standing strategy of origination focused on affluent customers with high levels of disposable income. Personal loans increased 9.0% and continue to be conservatively underwritten, benefitting from enhancements to our digital acquisition implemented in 2018. We would expect the pace of growth to slow dramatically in the second half, as there has already been a noticeable slowing in spending on credit cards in April and we expect the demand for personal loans to shrink as consumers focus on essentials.

 

In our Mortgage business balances declined 0.9% to £59.5bn as we maintained pricing discipline in a competitive environment, continuing to optimise for value in line with our strategy. At H1 2020, c.7% of the book was on SVR, slightly down on FY 2019. We anticipate a marked reduction in originations in H2 2020 given the inability to conduct physical home valuations and our focus will therefore be on existing customer retention.

 

Customer deposit balances grew 1.4% in the period to £64.7bn, driven by stronger relationship deposits which rose 4.3% to £22.3bn. The growth was seen across personal and business current accounts, and personal linked-savings balances, as we continued to execute on our strategy to optimise our deposit mix.

 

Wholesale funding and liquidity

The Group maintains a robust funding and liquidity position, reflecting our retail depositled funding strategy. The loan to deposit ratio was stable over the period at 113%. Having made the prudent decision to retain most of the additional liquidity held against potential Brexit and FSMA Part VII transfer risks, the Group's liquidity coverage ratio of 139% comfortably exceeds both regulatory requirements and internal risk appetite.

 

Supplementing the customer deposit position, we ensure appropriate diversification in our funding base through a number of well-established wholesale funding programmes. In the period we successfully completed issuance of mortgage-backed securities through the Group's Lanark programme across USD and GBP tranches, raising $250m and £300m in January. The Group has no reliance on short-term wholesale funding and can withstand a 9 to 12 month wholesale funding market shut-out if needed. Having continued the repayment, ahead of contractual maturity, of our drawings from the Bank of England's Term Funding Scheme (TFS) over the period, the Group will look to refinance the remaining £7.1bn outstanding with the BoE's new scheme (TFSME), extending the duration and optimising our funding flexibility to support customers through this period of stress.
 

Business and financial review

Chief Financial Officer's review

 

Capital and RWAs

 

 

 

 

 

 

 

                    As at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 Mar 2020

30 Sep 2019

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 ratio

 

 

 

 

 

 

 

 

13.0%

 

13.3%

(0.3)%pts

Total capital ratio

 

 

 

 

 

 

 

 

19.5%

 

20.1%

(0.6)%pts

MREL ratio

 

 

 

 

 

 

 

 

25.6%

 

26.6%

(1.0)%pts

UK leverage ratio

 

 

 

 

 

 

 

 

4.9%

 

4.9%

-%pts

RWAs

 

 

 

 

 

 

 

 

25,173

 

24,046

4.7%

of which Mortgages

 

 

 

 

 

 

 

 

9,104

 

8,846

2.9%

of which Business

 

 

 

 

 

 

 

 

7,580

 

7,124

6.4%

of which Personal

 

 

 

 

 

 

 

 

4,238

 

4,042

4.8%

                           

 

CET1 Capital movements

 

6 months to

31 Mar 2020

 

 

%/bps

 

 

 

 

 

 

Opening CET1 ratio as at 1 October 2019

 

13.3%

Generated(1) (bps)

 

97

COVID-19 impairment charge (bps)

 

(51)

COVID-19 regulatory adjustments(2) (bps)

 

51

Underlying RWA growth (bps)

 

(31)

Mortgage model RWA changes (bps)

 

(28)

AT1 distributions (bps)

 

(14)

 

 

 

 

 

 

Underlying capital generated (bps)

 

24

 

 

 

 

 

 

Integration and transformation costs (bps)

 

(21)

Acquisition accounting impacts

 

(16)

Other (bps)

 

(22)

 

 

 

 

 

 

Net capital absorbed (bps)

 

(35)

 

 

 

 

 

 

Closing CET1 ratio

 

13.0%

 

 

 

 

(1)

Generated includes 4bps of IFRS 9 transitional relief relating to pre-COVID-19 impairment charges.

(2)

COVID-19 regulatory adjustments include IFRS 9 transitional relief and movements in excess expected losses.

 

CET1 capital

The Group's CET1 ratio reduced by 35bps in the period primarily due to planned mortgage model RWA changes. Profit generated capital (pre-COVID-19 impairment charge) of 97bps was offset by AT1 costs of 14bps and underlying RWA growth of 31bps. The implementation of planned mortgage model changes that increased RWAs consumed a further 28bps of capital. The COVID-19 impairment provision had no CET1 impact as the after-tax income statement impairment charge was fully offset by the Group's c.£90m EEL capital deduction and 85% IFRS transitional relief on the remainder. The Group incurred exceptional item charges including restructuring costs and acquisition accounting unwind totalling 37bps along with other item charges of 22bps, including the Q1 pension scheme contributions and movements in the cash flow hedge reserve.

 

Risk weight assets

RWAs have grown by c.5% during the period, largely reflecting the shift in the mix of the Group's lending towards higher RWA density lending and mortgage model changes. The impact of implementing the planned Mortgage model changes increased RWAs by c.£0.5bn. RWAs in the Personal and Business portfolios tracked lending volumes and non-credit risk RWAs of £3.0bn remained stable.

 

MREL

The Group's MREL ratio remained robust at 25.6%, comfortably ahead of the Group's 2020 interim MREL requirement of 18.0% of RWAs. While the final MREL requirements are not yet confirmed, we expect to issue, subject to market conditions, between £1.5bn and £2.0bn of further MREL eligible senior unsecured between now and 2022 to meet our estimated final MREL requirements.

 

 

Business and financial review

Chief Financial Officer's review

 

Outlook and guidance

 

Given the unprecedented nature of COVID-19, the exact economic outlook for the UK is clearly evolving and remains hard to predict with any certainty. The implications of the support measures currently being deployed in the UK will take time to feed through in to the real economy, while the speed with which current restrictions are lifted will be key in determining the size of the shock to GDP and the associated shape of any recovery. However, the Group enters this period from a position of balance sheet strength and we remain agile in managing the emerging risks while continuing to support our existing customers.

 

Since our NIM guidance range was set back in November 2019, the Bank of England's MPC has cut the base rate by 65bps to 0.10% with a corresponding impact on the Group's NII and we therefore now expect the Group NIM for FY2020 to be 155-160bps. We anticipate a structural step down in the NIM in Q3 due to the adverse mismatch in timing between asset repricing and deposit repricing, but thereafter our ongoing balance sheet optimisation strategy should support a relatively resilient NIM.

 

We have also taken the decision to re-phase our Transformation programmes to allow colleagues to focus on supporting customers, which is the right thing to do but will limit the planned delivery of synergies in the second half of 2020. As a result of these changes, we now expect to deliver operating costs of <£920m for FY2020.

 

It remains the Group's ambition to return to a sustainable dividend approach in time and the Board always considers any dividend decision at the end of the financial year. However, the Board will of course give consideration to the unprecedented economic backdrop when considering any dividend decision in respect of full year 2020.

 

In the medium term, we continue to believe our self-help strategy remains the right approach, with our focus on cost reduction, digitising the bank and driving an improved balance sheet mix. However with such an uncertain outlook and delays to the delivery of some elements of our Transformation programme, it is too early to say what, if any, impact the implications of COVID-19 will have on our 2022 financial targets.
 

Business and financial review

Reconciliation of statutory to underlying results

The statutory basis presented within this section reflects the Group's results as reported in the financial statements, incorporating Virgin Money Holdings (UK) PLC from 15 October 2018. The pro forma comparative basis includes the consolidated results of Virgin Money Holdings (UK) PLC as if the acquisition had occurred on 1 October 2018. The underlying results reflect the Group's results prepared on an underlying basis as presented to the CEO, Executive Leadership Team and Board. These exclude certain items that are included in the statutory results, as management believes that these items are not reflective of the underlying business and do not aid meaningful period-on-period comparison. The table below reconciles the statutory results to the underlying results, and full details on the adjusted items to the underlying results are included on page 80.

 

 

Statutory results

Integration and transformation

costs 

Acquisition accounting unwinds

Legacy

conduct

Other

Underlying basis

6 months to 31 Mar 2020

£m

£m

£m

£m

£m

£m

Net interest income

671

-

31

-

-

702

Non-interest income

96

-

15

-

4

115

Total operating income

767

-

46

-

4

817

Total operating and administrative expenses before impairment losses

(537)

61

6

-

5

(465)

Operating profit before impairment losses

230

61

52

-

9

352

Impairment losses on credit exposures

(237)

-

5

-

-

(232)

(Loss)/profit on ordinary activities before tax

(7)

61

57

-

9

120

Financial performance measures

 

 

 

 

 

 

RoTE

(1.0)%

2.7%

2.5%

-%

0.4%

4.6%

CIR

70.0%

(6.3)%

(5.8)%

-%

(0.9%)

57.0%

Return on assets

0.02%

0.11%

0.10%

-%

0.02%

0.25%

Basic EPS

(1.2)p

3.3p

3.1p

-p

0.5p

5.7p

 

 

 

 

 

 

 

 

 

Statutory results

Integration and transformation

costs 

Acquisition accounting unwinds

Legacy

conduct

Other

Underlying basis

6 months to 30 Sep 2019

£m

£m

£m

£m

£m

£m

Net interest income

694

-

11

-

-

705

Non-interest income

129

-

-

-

(38)

91

Total operating income

823

-

11

-

(38)

796

Total operating and administrative expenses before impairment losses

(1,018)

111

6

400

34

(467)

Operating (loss)/profit before impairment losses

(195)

111

17

400

(4)

329

Impairment losses on credit exposures

(79)

-

3

-

-

(76)

(Loss)/profit on ordinary activities before tax

(274)

111

20

400

(4)

253

 

 

 

Statutory results

Include Virgin Money pre-acquisition results

Pro forma results

Integration and transformation

costs

Acquisition accounting unwinds

Legacy

conduct

Other

Underlying basis

6 months to 31 Mar 2019

£m

£m

£m

£m

£m

£m

£m

£m

Net interest income

820

22

842

-

(34)

-

(80)

728

Non-interest income

106

9

115

-

-

-

-

115

Total operating income

926

31

957

-

(34)

-

(80)

843

Total operating and administrative expenses before impairment losses

(711)

(60)

(771)

45

1

33

212

(480)

Operating profit/(loss) before impairment losses

215

(29)

186

45

(33)

33

132

363

Impairment losses on credit exposures

(173)

(4)

(177)

-

100

-

-

(77)

Profit/(loss) on ordinary activities before tax

42

(33)

9

45

67

33

132

286

Financial performance measures

 

 

 

 

 

 

 

 

RoTE

0.1%

(1.5)%

(1.4)%

1.9%

2.9%

1.4%

5.6%

10.4%

CIR

77%

4%

81%

(6)%

4%

(4)%

(18)%

57%

Return on assets

0.06%

(0.06)%

-%

0.08%

0.12%

0.06%

0.23%

0.49%

Basic EPS

0.2p

(2.0)p

(1.8)p

2.5p

3.7p

1.8p

7.2p

13.4p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business and financial review

Financial review - statutory basis

Summary income statement- statutory basis

 

 

 

 

6 months to

6 months to

 

 

6 months to

 

 

 

 

31 Mar 2020

31 Mar 2019

Change

 

30 Sep 2019

Change

 

 

 

£m

 

£m

%

 

 

£m

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

671

 

820

(18)

 

 

694

(3)

Non-interest income

 

 

96

 

106

(9)

 

 

129

(26)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating income

 

 

767

 

926

(17)

 

 

823

(7)

Operating and administrative expenses

 

 

(537)

 

(711)

(24)

 

 

(1,018)

(47)

Operating profit/(loss) before impairment losses

 

 

230

 

215

7

 

 

(195)

 

Impairment losses on credit exposures

 

 

(237)

 

(173)

37

 

 

(79)

200

Statutory (loss)/profit on ordinary activities before tax

 

 

(7)

 

42

 

 

 

(274)

(97)

Tax credit/(expense)

 

 

29

 

(5)

 

 

 

58

(50)

Statutory profit/(loss) after tax

 

 

22

 

37

(41)

 

 

(216)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                       

 

Key performance indicators(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

6 months to

6 months to

 

12 months to

 

 

 

 

 

31 Mar 2020

31 Mar 2019

Change

30 Sep 2019(2)

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profitability:

 

 

 

 

 

 

 

 

Statutory RoTE

 

(1.0)%

0.1%

(1.1)%pts

(6.8)%

5.8%pts

 

Statutory CIR

 

70%

77%

(7)%pts

99%

(29)%pts

 

Statutory return on assets

 

 

0.02%

0.06%

(4)bps

(0.23)%

25bps

 

Statutory EPS

(1.2)p

0.2p

(1.4)p

(17.9)p

16.7p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

For a definition of each of the KPIs, refer to 'Measuring financial performance - glossary' on pages 278 to 279 of the Group Annual Report and Accounts for the year ended 30 September 2019. The KPIs include statutory, regulatory and alternative performance measures. Where applicable certain KPIs are calculated on an annualised basis for the periods to 31 March.

 

(2)

Profitability KPIs are provided with a full year to 30 September 2019 comparative in line with the statutory income statement presentation in the financial statements and as previously reported in the 2019 Group Annual Report and Accounts.

                     

 

 

  

 

Risk management

Risk overview

 

Effective risk management is critical to realising the Group's strategic priorities of pioneering growth, with delighted customers and colleagues, while operating with super straightforward efficiency, discipline and sustainability. The safety and soundness of the Group is aligned to Our Purpose and is a fundamental requirement to enable our customers and stakeholders to be 'happier about money'.

Risk appetite is defined as the level and types of risk the Group is willing to assume within the boundaries of its risk capacity, to achieve its strategic objectives. The Risk Appetite Statement (RAS) articulates the Group's risk appetite to stakeholders and provides a view on the risk-taking activities the Board is comfortable with, guiding decision-makers in their strategic and business decisions.

The Group identifies and manages risk in line with the Risk Management Framework (RMF). The RMF is the totality of systems, structures, policies, processes and people that identifies, measures, evaluates, controls, mitigates, monitors and reports all internal and external sources of material risk.

COVID-19

The Group's priority in dealing with the exceptional challenges posed by COVID-19 is to ensure the safety of, and provision of support for, customers and colleagues.

COVID-19 is a global crisis resulting in the Group invoking intensive incident management, governance and procedural actions. The pandemic poses multiple risks to the Group in both the short and longer-term and the Group's response to date includes:

-     updating the capital and funding plans to incorporate the prudential responses introduced, such as the UK base rate cut and a reduction in the countercyclical capital buffer;

-     implementing the range of government, regulatory and central bank support measures to support customers, including the application of FCA direction on payment holidays and overdraft buffers, participation in the CBILS, the CLBILS, the Bounce Back Loan Scheme (BBLS) and the TFSME;

-     operational changes to ensure that as many colleagues as possible can work from home in accordance with the Government's "stay at home, protect the NHS, stay safe" objectives. These changes have been made in ways that allow us to continue to offer support to our customers during these difficult times;

-     analysing various scenarios in order to understand and plan for potential outcomes;

-     undertaking risk assessments and establishing action plans to address any material control gaps;

-     re-deploying skilled colleagues to customer support, business lending and financial care departments, to ensure customers in or approaching financial difficulty are supported. This includes a balanced streamlining of processes and policies to rapidly provide support to customers who need it most;

-     evaluating the potential impacts on financial results, including impairment, provisioning and RWA calculations, given the deep and prolonged customer impacts expected. Further detail on this can be found within the credit risk section on page 23; and

-     developing a programme to provide ongoing monitoring of risks, indicators and impacts, with regular reporting to appropriate Committees and the Leadership Team;

Principal risks and definitions

The Group's principal risks remain as disclosed in the 2019 Annual Report and Accounts and are shown below.

Credit risk

The risk of loss of principal or interest stemming from a borrower's failure to meet its contracted obligations to the Group in accordance with the terms agreed. Credit risk manifests at both a portfolio and transactional level.

Financial risk

Financial risk includes capital risk, funding risk, liquidity risk, market risk, model risk, pension risk and financial risks arising from climate change, all of which have the ability to impact the financial performance of the Group, if managed improperly.

Regulatory and compliance risk

The risk of failing to comply with relevant laws and regulatory requirements, not keeping regulators informed of relevant issues, not responding effectively to information requests, not meeting regulatory deadlines or obstructing the regulator.

Conduct risk

The risk of undertaking business in a way that is contrary to the interests of customers, resulting in inappropriate customer outcomes or detriment, regulatory censure, redress costs and/or reputational damage.

Operational risk

The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events.
 

Risk management

Risk overview

 

Financial crime risk

The risk that the Group's products and services will be used to facilitate financial crime against the Group, its customers or third parties.

Technology risk

The risk of loss resulting from inadequate or failed information technology processes. Technology risk includes cybersecurity, IT resilience, information security, data privacy and payment risk.

Strategic and enterprise risk

The risk of significant loss of earnings or damage arising from decisions or actions that impact the long-term interests of the Group's stakeholders or from an inability to adapt to external developments, including potential execution risk as a result of integration and transformation activity.

People risk

The risk of not having sufficiently skilled and motivated colleagues, who are clear on their responsibilities and accountabilities and who behave in an ethical way.

Operational resilience underpins all nine principal risks and is defined as the ability of the Group to support its customers and protect and sustain the most critical functions and underlying assets, while adapting to expected or unexpected operational stress or disruption. In addition, operational resilience includes having the capacity to recover from issues as and when they arise. The Group assesses its operational resilience in relation to people, technology, third parties and premises, ensuring it aims to provide a superior level of support and services to customers and stakeholders on a consistent and uninterrupted basis.

 

COVID-19 impacts on principal risks

 

COVID-19 has emerged as a multi-faceted risk with a variety of implications for individuals, businesses and communities. The measures introduced to support the economy create new operational, conduct, enforceability and financial risks to the Group and these risks will be monitored and managed over time.

 

The most material potential impacts on the Group's principal risks are:

 

Risk

Key Mitigating actions

Credit Risk: Although the impact on the Group's retail and business credit portfolios is yet to fully manifest, it is clear that credit risk is heightened, with implications for the Group's customers, resulting in increased levels of capital repayment holidays, forbearance and other forms of customer support.

 

Levels of default, provisions and impairments are also expected to increase over time.

 

 

The Group has amended credit frameworks and policies, providing temporary support to existing customers through capital repayment holidays, interest free overdrafts (for retail customers), extensions of credit, including through the CBILS and the CLBILS, and introduced a variety of additional supporting measures across all portfolios.

 

The Group has implemented additional credit monitoring and updated the Risk Appetite Statement.

 

Operational Risk, Technology Risk and Financial Crime:

Increased remote working, the implementation of new processes and the pressure on customer support areas all have the potential to increase the Group's operational risk profile. This could lead to increased errors or delays and subsequent loss.

 

Enabling working from home can increase risk of internal fraud, which may arise as a result of unauthorised access to critical systems and data. There is an increased risk in cyber-attacks, due to phishing emails which use a COVID-19 theme, and breaches could have legal, regulatory or privacy implications.

 

There is an increased risk of fraud, as fraudsters take advantage of the vulnerabilities created by the current situation.

 

There is additional fraud monitoring, continuous risk assessment of temporary process changes, customers have been directed to digital banking and there continues to be enhanced focus on supplier service level agreements and contingency plans.

 

A significant amount of work has been undertaken to enable and improve home working conditions, and network capacity for telephony has been increased to meet demand. System monitoring, incident management and escalation processes are in place with oversight from the Risk function.

 

The Group has undertaken risk assessments for remote working, tracked policy exceptions, implemented additional controls such as an increased levels of monitoring, and mobilised awareness initiatives.

 

 

 

 

Risk management

Risk overview

 

COVID-19 impacts on principal risks (continued)

 

People Risk: There is an impact on colleague health from risk of illness and increased absence, in addition to longer-term well-being risks, such as mental health impacts, which may arise from societal factors. These factors could also increase pressure and reduce skills availability in key areas.

 

The Group is following government advice with colleagues working from home where possible, and social distancing and additional cleaning measures are in place to support key workers based in offices and branches. Vulnerable colleagues are not on site.

 

The Group is ensuring that colleagues are protected through adhering to the government's physical and health measures, while recognising there is uncertainty surrounding timing of their removal or relaxation. Additional well-being programmes have been implemented to support colleagues.

 

Conduct Risk: There is the potential for harm to customers impacted by COVID-19 through failure to recognise customer circumstances, financial difficulties or vulnerability and to apply appropriate actions.

 

 

The Group is prioritising its customers and will maintain open and transparent communication with regulators. The Group is undertaking file reviews, call listening, managing contact centre availability and workflow management impacted due to increased volumes and reduced staff.

 

Financial Risk: Capital may be required to absorb the impact of heightened levels of credit risk and the expected increase of impairment levels over time. Wholesale funding markets may be fragile during high levels of uncertainty. Customers' use of deposits may change, particularly amongst businesses, and the taking of loan repayment holidays will alter cash flows for the management of liquidity.

 

Capital, funding and liquidity are all subject to extensive stress testing with the results informing the levels of capital and liquidity that are required to be held in the event of adverse conditions.

 

Emerging risks

The Group's risks are continually reviewed and reassessed through a horizon scanning process, with escalation and reporting to the Board. The horizon scanning process fully considers all relevant internal and external factors, and is designed to capture those risks which are current but have not yet fully crystallised, as well as those which are expected to crystallise in future periods. These risks are allocated a status based on their expected impact and time to fully crystallise, in line with the definitions outlined in the RMF.

With the exception of material developments in the period as a result of COVID-19, the key emerging risks to the Group's strategy, as stated below, remain broadly unchanged to those set out in the 2019 Annual Report and Accounts.

 

Geo-political and macro-economic environment

 

The Group is exposed to a variety of risks resulting from a downturn in the UK economic environment. These risks are expected to crystallise in the near- term due to the impact of the COVID-19 pandemic.

 

The precise duration and depth of the downturn is uncertain, but risks to credit and margin performance are expected and significant disruption to both business supply and demand has already been seen. The efficacy of monetary and fiscal policy, and the speed and ability with which the UK can return to normal operating conditions, will determine the overall economic impact for the UK and the Group.

 

Uncertainty remains regarding the future relationship between the UK and EU and whether the scheduled trade deal negotiations can be completed ahead of the transition period end date of 31 December 2020.

 

 

 

Risk management

Risk overview

 

Emerging risks (continued)

Regulatory change

 

There is wide-ranging and material short-term disruption to firms and regulators as a result of COVID-19 that impacts customers, businesses and firms, requiring large-scale prioritisation decisions in a fast-moving and highly uncertain environment.

 

The longevity of temporary changes (e.g. cancellation of the 2020 Annual Cyclical Scenario), or the possible requirement for lasting changes, is currently unknown and may impact firms in the medium term.

 

Beyond COVID-19, there is continued evolution of the regulatory landscape, and the requirement to respond to on-going prudential and conduct driven initiatives.

Competition

 

The Group continues to operate in a highly competitive environment, with growth across a number of digital-only providers, and emerging signs of participation from large technology companies. Forced changes in customer behaviour, as a result of COVID-19, could make it easier, and faster, for these digital companies to enter the UK financial services market.

 

As the market continues to react to COVID-19, and the impacts become clearer, it will be necessary to remain agile, focused and responsive to ensure we are addressing new risks in a safe and efficient manner.

 

This increased competition within the financial services industry could also drive consolidation within the market, as banks review ways of increasing their UK footprint.

Climate change

 

The Group continues to consider its exposure to the physical, transitional and reputational risks arising from climate change, and the transition to a low carbon economy, which have the potential to impact the Group's customers, strategic priorities and operational activities.

 

Further detail on these risks and how they are managed is available in the 2019 Annual Report and Accounts.

 

 

Risk management

Credit risk

 

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/or products that the Group offers, and those in which the Group invests (including, among others, loans, guarantees, credit-related commitments, letters of credit, acceptances, inter-bank transactions, foreign exchange transactions, swaps and bonds). Credit risk can be found both on-balance sheet and off-balance sheet.

 

COVID-19 Assessment

 

The single largest impact on the Group's credit risk profile, for the six months to 31 March 2020, has been the emergence of the COVID-19 pandemic. 

 

The implications of the COVID-19 pandemic on both the Global and UK macro-economic environment is evolving and fluid. Given the fluidity it has not been possible to fully reflect anticipated economic impacts in the underlying assumptions embedded within the IFRS 9 models. As a result, the Group's approach to estimating the impact of COVID-19 on impairment provisioning has been partially enacted through post model adjustments, and in doing so has not impacted the staging composition of the portfolios as at 31 March 2020. A three-stage approach has been adopted comprising (i) weighting the existing IFRS 9 models to a 100% severe downside scenario; (ii) applying additional expert credit risk judgment overlays in relation to the individual portfolios based on customer insight and expected behaviour; and (iii) modelling a "pandemic" scenario for our largest at risk portfolios of business and credit cards. The additional expert credit risk judgement is based on an assessment of credit performance at both the portfolio and customer level for Business lending with a particular focus on higher risk sectors and specific segments of the portfolio. For the mortgages and personal portfolios, expert judgement and historical data has been used to determine what proportion of customers, for example, those granted payment holidays, could potentially lead to credit losses. The outcome of this has resulted in an increase to the impairment provision of £164m, split £110m in Business, £39m in Personal and £15m in Mortgages. After reallocating some of the existing provision for economic uncertainty, the net increase to the impairment charge is £146m, split £104m in Business, £32m in Personal and £10m in Mortgages. 

 

IFRS 9 Methodology

While the overall policies and methodologies adopted by the Group relative to the calculation of IFRS 9 provisions are compliant with the standard, there are differences in the detail relating to the two heritage business inputs and processes supporting the Expected Credit Loss (ECL) calculation. The complexity of the underlying data, model related methodology and inputs used means that a single methodology in providing a combined Group ECL view, while being developed, is not possible at this point in time, with each heritage retaining its own distinct set of IFRS 9 compliant models.

 

Key credit metrics

 

 

As at

 

31 Mar 2020

(unaudited)

£m

30 Sept 2019

(audited)

£m

31 Mar 2019

(unaudited)

£m

Impairment provisions held on credit exposures(1)

(pre COVID-19)

 

 

Mortgage lending

40

40

35

Personal lending

199

175

152

Business lending

157

147

163

 

396

362

350

         

 

 

As at

 

31 Mar 2020

(unaudited)

£m

30 Sept 2019

(audited)

£m

31 Mar 2019

(unaudited)

£m

Impairment provisions held on credit exposures(1)

(post COVID-19)

 

 

Mortgage lending

50

40

35

Personal lending

231

175

152

Business lending

261

147

163

 

542

362

350

         

 

(1)

The impairment provision includes an element relating to the Group's undrawn credit exposures.

 

 

Risk management

Credit risk

 

6 months to

31 Mar 2020

(unaudited)

£m

Pro-forma(3) 12 months to

30 Sept 2019

(unaudited)

£m

Pro-forma 6 months to

31 Mar 2019

(unaudited)

£m

Underlying impairment charge on credit exposures(1)

 

 

Mortgage lending (pre COVID-19)

2

4

1

Mortgage lending impairment charge for COVID-19

10

n/a

n/a

Personal lending (pre COVID-19)

68

124

58

Personal lending impairment charge for COVID-19

32

n/a

n/a

Business lending (pre COVID-19)

16

25

18

Business lending impairment charge for COVID-19

104

n/a

n/a

 

232

153

77

Asset quality measures:

 

 

 

Underlying cost of risk pre COVID-19(2)

0.23%

0.21%

0.21%

Underlying cost of risk post COVID-19

0.63%

n/a

n/a

Stage 3 assets to customer loans

1.13%

1.09%

1.08%

Total provision to customer loans pre COVID-19

0.55%

0.50%

0.49%

Total provision to customer loans post COVID-19

0.75%

n/a

n/a

Stage 3 provision to Stage 3 loans

18.38%

14.32%

15.00%

(1)

The underlying impairment charge in the 2019 periods exclude the impact of the acquisition of Virgin Money Holdings (UK) PLC on 15th October 2018.

 

(2)

Inclusive of gains/losses on assets held at fair value and elements of fraud loss.

 

(3)

The comparative has been restated in line with the current period presentation

 

                         

 

The increase in the underlying pre-COVID-19 impairment charge, to £86m for the 6 months to 31 March 2020 (£77m H1 FY19; £76m H2 FY19) reflects a higher charge on business exposures as a result of portfolio growth and the recognition of a small number of single name, individually significant, provisions. The charge relative to personal exposures has also increased due to a higher level of early stage delinquency and arrears, together with a lower level of recoveries, the pre-COVID-19 cost of risk, at 23bps, is reflective of normalisation and is in line with expectations.

 

Overall asset quality remained resilient, reflective of the focus on responsible credit decisions and controlled risk appetite. The level of Stage 3 assets remains modest against a growing book and demonstrates the credit quality of the portfolios, supported by the low interest rate environment. The ratio of total provisions to customer loans, pre-COVID-19, at 0.55% is reflective of a well-collateralised portfolio, supported by the size of the mortgage portfolio which proportionately requires a lower provision coverage.

 

The distribution of the Group's gross loans and advances is analysed below:

 

As at 31 March 2020

(unaudited)

 

 

 

 

 

Stage 2

Stage 2

Stage 2

 

Stage 3

 

 

Stage 1

<30 DPD

>30 DPD

Total

Stage 3

POCI

Total

 

£m

£m

£m

£m

£m

£m

£m

Mortgages

56,906

2,180

188

2,368

398

92

59,764

Personal of which:

4,929

425

35

460

66

5

5,460

 - credit cards

3,875

384

28

412

50

5

4,342

 - personal overdrafts

42

-

1

1

3

-

46

 - other retail lending

1,012

41

6

47

13

-

1,072

Business

5,570

2,456

3

2,459

273

-

8,302

Closing balance

67,405

5,061

226

5,287

737

97

73,526

 

As at 30 September 2019

(audited)

 

 

 

 

 

 

 

 

 

Stage 2

Stage 2

Stage 2

 

Stage 3

 

 

Stage 1

<30 DPD

>30 DPD

Total

Stage 3

POCI

Total

 

£m

£m

£m

£m

£m

£m

£m

Mortgages

 58,120

 1,637

 168

 1,805

 363

 103

 60,391

Personal of which:

 4,787

 392

 32

 424

 61

 8

 5,280

 - credit cards

 3,806

 353

 25

 378

 46

 8

 4,238

 - personal overdrafts

 53

 -  

 1

 1

 4

 -  

 58

 - other retail lending

 928

 39

 6

 45

 11

 -  

 984

Business

 5,018

 2,280

 5

 2,285

 272

 -  

 7,575

Closing balance

 67,925

 4,309

 205

 4,514

 696

 111

 73,246

 

Risk management

Credit risk

 

The lending portfolio increased by £280m between 1 October 2019 and 31 March 2020, with growth in both business and personal lending marginally offset by a small contraction in mortgages lending.

 

Mortgages - With total gross loans and advances of £59.84bn as at 31 March 2020, there has been marginal underlying contraction in the portfolio. Over 95% are classed as Stage 1, reflective of the strong credit quality of the portfolio. Stage 3 purchased or originated credit impaired (POCI) for Mortgages reduced from £103m as at 30 September 2019 to £92m as at 31 March 2020, as a result of customer redemptions and balance paydowns.

 

Personal - Of the £5.5bn total personal portfolio, the majority is credit cards, at £4.3bn. The growth in the period results mainly from the credit cards portfolio, however there has also been an increase in the balance of personal loans. The personal portfolio continues to evidence stable performance with 90% of balances classed as Stage 1. Stage 3 POCI has reduced from £8m as at 30 September 2019 to £5m as at 31 March 2020, due to write-offs and customer balance paydowns.

 

Business - At £8.3bn, business lending continues to evidence strong underlying growth. The proportion of lending in Stage 2 has remained stable at 30%, reflective of the Group's controlled and cautious approach to identifying customers experiencing financial difficulty and, where appropriate, providing early intervention assistance such as forbearance, to support customers in meeting their financial commitments to the Group.

 

Credit quality of loans and advances as at 31 March 2020 (unaudited)

The following tables highlight the significant exposure to credit risk in respect of which the ECL model is applied for the Group's Mortgage, Personal and Business loans and advances, including loan commitments and financial guarantee contracts, based on the following risk gradings.

 

 

Risk management

Credit risk

 

Credit risk exposure, by internal PD rating, by IFRS 9 stage allocation (unaudited)

 

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

 

As at 31 March 2020

 

 

                Gross carrying amount

 

 

 

Stage 2

Stage 3

 

 

 

Stage 1

(not credit

(credit

Stage 3

 

 

12 month

impaired)

impaired)

(POCI)

 

 

ECLs

Lifetime ECLs

Lifetime ECLs

Lifetime ECLs

Total

 

£m

£m

£m

£m

£m

Mortgages

 

 

 

 

 

<0.15

36,087

369

-

-

36,456

0.15 to <0.25

6,135

178

-

-

6,313

0.25 to <0.50

9,040

395

-

-

9,435

0.50 to <0.75

2,683

170

-

-

2,853

0.75 to <2.50

2,561

629

-

-

3,190

2.50 to <10.00

339

266

-

-

605

10.00 to <100.00

61

361

-

-

422

100.00 (Default)

-

-

398

92

490

Total

56,906

2,368

398

92

59,764

 

Personal

 

 

 

 

 

<0.15

81

-

-

-

81

0.15 to <0.25

70

-

-

-

70

0.25 to <0.50

1,248

5

-

-

1,253

0.50 to <0.75

1,001

7

-

-

1,008

0.75 to <2.50

1,910

35

-

-

1,945

2.50 to <10.00

584

250

-

-

834

10.00 to <100.00

35

163

-

-

198

100.00 (Default)

-

-

66

5

71

Total

4,929

460

66

5

5,460

 

Business

 

 

 

 

 

<0.15

658

5

-

-

663

0.15 to <0.25

308

10

-

-

318

0.25 to <0.50

788

56

-

-

844

0.50 to <0.75

365

118

-

-

483

0.75 to <2.50

2,373

971

-

-

3,344

2.50 to <10.00

1,078

1,159

-

-

2,237

10.00 to <100.00

-

140

-

-

140

100.00 (Default)

-

-

273

-

273

Total

5,570

2,459

273

-

8,302

 

 

Risk management

Credit risk

 

Credit quality of loans and advances as at 30 September 2019 (audited)

 

As at 30 September 2019

 

 

                Gross carrying amount

 

 

 

Stage 2

Stage 3

 

 

 

Stage 1

(not credit

(credit

Stage 3

 

 

12 month

impaired)

impaired)

(POCI)

 

 

ECLs

Lifetime ECLs

Lifetime ECLs

Lifetime ECLs

Total

 

£m

£m

£m

£m

£m

Mortgages

 

 

 

 

 

<0.15

38,816

389

-  

-  

39,205

0.15 to <0.25

5,836

103

-  

-

5,939

0.25 to <0.50

7,983

245

-

-

8,228

0.50 to <0.75

2,422

96

-

-

2,518

0.75 to <2.50

2,648

455

-

-

3,103

2.50 to <10.00

376

274

-

-

650

10.00 to <100.00

39

243

-

-

282

100.00 (Default)

-

-

363

103

466

Total

58,120

1,805

363

103

60,391

 

Personal

 

 

 

 

 

<0.15

 93

 -  

 -  

 -  

 93

0.15 to <0.25

 68

 -  

 -  

 -  

 68

0.25 to <0.50

 1,326

 6

 -  

 -  

 1,332

0.50 to <0.75

 967

 8

 -  

 -  

 975

0.75 to <2.50

 1,743

 36

 -  

 -  

 1,779

2.50 to <10.00

 553

 231

 -  

 -  

 784

10.00 to <100.00

 37

 143

 -  

 -  

 180

100.00 (Default)

 -  

 -  

 61

 8

 69

Total

 4,787

 424

 61

 8

 5,280

 

Business

 

 

 

 

 

<0.15

 530

 5

 -  

 -  

 535

0.15 to <0.25

 440

 17

 -  

 -  

 457

0.25 to <0.50

 718

 52

 -  

 -  

 770

0.50 to <0.75

 537

 101

 -  

 -  

 638

0.75 to <2.50

 2,199

 1,019

 -  

 -  

 3,218

2.50 to <10.00

 592

 919

 -  

 -  

 1,511

10.00 to <100.00

 2

 172

 -  

 -  

 174

100.00 (Default)

 -  

 -  

 272

 -  

 272

Total

 5,018

 2,285

 272

 -  

 7,575

 

 

  

 

 

 

Risk management

Credit risk

 

The following tables disclose the impairment allowance by portfolio:

 

As at 31 March 2020

(unaudited)

 

 

 

 

 

 

 

 

 

Stage 2

Stage 2

Stage 2

 

Stage 3

 

 

Stage 1

<30 DPD

>30 DPD

Total

Stage 3

POCI

Total

 

£m

£m

£m

£m

£m

£m

£m

Mortgages

7

8

7

15

29

(1)

50

Personal of which:

79

92

20

112

42

(2)

231

 - credit cards

65

85

15

100

30

(2)

193

 - personal overdrafts

2

-

1

1

3

-

6

 - other retail lending

12

7

4

11

9

-

32

Business

44

140

-

140

77

-

261

Closing balance

130

240

27

267

148

(3)

542

 

As at 30 September 2019

(audited)

 

 

 

 

 

 

 

 

Stage 2

Stage 2

Stage 2

 

Stage 3

 

 

Stage 1

<30 DPD

>30 DPD

Total

Stage 3

POCI

Total

 

£m

£m

£m

£m

£m

£m

£m

Mortgages

 6

 5

 4

 9

 26

 (1)

 40

Personal of which:

 53

 71

 16

 87

 37

 (2)

 175

 - credit cards

 42

 65

 12

 77

 28

 (2)

 145

 - personal overdrafts

 2

 -  

 1

 1

 3

 -  

 6

 - other retail lending

 9

 6

 3

 9

 6

 -  

 24

Business

 20

 72

 -  

 72

 55

 -  

 147

Closing balance

 79

 148

 20

 168

 118

 (3)

 362

 

The Group's impairment allowance has increased by £180m in the period from 1 October 2019 to 31 March 2020, which is primarily due to the impact of the COVID-19 related overlay of £164m. 

 

Mortgages - The Mortgage impairment allowance of £50m is reflective of the level of collateral held and the low expected credit loss for this portfolio. The increase from September 2019 is due to the £15m impact of COVID-19 overlay.

 

Personal - The total impairment allowance for the personal portfolio of £231m has increased by £56m, of which £39m is attributed to the COVID-19 overlay. The underlying increase in impairment allowance over the period is almost entirely due to the credit cards portfolio as a result of the combined effect of portfolio growth, higher default rates due to seasoning and maturation of the portfolio and routine recalibration of underlying provisioning models.

 

Business - Total impairment allowance for the business portfolio increased by £114m to £261m, primarily due to the impact of the COVID-19 overlay. The pre-COVID-19 increase is due to the growth in the portfolio over the period.

 

 

Risk management

Credit risk

 

Coverage ratios

 

As at 31 March 2020

(unaudited)

 

 

 

 

 

 

 

 

 

Stage 2

Stage 2

Stage 2

 

Stage 3

 

 

Stage 1

<30 DPD

>30 DPD

Total

Stage 3

POCI

Total

 

%

%

%

%

%

%

%

Mortgages

0.01

0.39

3.88

0.67

7.23

(0.58)

0.09

Personal of which:

1.65

22.44

59.68

25.27

66.67

(36.72)

4.40

 - credit cards

1.69

22.83

54.95

25.03

63.13

(36.72)

4.56

 - personal overdrafts

5.51

13.69

66.06

57.77

86.07

-

12.20

 - other retail lending

1.32

18.59

82.36

26.83

76.05

-

3.32

Business

0.80

5.86

6.37

5.86

29.14

-

3.23

Closing balance

0.19

4.84

12.35

5.16

20.43

(2.43)

0.75

 

As at 30 September 2019

(audited)

 

 

 

 

 

 

 

 

Stage 2

Stage 2

Stage 2

 

Stage 3

 

 

Stage 1

<30 DPD

>30 DPD

Total

Stage 3

POCI

Total

 

%

%

%

%

%

%

%

Mortgages

0.01

0.29

2.26

0.47

7.13

(0.80)

0.07

Personal of which:

1.15

18.22

51.18

20.64

62.14

(22.61)

3.39

 - credit cards

1.11

18.49

46.91

20.35

60.39

(22.61)

3.42

 - personal overdrafts

5.00

14.17

66.02

56.00

91.21

-

11.41

 - other retail lending

1.09

15.56

68.29

22.35

60.64

-

2.75

Business

0.40

3.13

2.27

3.13

19.99

-

1.93

Closing balance

0.12

3.41

9.68

3.69

16.89

(2.30)

0.50

 

The coverage ratio increased by 25bps in the period, of which 21bps can be attributed to the impact of the COVID-19 related overlay.

 

Mortgages - The coverage ratio increased by 2bps in the period as a result of the COVID-19 overlay. On an underlying basis the coverage ratio remained stable at 7bps, reflective  of the composition, quality and value of the mortgage portfolio.

 

Personal - The total coverage ratio increased by 101bps, with the COVID-19 overlay representing 61bps. Underlying coverage of 3.79% is an increase of 40bps, primarily due to the increased early delinquency and arrears and maturation of the portfolios.

 

Business - Coverage for the business portfolio increased by 130bps, almost all of which is attributable to the COVID-19 overlay. Excluding the impact of the overlay, the underlying increase was 2bps reflective of portfolio growth in Stage 1 where proportionately less provision coverage is required, and a small number of significant write-offs from Stage 3. Coverage in Stage 2 for the business portfolio has reduced on an underlying basis to 3.07%.

 

 

Risk management

Credit risk

 

Reconciliation of movement in gross balances and impairment loss allowance (unaudited)

The following tables explain the changes in the loss allowance and gross carrying value of the portfolios between 30 September 2019 and 31 March 2020. Values are calculated using the individual customer account balances, and the stage allocation is taken as at the end of each month. The monthly position of each account is aggregated to report a net closing position for the period, thereby incorporating all movements an account has made during the period.

 

 

Non credit impaired

Credit impaired

 

Total

Total

 

Stage 1

Stage 2

Stage 3

Stage 3 POCI

 

 

 

 

Gross Loans

ECL

Gross Loans

ECL

Gross Loans

ECL

Gross Loans

ECL

 

Gross Loans

ECL

 

£m

£m

£m

£m

£m

£m

£m

£m

 

£m

£m

Opening balance at 1 October 2019

67,925

79

4,514

168

696

118

111

(3)

 

73,246

362

Transfers Across Stages

(1,511)

(3)

790

29

141

54

-

-

 

(580)

80

Assets Originated or Purchased

9,790

42

529

37

68

3

-

-

 

10,387

82

Repayments and Other movements

(8,799)

12

(546)

33

(100)

29

(13)

1

 

(9,458)

75

Write-offs

-

-

-

-

(68)

(68)

(1)

(1)

 

(69)

(69)

Cash Recoveries

-

-

-

-

-

12

-

-

 

-

12

Closing balance at 31 March 2020

67,405

130

5,287

267

737

148

97

(3)

 

73,526

542

 

The contractual amount outstanding on loans and advances that were written off during the reporting period or still subject to enforcement activity was £2.9m.

 

Transfers Across Stage - The net movement of loan and ECL balances across the IFRS stages.

 

Assets originated or purchased - The balance and ECL calculated on newly opened or originated assets. Assets where the term has ended, and a new facility has been provided are reported as new assets.

 

Repayments and other movements - Movements due to customer repayment and other minor movements not captured under any other category.

 

Write-offs - The amount of principal written off and derecognised from the balance sheet.

 

Cash recoveries - ECL impact of payments received on assets that had previously been written off.

 

 

Risk management

 

Credit risk

 

Mortgage lending by average LTV

The LTV ratio of mortgage lending, coupled with the relationship of the debt to customers' income, is key to the credit quality of these loans. The table below sets out the indexed LTV analysis of the Group's mortgage stock:

 

 

31 Mar 2020

30 Sep 2019

 

 

(unaudited)

(audited)

 

LTV(1)

%

%