Virgin Money UK PLC Interim Results 2021

David Duffy, Chief Executive Officer:

 

"Virgin Money had a strong first half. We doubled underlying profit compared to last year and returned to statutory profit. The quality of our loan book remained resilient in the period, and we've continued to support customers and look after our colleagues and communities, while safeguarding the bank. We've made significant strategic progress to transform Virgin Money into a leading digital bank and our rebranding is largely complete. We've launched a range of innovative and compelling Virgin Money personal and business products as well as differentiated loyalty offers, which are showing early signs of success. Our ESG strategy continues to gain momentum across the business including developing sustainability-linked business loans and a green mortgage product as we look to further embed sustainability across everything we do. This lays the foundation for efficient, sustainable growth of deep, long-lasting customer relationships.

 

We are cautiously optimistic about the improving outlook as the impact of the vaccination programme in the UK delivers positive revisions to economic expectations. We're continuing to manage through what is still an uncertain economic backdrop, but the bank is well placed, with a strong balance sheet, and through ongoing strategic delivery we have a clear path to long-term, improved sustainable returns."

 

Significantly stronger financial performance in H1

·      Returned to statutory profit, with underlying profit more than doubling YoY to £245m (H1 2020: £120m) given significantly lower impairment charge; underlying RoTE improved to 10.1% (H1 2020: 4.6%)

·      Income 9% lower YoY saw pre-provision operating profit decline to £283m, although this recovered by 4% compared to H2 2020:

o  H1 NIM declined 6bps YoY to 1.56% but with improved momentum as Q2 increased to 1.60%; continued deposit repricing and mix benefit, and stronger mortgage spreads more than offset lower hedge income and higher liquidity

o  Deposit costs now 61bps (FY20: 90bps) underpinning overall cost of funds reduction compared to FY20

o  Subdued non-interest income of £66m primarily reflects low activity; expected to improve with the easing of lockdown and as broader economic activity rebounds

·      Operating costs of £460m reduced 1% YoY but remained stable in the half as cost savings were offset by one-off costs and the impact of higher investment; expect stronger H2 reduction given benefit of transformation savings and lower investment

·      Low impairment charge of £38m (11bps cost of risk) given continuing support reducing the impact on customers; updated macroeconomics and limited specific provisions or changes in portfolio asset quality metrics in the period

·      Statutory profit before tax of £72m after deducting £173m of exceptional items: £49m of integration & transformation costs, £47m of acquisition accounting unwind, £71m of conduct charges (£59m related to PPI, including charge taken in Q1); working towards closing down PPI programme

·      Prudent volume management saw a stable loan book at £72.2bn:

o  Stable mortgages balances at £58.3bn with volumes carefully managed through an uncertain backdrop, prioritising margin over volume

o  Business lending declined 0.6% to £8.9bn which includes £1.4bn of government-guaranteed lending

o  Personal lending declined 3.2% to £5.1bn due to subdued customer demand across the market

·      Deposits grew 1.5% to £68.5bn; strong relationship deposits growth of 12% to £28.7bn across both consumers and businesses

·      Restarted structural hedging programme: c.£25.9bn of eligible liabilities now >95% re-invested since March; avg. yield c.0.3%; No impact on unwound hedge NII profile

 

Prudent balance sheet well positioned for an uncertain outlook

·      Maintained considerable credit provisions of £721m (FY20: £735m); total coverage ratio of 1.00% (FY20: 1.02%)

·      Fully updated economic scenarios: remain cautiously positioned despite greater optimism in recent economic data

·      Arrears across most portfolios increased from subdued FY20 levels but remain at low levels

·      Low remaining payment holidays representing <1% of balances across mortgages & personal; vast majority returned to payments

·      Robust capital base: transitional CET1 ratio strengthened to 14.4% or 13.9% excluding software intangible benefit:

o  Improved 99bps in the half driven by stronger profitability and limited RWA inflation to date

o  Significant c.£1.3bn management buffer above regulatory minimum of 9.2%; CET1 ratio 13.2% on fully loaded basis

 

Good progress on strategic execution

·      Innovative propositions launched: Brighter Money bundles campaign drove >90% increase in monthly PCA sales vs H2 20; c80k total sales in H1; 100k credit card cashback signups; re-launched BCA with Working Capital Health solutions to launch in H2

·      Laying the foundations for future growth: rebranding substantially complete; expanded digital distribution capability with c.90% of Personal sales now digital; Mortgage APIs now integrated across c.6k brokers

·      Building long-term customer loyalty: Virgin Red programme pilot launched - ability to earn and spend Virgin Points, significant customer opportunity; Virgin Money Rewards positively received, reflected in strong customer advocacy

·      Momentum on ESG agenda: Improved Board-level gender diversity; leading edge initiatives on the Poverty Premium; reducing operating emissions; progressing climate scenario analysis and TCFD disclosure; sustainable product development underway

 

Outlook and guidance

·      Net interest margin expected to be around 160bps for FY21

·      Structural hedge programme restarted: Expected benefit to NII of c.£25m in FY21; c.£60m of benefit in FY22

·      Underlying operating expenses expected to be <£890m in FY21 reflecting the impact of COVID restrictions and updated phasing; committed to long-term cost reduction and will provide a further update on incremental cost opportunities from digital transformation alongside FY21 results

·      Cost of risk expected to be subdued in the near term through FY21

·      CET1 ratio expected to continue to exceed 13% (excluding software intangible benefit) at FY21

·      SST outcome in December and impairment outlook will be key inputs into our approach to considering dividends; expect a further update on our capital framework post-SST

·      Clear path to delivering double digit statutory returns on tangible equity in the medium term

 

 

Contact details

 

For further information, please contact:

 

 

Investors and Analysts
Richard Smith Head of Investor Relations	+44 7483 399 303 richard.smith@virginmoneyukplc.com
Amil Nathwani Senior Manager, Investor Relations	+44 7702 100 398 amil.nathwani@virginmoneyukplc.com
Martin Pollard Manager, Investor Relations	+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
Citigate Dewe Rogerson
Andrew Hey	+44 7903 028 448
Media (Australia)
P&L Communications
Ian Pemberton Sue Frost	+61 402 245 576 +61 409 718 572

 

Virgin Money UK PLC will today be hosting a presentation for analysts and investors covering the 2021 interim financial results starting at 08:30 BST (17:30 AEST) with a pre-recorded presentation followed by live Q&A call:

 

https://webcast.openbriefing.com/vmuk-interim21/ 

 

A recording of the webcast and conference call will be made available on our website shortly after the meeting at:

 

https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/

 

A call for fixed income investors will be held at 09:00 BST on Friday 7 May 2021: Dial-in details: UK: 0800 640 6441;  All other locations: +44 20 3936 2999; Access code: 983095

 

 

 

Business and financial review

Financial performance - underlying basis

 

Summary income statement

						6 months to	6 months to					6 months to
						31 Mar 2021	31 Mar 2020			Change		30 Sep 2020				Change
						£m			£m	%				£m		%
Underlying net interest income (NII)						677			702	(4)				649		4
Underlying non-interest income						66		115		(43)					76	(13)
Total underlying operating income						743			817	(9)				725		2
Underlying operating and administrative expenses						(460)			(465)	(1)				(452)		2
Underlying operating profit before impairment losses						283			352	(20)				273		4
Impairment losses on credit exposures						(38)			(232)	(84)				(269)		(86)
Underlying profit on ordinary activities before tax						245			120	104				4		n/a
-  Integration and transformation costs						(49)			(61)	(20)				(78)		(37)
-  Acquisition accounting unwinds						(47)			(57)	(18)				(56)		(16)
-  Legacy conduct costs						(71)			-	n/a				(26)		173
-  Other items						(6)			(9)	(33)				(5)		20
Statutory profit/(loss) on ordinary activities before tax						72			(7)	n/a				(161)		n/a
Tax credit/(charge)						8			29	(72)				(2)		n/a
Statutory profit/(loss) after tax						80			22	264				(163)		n/a

 

Key performance indicators⁽¹⁾

				6 months to	6 months to		6 months to
				31 Mar 2021	31 Mar 2020	Change	30 Sep 2020	Change
Profitability:
Net interest margin (NIM)				1.56%	1.62%	(6)bps	1.49%	7bps
Underlying return on tangible equity (RoTE)				10.1%	4.6%	5.5%pts	(3.5)%	13.6%pts
Underlying cost to income ratio (CIR)				62%	57%	5%pts	62%	-%pts
Underlying return on assets				0.47%	0.25%	22bps	(0.07)%	54bps
Underlying earnings per share (EPS)				12.6p	5.7p	6.9p	(4.3)p	16.9p
(1)    For a definition of each of the KPIs, refer to 'Measuring financial performance - glossary' on pages 257 to 258 of the Group's 2020 Annual Report and Accounts. The KPIs include statutory, regulatory and alternative performance measures. Where applicable certain KPIs are calculated on an annualised basis for the periods to 31 March.

 

 

Business and financial review

Financial performance - underlying basis

 

Key performance indicators (continued)

As at:					31 Mar 2021	31 Mar 2020	Change		30 Sep 2020			Change
Asset quality
Cost of risk(1)					0.11%	0.63%	(52)bps		0.68%			(57)bps
Total provision to customer loans					1.00%	0.75%	25bps		1.02%			(2)bps
Indexed loan to value ratio (LTV) of mortgage portfolio(2)					55.2%	57.1%	(1.9)%pts		57.3%			(2.1)%pts
Regulatory Capital:
Common equity tier 1 (CET1) ratio (IFRS 9 transitional)					14.4%	13.0%	1.4%pts		13.4%			1.0%pts
CET1 ratio (IFRS 9 fully loaded)					13.2%	12.4%	0.8%pts		12.2%			1.0%pts
Total capital ratio					21.2%	19.5%	1.7%pts		20.2%			1.0%pts
Minimum requirement for own funds and eligible liabilities (MREL) ratio					29.3%	25.6%	3.7%pts		28.4%			0.9%pts
Capital Requirement Directive IV (CRD IV) leverage ratio					5.2%	4.4%	0.8%pts		4.8%			0.4%pts
UK leverage ratio					5.2%	4.9%	0.3%pts		4.9%			0.3%pts
Tangible net asset value (TNAV) per share					257.5p	252.5p	5.0p		244.2p			13.3p
Funding and Liquidity:
Loan to deposit ratio (LDR)					105%	113%	(8)%pts		107%			(2)%pts
Liquidity coverage ratio (LCR)					151%	139%	12%pts		140%			11%pts
Net stable funding ratio (NSFR)					134%	129%	5%pts		131%			3%pts
(1)	Cost of risk is calculated on an annualised basis.
(2)	LTV of the mortgage portfolio is defined as mortgage portfolio weighted by balance.

Summary balance sheet

									As at
									31 Mar 2021	30 Sep 2020			Change
									£m			£m	%
Customer loans									72,211			72,457	(0.3)
of which Mortgages									58,270			58,290	-
of which Personal									5,050			5,219	(3.2)
of which Business									8,891			8,948	(0.6)
Other financial assets									15,884			15,608	1.8
Other non-financial assets									2,044		2,194		(6.8)
Total assets									90,139			90,259	(0.1)
Customer deposits									68,538			67,511	1.5
of which relationship deposits(1)									28,744			25,675	12.0
of which non-linked savings									21,506			20,729	3.7
of which term deposits									18,288			21,107	(13.4)
Wholesale funding									13,289			14,227	(6.6)
Other liabilities									3,232			3,589	(9.9)
Total liabilities									85,059			85,327	(0.3)
Ordinary shareholders' equity									4,165			4,017	3.7
Additional Tier 1 (AT1) equity									915			915	-
Equity									5,080			4,932	3.0
Total liabilities and equity									90,139			90,259	(0.1)
Risk Weighted Assets (RWAs)									24,152			24,399	(1.0)

(1)   Current account and linked savings balances

 

 

 

 

Business and financial review

Chief Executive Officer's statement

Laying the Foundations for growth

 

"Virgin Money had a strong first half. We doubled underlying profit compared to last year and returned to statutory profit. The quality of our loan book remained resilient in the period, and we've continued to support customers and look after our colleagues and communities, while safeguarding the bank. We've made significant strategic progress to transform Virgin Money into a leading digital bank and our rebranding is largely complete. We've launched a range of innovative and compelling Virgin Money personal and business products as well as differentiated loyalty offers, which are showing early signs of success. Our ESG strategy continues to gain momentum across the business including developing sustainability-linked business loans and a green mortgage product as we look to further embed sustainability across everything we do. This lays the foundation for efficient, sustainable growth of deep, long-lasting customer relationships.

 

We are cautiously optimistic about the improving outlook as the impact of the vaccination programme in the UK delivers positive revisions to economic expectations. We're continuing to manage through what is still an uncertain economic backdrop, but the bank is well placed, with a strong balance sheet, and through ongoing strategic delivery we have a clear path to long-term, improved sustainable returns." David Duffy, CEO

 

Dear stakeholder,

Our business performance has been encouraging during the first half of the year against a currently challenging but improving economic backdrop. Ensuring that we support customers through the pandemic, provide flexibility for our colleagues, and deliver for the communities in which we operate, continue to be key priorities for the bank. Alongside a stronger financial performance with underlying profit more than doubling and a return to statutory profit, we have also driven significant strategic execution through the period. We now have a substantially rebranded set of distribution channels, a series of innovative, new propositions for customers and early signs of improved customer advocacy as we move into the next phase of our journey to becoming a digital bank. The rollout of the UK vaccination programme has given the country an exit route from the restrictions of the pandemic, although there may still be implications for customers once the current levels of support for the economy are removed. We have made substantial progress in the period on the key drivers of our strategy, and there's more to follow over the remainder of the year. While we have managed volumes carefully through the pandemic, we are well placed to exit lockdown with growing strategic momentum as we continue to support all our stakeholders.

 

Stronger financial performance against an improving backdrop

I am pleased to report an improvement in the financial performance of the Group during the first half of the year as impairments fell significantly compared to the elevated levels seen in response to the deterioration in the macroeconomic outlook last year. Underlying profit before tax more than doubled in the period to £245m (H1 2020: £120m), with a return to statutory profit before tax of £72m.

Lending volumes remained broadly stable as we deliberately managed our portfolios carefully through an uncertain period, focusing on customer support, loan quality and delivering the improved returns that will drive long-term profitable growth. Deposit balances increased 1.5%, driven by growth in lower-cost relationship deposit balances which increased 12% in the period.   

The lower rate environment and a subdued economic backdrop given UK lockdown restrictions saw income down 9% year-on-year, although with signs of recovery from H2 2020, with a 2% improvement half-on-half. NIM has improved through the period, rising from 152bps in Q4 2020 to 160bps in Q2 2021 and resulting in an overall NIM for H1 2020 of 156bps. The combination of deposit repricing and a shift in mix towards lower-cost relationship deposits more than offset lower lending yields and the drag of additional liquidity. Other income remained subdued given the impacts of the most recent restrictions on UK economic activity and customer spending.

Costs were controlled, down 1% compared to the same period last year, but stable when compared to H2 2020 as the cost savings delivered by our transformation programme were offset by higher one-off costs and higher investment that will underpin our cost delivery in to H2 and beyond. We remain focused on delivering the cost savings of our transformation programme, although additional UK lockdown restrictions have meant a delay in the delivery of our plans and we now expect H2 costs of <£430m leading to total costs for FY21 of <£890m, with a strong exit rate into FY22.

Asset quality remained resilient in the period. The successful rollout of the vaccination programme together with ongoing customer support continue to inform improving economic forecasts. Gross Domestic Product (GDP), unemployment and house prices are all performing better than initially feared. Despite this, whilst there is scope for increased optimism, we remain cautious in the near term until the impact of the removal of government support becomes clear.

 

Overall provisions at H1 of £721m were equivalent to a coverage level of 100bps, broadly stable on our position at FY20. Together with the improved economic outlook, this led to the low impairment charge of 0.11% taken in the period.

 

 

Business and financial review

Chief Executive Officer's statement

Accelerating our digital ambition

Our strategy outlined at Capital Markets Day in 2019 set out our ambition to become a purpose-led digitally-focused bank over time. The lessons learned over the past year have reaffirmed that intention is the right one, and the need to accelerate our digital agenda. Across our business three major themes to emerge from the COVID-19 pandemic have been: increased levels of digital engagement from customers, higher numbers of colleagues aspiring to work remotely, and improved technology optionality. By accelerating our digital ambitions we will not only deliver a better experience for our customers and colleagues but it will also support a reduction in costs over time.  

The way customers engage with us has changed over the past year. Increasingly they're choosing to interact with us through digital channels. As digital adoption levels increase and more customers use self-managed processes, there's consequentially lower branch footfall and reduced cash usage. Our business customers have increasingly been using technology to improve their productivity and we're focused on supporting their preference. Our successful and growing fintech partnerships will allow us to provide insights and analytics in a way that will be industry-leading, providing a great customer experience.

From a colleague perspective, with c.6k colleagues working from home, and following employee feedback we're implementing a predominantly remote working model. Our "Life More Virgin" approach will offer colleagues the flexibility to work remotely, on a sustainable basis, with offices increasingly being used as hubs for collaboration and innovation, providing greater flexibility in our property footprint over time.

Finally, the pandemic has highlighted that technology solutions can be delivered in days, rather than weeks and months, and we remain determined to leverage that capability to drive additional efficiency improvements. With customer expectations rising it's important we make sure we focus on the opportunity to go further and faster. Delivering an automated and digitised customer journey will support better customer experience and improved efficiency.

In the near term, we remain focused on delivering further efficiencies and whilst we've rephased some of the FY21 cost reductions as a result of COVID-19, we're committed to delivering these in H1 2022. Longer term, the acceleration of our digital transformation will deliver further cost savings. The overall potential is something we're currently analysing carefully in the context of investment needed in the business. We'll give more detail alongside our full year results but what's clear is that accelerating our delivery represents a strong opportunity for further cost savings in the coming years.

 

Laying the foundations for future customer growth

Despite the impacts of COVID-19, we have good momentum in the business and have made progress in laying the foundations for our future customer growth. During the first half, we delivered strong improvements in our digital sales capability and c90% of personal sales are now through digital channels with a rising proportion of business banking sales as well. This continued increase in our digital sales channels will be key to our success over the coming years.

The vast majority of our stores are now rebranded, and most new sales are now also being completed under the Virgin Money brand. In total over >95% of new personal current account (PCA) sales and all new business current account (BCA) sales in business banking are now completely rebranded. We're also increasingly incorporating Virgin lifestyle propositions. Our Brighter Money Bundles, which partner with other Virgin companies, have seen a positive initial reaction with PCA sales >90% higher compared to H2 2020, delivering a total of c.80k in the period. Cashback credit cards have already seen 100k sign ups and we'll continue to expand and develop these propositions over the coming months.

Alongside our own proposition developments, we've also continued to expand our fintech partnership model in the half. We have a number of existing retail fintech partnerships, but more recently we've signed 7 new fintech partnerships within Business and are targeting 20 partnerships by 2022. Leveraging the additional capabilities will be a key element of our Working Capital health proposition to be launched in H2 for SMEs. This will provide unique analysis for business owners giving them access to real-time cash flow data, account tracking and insights. Using the power of our fintech partners, we're not just allowing SMEs to take control of their finances, but we're also staying true to the entrepreneurial spirit of the brand.

In Mortgages, our new application programming interfaces (APIs) have now been rolled out to c.6k mortgage brokers, offering them significant time efficiencies. As we come to the end of the testing phase there has already been a positive initial reaction. We have also seen a good response to our Mortgage Home Coach app, with 22k downloads to date and we see good signs of the potential to generate significant additional lending from the app over time.

 

 

 

 

 

 

 

 

 

Business and financial review

Chief Executive Officer's statement

Building long term customer loyalty

Alongside the significant development in our propositions and our distribution channels, we've continued to focus on developing our loyalty strategy to support our future growth ambitions. The core Virgin Group loyalty programme Virgin Red, which offers users the ability to earn and spend points inside and outside the Group, was launched in February and is expanding rapidly. Whilst still a soft launch, the Virgin Red app already has over 100k users, with plans to grow to over 1m within a year of its launch. The opportunity to switch to a Virgin Money PCA has already launched through the app, with a good early reception from customers who are able to earn 15,000 Virgin Red points for switching. We continue to explore this and other opportunities to target the c.17m Virgin Group UK customer relationships with a known affinity for the Virgin brand.

We have also had strong early success with our Virgin Money Rewards and we'll continue to focus on further developing these. This will include refreshed Brighter Money Bundles offers and expanding cashback opportunities, with more to follow as we'll be launching in-app rewards in H2 and continuing to develop and expand our loyalty schemes. The potential to expand further across our other products such as debit cards and to businesses, as well as offer rewards from a growing number of companies within and outside the Virgin Group, is something to be explored over time.

The opportunities from a compelling loyalty strategy across both Virgin Red and our own Rewards will support our growth ambitions over the coming years. Delivering lower acquisition costs and ongoing value for customers will be key in delivering deeper, and more valuable, customer relationships over the coming years. 

 

Adapting our leadership to our digital transformation agenda

I wish to welcome our new CFO Clifford Abrahams to the Group; I am delighted he has chosen to join us and he is already having a big impact. I look forward to working with him to deliver our agenda in the years ahead. I should also like to take this opportunity to thank Enda Johnson, who had been acting as interim CFO since Autumn 2020, for taking on that role during the last few months, as well as for his significant contribution to the Group since 2015.

I am also pleased that we have been able to welcome Elena Novokreshchenova to the Board, bringing her unique mix of banking, technology and customer-centric leadership experience from an international career spanning 20 years. Elena's appointment helps ensure the Board has the right mix of skills to help us deliver our digital ambitions.

As the Group accelerates its digital agenda, developing digital solutions, with one product set, on a single platform, and a unified customer experience will be key. Developing strategic data, artificial intelligence, cloud and partnership capabilities will become core competencies in time. To ensure we deliver these I've created a new role of Chief Digital and Innovation Officer to focus on the delivery of our planned digital propositions for both customers and colleagues and have appointed Fraser Ingram to the position.

The success of a digital bank will be defined by the experience it creates for customers both on acquisition and throughout the lifecycle of that product. Our customers' expectations are rising on all fronts. To ensure we deliver against those expectations, I have created a new Chief Customer Experience Officer role within my Leadership Team, responsible for the design and delivery of a brilliant, purpose-led customer experience. Fergus Murphy has taken up this role and is working closely with Fraser.

Finally, I've taken the opportunity to bring together all commercial aspects of our existing customer propositions, under a newly created role of Chief Commercial Officer. This role is responsible for ensuring that our products and propositions are customer-focused and competitive in the market while achieving the required return for our investors. We have commenced an external recruitment process for this role, but I am pleased to say Hugh Chater has taken on this role on an interim basis.

The extent of our digital ambition is clear and configuring our leadership to this new future will help us to deliver on our strategic ambition to disrupt the status quo.

 

Building momentum in delivering our Environmental, Social and Governance (ESG) ambitions

The pandemic has highlighted the interconnections between business and society and that successful brands must demonstrate the value they add to all stakeholders - customers, employees, shareholders and broader society.

Virgin Money continues to develop its ESG agenda and, after laying out the key elements of our strategy at our FY20 results, we are already seeing some early signs of success. From a climate perspective, we have put our carbon foot down, with the latest data (six months to December 2020) showing a 14% reduction in operational (scope 1 and 2) emissions compared to the previous six-month period. This gives us a Greenhouse Gas intensity ratio of 1.50 for the period, down from the 1.70 reported at FY20. From 1 April 2021, all the energy that the Bank is responsible for supplying is renewably sourced following a switch to biogas which will save an estimated 9 tonnes of carbon per day.

 

 

Business and financial review

Chief Executive Officer's statement

Building momentum in delivering our Environmental, Social and Governance (ESG) ambitions (continued)

As we look to build a brighter future, we are developing a product framework that will help customers make a positive impact on society and the environment. In the period we launched a pilot scheme for our Business customers in the agricultural sector to undertake carbon audits and became one of the first banks in Europe to rate counterparties based on ESG across companies of all sizes. This will enable us to offer sustainability-linked loans in the second half which will reduce the cost of finance for businesses whose core activities proactively help the economy transition to a more sustainable model. Later in the year we'll also follow this with the launch of our green mortgage framework designed to support customers in making green choices around their home. Finally, our latest Brighter Money bundles offer, which supports Personal customers to donate £50 to a charity of their choice, has raised over £180k for good causes to date.

We also look to open doors for customers, colleagues and communities through our activities. We are stepping up our efforts to ensure no Virgin Money customer pays a Poverty Premium, launching a call to action in the first half and identifying c.21k customers at risk of paying an energy premium who we will commence contact with in the second half. We are also actively migrating existing PCA customers to our best accounts with more favourable terms.

We firmly believe that successful organisations need a diverse and inclusive workforce. We improved our Board diversity balance to 33% in the period, and improving diversity remains a key priority for the Group. We are also focused on accelerating our Black, Asian and Ethnic minority diversity strategy and we'll say more about our revised targets at year end.

We are also committed to 'Straight-up ESG', aligning our strategic goals to ESG and embedding an ESG focus across the business while improving our disclosure and further developing our targets. We are planning to roll out ESG training for Board, Leadership and all colleagues in the second half, develop further role-specific training, and have embedded ESG considerations in our business case templates. In the second half, we will focus on developing our climate impact modelling capability and continuing the development of our Task Force on Climate-related Financial Disclosures (TCFD) disclosures which we will update on at the full year.

 

Outlook

Over the first half of the year, we've deliberately controlled growth as we managed carefully through the pandemic and our overriding priorities remain the health and economic well-being of our customers, colleagues and communities while safeguarding our bank. We've had a strong first half, achieving a number of strategic milestones, including substantially completing the rebranding activity of all physical channels and delivering innovative new propositions across all key customer sets, and there's more to come in the second half as we launch additional propositions and continue improving the digital customer experience. As we exit from COVID-19 restrictions, we aim to do so with high momentum in our strategic delivery and all the foundations in place to support sustainable future growth based on deep customer relationships.

The Group's financial performance has improved significantly with lower impairment charges, better capital ratios and a stronger NIM outlook for the year. We remain disciplined and are cautiously optimistic as we wait to see how the economic backdrop evolves after the removal of government support into our next financial year. We continue to analyse how we adapt to the shift in customer preferences for digital channels and our colleagues' needs for flexibility with potential opportunities around physical presence. We are also looking at ways in which we can leverage fintech partnership capabilities further within a tight investment envelope, and we'll provide more detail around the potential cost opportunities of our digital transformation alongside full year results.

Whilst we remain alert to the needs of customers as we exit the pandemic, it has been a good first half for the Group and I'm proud of all the hard work from our colleagues. We continue to have the right strategy and are executing on the key pillars that will underpin our delivery of improved returns and profitable growth over the coming years as we fulfil our ambition to Disrupt the Status Quo of the UK banking market. 

 

 

 

 

David Duffy, Chief Executive Officer - 4 May 2021
 

Business and financial review

Chief Financial Officer's review

Driving sustainable improvements in returns

 

"Underlying profit more than doubled in the period, with good financial momentum across the business. While the backdrop remains uncertain, the Group remains focused on delivering the key pillars of our strategy which are the foundations of driving improved returns and then profitable growth, in the medium term." Clifford Abrahams, Group CFO

 

Financial Highlights

 

Statutory profit before tax £72m H1 2020: £(7)m		Underlying profit before tax £245m H1 2020: £120m		Underlying RoTE 10.1% H1 2020: 4.6%
NIM 1.56% H1 2020: 1.62%		Underlying CIR 62% H1 2020: 57%		Cost of risk 11bps H1 2020: 63bps
CET1 ratio 14.4% 2020: 13.4%		Loan growth (0.3)% H1 2020: +0.3%		Relationship deposit growth +12.0% H1 2020: +4.3%

 

 

 

 

Business and financial review

Chief Financial Officer's review

 

Strategic pillars to deliver shareholder value over time

In my first report as CFO of Virgin Money, I'm pleased to note the Group has continued to make good progress with a strong set of financial results, ongoing strategic delivery, and that it remains well positioned as the UK looks to exit the pandemic, all of which has been delivered against a challenging external backdrop. My initial impressions on joining the Group have been very positive and I'd like to thank my colleagues for their warm welcome.

Despite the impacts of COVID-19 we've continued to deliver the strategy laid out at the Capital Markets Day and as we move towards a more normalised environment, the Group's strategy continues to be the right one. Delivering on our four strategic pillars - Super Straight-forward Efficiency, Delighted Customers and Colleagues, Discipline and Sustainability, and Pioneering Growth - remains key. We have a clear roadmap to double digit statutory returns and then profitable growth, which will deliver increased shareholder value over the coming years.

Demonstrating resilience through COVID-19

In the near term, the Group's focus remains on managing the business carefully as the UK exits the pandemic. The balance sheet is resilient, we have a strong capital position, and there is improving momentum in the financials. Credit provision coverage was stable at 1.00% in the period, and to date we've seen limited specific provisions or material signs of deterioration in asset quality across any of our portfolios. Capital strengthened in the period, with the transitional CET1 ratio improving c.100bps to 14.4% (13.9% excluding software intangibles benefit) and we now have c£1.3bn of management buffer over the Group's regulatory requirement. Pleasingly, the key driver of that improvement was stronger profitability as the Group returned to statutory profit. We remain focused on delivering the Group's inaugural participation in the Solvency Stress Test (SST) run by the Prudential Regulation Authority (PRA) later this year.  

Continuing to transform the bank

As we exit the pandemic, the Group must maintain focus on transforming the bank as we move into FY22. The Group has a good track record of reducing costs since IPO, but we need to maintain that focus and redouble efforts to ensure that we continue to drive greater efficiencies as we deliver the transformation agenda. We are assessing the potential for further cost reduction as we progress our journey towards becoming a digital bank, but we will balance this carefully against the restructuring costs and investment needed. We'll talk more about the opportunities at full year.

The business has made good progress this year on improving its funding cost, reducing its cost of deposits by 29bps in the period compared with FY20, and the overall cost of funds by 28bps over the same period. A continued focus on optimising the cost of funds will support the drivers of an improved statutory RoTE and strengthen CET1 generation. This provides the support for the Group's future growth ambitions and progressive dividends over time.

Building an exciting, growth-led future

As RoTE and capital generation improve, we have a clear roadmap to an exciting growth-led future that becomes a focus for FY22 and beyond. The early customer reaction to our completed rebranding activity is encouraging for our future growth prospects. Combined with stronger digital advocacy levels, and our focus on delivering a low cost-to-serve, there are substantial opportunities for us.

Relationship deposit growth has been strong year-to-date as customers save more and businesses carry additional liquidity. Longer term these relationship deposits will continue to be a key area of focus for the Group, underpinning NIM and providing a low-cost base for above market asset growth over time. The launch of our Brighter Money Bundles proposition in the PCA market saw c80k sales in H1, and the relaunch of our newly rebranded Virgin Money BCA will continue to support the delivery of a stronger NIM as we grow our funding cost-effectively and expand our lending profitably. The improvement in returns will position the Group well for future growth, alongside consistent capital generation and the establishment of ongoing dividends, and I'm looking forward to helping drive the business towards those ambitions.

Significantly stronger financial performance in H1

Against a tough external backdrop, the Group delivered an underlying profit in H1 of £245m, a significant improvement compared to last year and supporting an improvement in underlying RoTE to 10.1% (H1 2020: 4.6%). NIM of 1.56% (H1 2020: 1.62%) was lower year-on-year due to the lower rate environment, but showed momentum through the period, with the second quarter NIM increasing to 1.60%. Subdued non-interest income of £66m was 43% lower year-on-year driven by the non-repeat of gilt sales, the impact of the high cost of credit review and lower activity levels. Total income declined 9% compared to a year ago, although the improved margin backdrop underpinned a 2% improvement when compared to H2 2020. Operating costs were 1% lower compared to H1 2020 and we expect to see an improvement in the second half of the year. The reduction in income resulted in a 5%pts increase in the cost: income ratio to 62% and drove a 20% reduction in pre-provision profit, year-on-year. However, despite the impact on pre-provision earnings, the reduction in impairment charges was significant, falling 84% to £38m compared to H1 2020 resulting in a cost of risk of 11bps and driving a more than doubling of underlying profit before tax.

The Group also returned to statutory profit in the period delivering £72m before tax after deducting £173m of exceptional items including £49m of restructuring charges, £47m of acquisition accounting unwind, £71m of legacy conduct costs primarily relating to payment protection insurance (PPI), and £6m of other charges.

Business and financial review

Chief Financial Officer's review

 

Resilient balance sheet with robust capital, liquidity and funding position

The Group maintained a conservative balance sheet position with stable credit provisions totalling £721m (FY20: £735m) equivalent to a coverage ratio of 1.00% (FY20: 1.02%). The Group continues to have a defensive portfolios comprising 81% low-risk mortgages, 12% business lending and 7% in our high-quality, affluence-focused unsecured book. The Group had already adopted a prudent set of economics in the fourth quarter of 2020 and these have been fully refreshed in the period. Whilst latest data provides some optimism in the outlook, the Group is maintaining a cautious stance on the ultimate impact and consequently held provision coverage broadly stable.

During the period, prudent balance management held lending volumes stable at £72.2bn. Deposit balances rose 1.5% to £68.5bn driven by 12% growth in relationship deposits as retail customers saved more and businesses opted to maintain higher levels of liquidity given the uncertain economic backdrop. The CET1 ratio improved to 14.4% (or 13.9% excluding software intangible benefit), benefiting from the stronger profitability and limited RWA inflation to date. The Group continues to prepare for our inaugural participation in the SST exercise run by the PRA with the results published later in the year.

 

Outlook

Despite the impact of COVID-19, we have made good progress on driving our strategy, which remains the right one to deliver value for investors over time. Whilst this year is primarily about maintaining resilience through the pandemic, we are focused on digitally transforming the business, as we work hard to further reduce costs. The completion of the transformation agenda alongside the reduced deposit costs and momentum on new propositions will be key enablers of the Group delivering double-digit statutory returns. With all the elements in place, the Group has an exciting growth-led future as strengthened customer advocacy and loyalty, combined with improved digital capability, allow strong profitable growth at low incremental costs. We have the right building blocks in place, and it has been a good first half for Virgin Money.

 

 

Underlying income
						6 months to	6 months to						6 months to
						31 Mar 2021	31 Mar 2020						30 Sep 2020
						£m			£m		Change				£m			Change
Underlying net interest income						677			702		(4)%				649			4%
Underlying non-interest income						66		115		(43)%						76			(13)%
Total underlying operating income						743			817		(9)%				725			2%
NIM						1.56%			1.62%		(6)bps				1.49%			7bps
Average interest-earning assets						87,134			86,847		-				86,885			-

 

Overview

 

Operating income of £743m was 2% higher compared to H2 2020, although 9% lower than H1 2020. The effects of the pandemic impacted the H2 2020 results and whilst year-on-year income remained lower there was some improvement in the first half. In that context, NII declined 4% compared to H1 2020 to £677m as NIM reduced 6bps to 1.56%. Despite the reduction, there was increased momentum through the period as NIM improved from 1.52% in Q4 2020 to 1.60% in Q2 2021. Other income of £66m was 43% lower compared to H1 2020 driven by the impact of the High Cost of Credit Review, lower activity levels and the non-repeat of gilt sales.

 

NII and NIM

Asset yields declined 42bps compared to H1 2020 with headline mortgage pricing, where yields declined 16bps, the primary contributor. The Group remained selective in terms of participation in the market in the first half, with lower average balances also driving a reduction in NII.

In Business, a 74bps reduction in yields was driven by mix impact as new volumes were primarily lower-yielding government-backed lending. The strong average balance sheet growth associated with this was more than offset by the lower yield.

In Personal, average balances remained stable relative to H1 2020, while yields contracted 93bps. The key driver of the reduction compared to H2 2020 was the credit card book which was impacted by mix changes as customers paid down higher-yielding unsecured balances. Elsewhere, the average yield on the Group's liquid assets fell 60bps reflecting the lower rate environment.

Liability rates also decreased 39bps relative to H1 2020, with the reduction driven broadly across lower savings costs, lower term deposit costs and reduced wholesale funding costs. Consumer and business pandemic-related deposit growth saw an increase in average balances across lower-cost current accounts and savings products. Term deposits fell as a proportion of the book and were also 27bps cheaper, while savings costs almost halved in the period to 48bps (H1 2020: 94bps), both reflecting the impact of the lower rate environment and repricing activity. Wholesale funding costs declined in the period, driven by a reduction in average balances following the Group's initial Term Funding Scheme (TFS) repayments, and the continued optimisation of overall funding.

 

 

Business and financial review

Chief Financial Officer's review

 

NII and NIM (continued)

Following the Bank of England's confirmation that negative interest rates are now explicitly within its policy toolkit, the Group has reinitiated its structural hedging programme. Balances of qualifying non-interest bearing liabilities have increased to £25.9bn with the Group expected to return to a fully hedged position early in H2; the Group anticipates a c£25m benefit in FY21 NII with a further c£60m of annualised benefit in FY22.

In FY21 we now anticipate a full year NIM of around 1.60%. This reflects continued momentum in deposit repricing and the benefit of a higher proportion of low-cost relationship deposits, optimisation of wholesale funding and structural hedge contributions partially mitigated by competitive pressure on asset yields.

 

Net interest income

		6 months ended 31 March 2021				6 months ended 31 March 2020
		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		58,303	673	2.32		59,823	742	2.48
Personal lending		5,344	194	7.26		5,344	219	8.19
Business lending(2)		8,916	149	3.34		7,963	162	4.08
Liquid assets		12,860	13	0.20		11,982	48	0.80
Due from other banks		1,707	-	(0.03)		1,730	4	0.44
Swap income/other		-	(55)	n/a		-	(20)	n/a
Other interest earning assets		4	-	n/a		5	-	n/a
Total average interest earning assets		87,134	974	2.24		86,847	1,155	2.66
Total average non-interest earning assets		3,450				3,416
Total average assets		90,584				90,263
Interest-bearing liabilities:
Current accounts		14,000	(4)	(0.06)		11,748	(9)	(0.16)
Savings accounts		29,284	(71)	(0.48)		27,221	(128)	(0.94)
Term deposits		19,892	(133)	(1.34)		22,151	(178)	(1.61)
Wholesale funding		13,767	(87)	(1.27)		17,172	(136)	(1.59)
Other interest earning liabilities		168	(2)	n/a		179	(2)	n/a
Total average interest bearing liabilities		77,111	(297)	(0.77)		78,471	(453)	(1.16)
Total average non-interest bearing liabilities		8,477				6,986
Total average liabilities		85,588				85,457
Total average equity		4,996				4,806
Total average liabilities and average equity		90,584				90,263
Net interest income			677	1.56			702	1.62
(1)	Average yield is calculated by annualising the interest income/expense for the period.
(2)	Includes loans designated at fair value through profit or loss (FVTPL).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business and financial review

Chief Financial Officer's review

 

Non-interest income

 

Non-interest income declined £49m relative to H1 2020 to £66m but was much more aligned to H2 20 levels. The key drivers of the reduction compared to a year ago was the non-repeat of the £16m one-off gilt sales gain during H1 2020, a £9m impact from fair value movements, and £20m lower income in Personal. The £20m reduction in Personal fee income was driven by the impacts of restrictions on customer activity, including lower card fees with reduced transaction volumes and also the impact of the High Cost of Credit Review. Business fee income reduced by £3m relative to H1 2020, reflecting lower activity-based fees whilst Mortgage non-interest income was broadly stable.

Non-interest income remains linked to activity levels and is expected to improve with the easing of lockdown and broader economic rebound.

 

Costs

						6 months to	6 months to				6 months to
						31 Mar 2021	31 Mar 2020				30 Sep 2020
Operating and administrative expenses						£m		£m	Change			£m	Change
Personnel expenses						164		169	(3)%			167	(2)%
Depreciation and amortisation expenses						81		71	14%			68	19%
Other operating and administrative expenses						215		225	(4)%			217	(1)%
Total underlying operating and administrative expenses						460		465	(1)%			452	2%
Underlying CIR						62%		57%	5%pts			62%	-%pts

 

Overview

Underlying operating expenses reduced 1% relative to H1 2020 to £460m with the cost: income ratio increasing 5% pts to 62% compared with H1 2020 due primarily to the impact on income from the challenging operating environment. In the half year additional investment in cost saving programmes and one-off costs drove an increase compared to H2 2020 and more than offset cost savings from our transformation programme. The Group also had to delay some initiatives due to the UK lockdown measures introduced in late December 2020. Over the remainder of the year, stronger cost delivery will be underpinned by additional transformation programme savings and lower investment spend.

 

Given the rephasing of savings delivery the Group now expects FY21 costs to be <£890m. The Group remains committed to delivering cost reduction in the longer term and we'll provide a further update on the digital transformation opportunities alongside full year results.

 

Impairments

 

As at 31 March 2021		Credit provisions £m	Gross lending £bn	Coverage ratio bps	Net cost of risk(1) bps	% of loans in Stage 2	% of loans in Stage 3
Mortgages		132	58.6	23	0	12%	1.2%
Personal:		293	5.4	603	107	18%	1.4%
of which credit cards		219	4.3	550	128	14%	1.4%
of which personal loans and overdrafts		74	1.1	839	9	34%	1.3%
Business		296	8.8	398(2)	26	40%	2.7%
Total		721	72.8	100	11	16%	1.4%
of which Stage 2		480	11.7	415
of which Stage 3		101	1.0	1,032
(1)	Cost of risk is calculated on an annualised basis.
(2)	Government-guaranteed loan balances excluded for purposes of calculating the Business division coverage ratio.

 

As at 30 September 2020		Credit provisions £m	Gross lending £bn	Coverage ratio bps	Net cost of risk bps	% of loans in Stage 2	% of loans in Stage 3
Mortgages		131	58.6	23	16	14%	0.9%
Personal:		301	5.6	591	423	15%	1.2%
of which credit cards		222	4.5	537	355	12%	1.2%
of which personal loans and overdrafts		79	1.1	824	721	28%	1.4%
Business		303	8.7	391(1)	212	44%	3.2%
Total		735	72.9	102	68	18%	1.2%
of which Stage 2		465	12.8	366
of which Stage 3		134	0.9	1,574
(1)	Government-guaranteed loan balances excluded for purposes of calculating the Business division coverage ratio.

 

 

Business and financial review

Chief Financial Officer's review

 

Overview

The Group has maintained broadly stable total credit provisions at £721m (FY20: £735m) retaining appropriate levels of provision coverage across its portfolios, equating to an aggregate coverage level of 100bps (FY20: 102 bps).

The key macroeconomic inputs and weightings have been updated based on scenarios provided by our 3rd party provider Oxford Economics. Overall, the Group remains cautiously positioned but with less severe weightings than previously assumed, incorporating a 20% weighting to the Upside scenario, 50% to the Base scenario and 30% to the Downside. The weighted economic scenarios include a more significant recovery in GDP in 2022 of 6.7%, peak unemployment of 7.5% and a less severe 8% peak-to-trough decline in HPI.

To supplement the models, the Group also applied expert credit risk judgement through PMAs. These are designed to account for factors that the models cannot incorporate, where the sensitivity is not as would be expected under what is an unprecedented economic stress scenario. Through this process, the Group applied PMAs of £222m (FY20: £186m) which are deemed to be balanced and appropriate for our portfolio at the current time.

The model updates and overlays have resulted in limited portfolio stage migration, with loans classified as Stage 2 reducing marginally from 18% of the portfolio to 16% at H1 2021. Although this is higher relative to pre-pandemic levels, 97% of Stage 2 lending balances remain <30 days past due (DPD) and the stage migration seen to date through the pandemic largely reflects the modelled PD migration impact from the economic updates and overlays applied.

The Group has broadly maintained its provision coverage levels across all portfolios. In Mortgages, the coverage ratio of 23bps is deemed appropriate for the conservative loan book. The mortgage portfolio continues to evidence strong underlying credit performance, with no notable deterioration in asset quality.

Our Personal lending book coverage ratio of 603bps includes 550bps of coverage for our high-quality credit card portfolio which focuses on more affluent customers, and 839bps of coverage for our smaller personal loans and overdrafts book. Balances fell over the period as tighter lending criteria and muted customer demand reduced new originations. Arrears levels remain modest across the portfolio and the reduction in the book drove a small increase in the coverage level which increased 12bps over the period. 

In Business, the coverage ratio of 398bps reflects a 7bps increase in the period. There has been no deterioration in underlying asset quality performance and, as yet, no significant increase in specific provision recognition. The lending book continues to be biased away from sectors likely to experience more disruption such as hospitality and retail, towards sectors expected to be resilient, such as agriculture and health and social care.

 

Payment holidays

The Group continues to support its Mortgage, Personal and Business customers through this difficult time with payment holidays where appropriate, although the level of new requests has reduced significantly. Across the Mortgage, Credit Cards and Personal loan portfolios we have only c.1% of portfolio balances still on a payment holiday and of those payment holidays that have matured the vast majority of customers have returned to payments. The key payment holiday statistics are set out below.

 

Payment holiday status

Product	Total balances of payment holidays granted to date	Representing % of balances	Total balances of payment holidays still in force	Representing % of balances	% of matured payment holiday customers returning to payment	% of matured payment holiday customers requiring support or in arrears
Mortgages	£12.3bn	21%	£377m	1%	94%	6%
Credit Cards	£267m	7%	£28m	1%	87%	13%
Personal Loans	£120m	14%	£5m	1%	90%	10%

 

 

Outlook

Overall, with muted levels of pandemic related defaults and impairments to date and prudent coverage levels, the Group continues to be resiliently positioned. The cost of risk is expected to remain subdued in the near term through FY21 given continued economic support. 

 

 

 

 

Business and financial review

Chief Financial Officer's review

 

Exceptional items and statutory profit

							6 months to
							31 Mar 2021	31 Mar 2020		30 Sep 2020
							£m		£m		£m
Underlying profit on ordinary activities before tax							245		120		4
Exceptional items
-  Integration and transformation costs							(49)		(61)		(78)
-  Acquisition accounting unwinds							(47)		(57)		(56)
-  Legacy conduct costs							(71)		-		(26)
-  Other items							(6)		(9)		(5)
Statutory profit/(loss) on ordinary activities before tax							72		(7)		(161)
Tax credit/(expense)							8		29		(2)
Statutory profit/(loss) for the period							80		22		(163)
Underlying RoTE							10.1%		4.6%		(3.5)%
Statutory RoTE							2.2%		(1.0)%		(11.6)%
TNAV per share							257.5p		252.5p		244.2p

 

Overview

The Group made a statutory profit before tax of £72m after deducting £173m of exceptional costs. The exceptional items charged in H1 2021 were higher than H1 2020 due to additional legacy conduct charges primarily relating to the Group's PPI programme, whilst integration & acquisition costs, acquisition accounting unwind costs and other items all reduced.

TNAV per share increased 13.3p in H1 2021 to 257.5p. The key drivers of the increase were 2.1p of retained earnings, a further 8.1p of positive reserve movements and a 3.1p increase driven by lower goodwill and intangibles and other movements.  

 

Integration and transformation costs

The Group continued with restructuring activity, spending £49m in the period as part of its ongoing integration and transformation programme. Overall, the Group now anticipates a total of c.£100m of costs during the year as it accelerates further cost saving activity.

 

Acquisition accounting unwinds

The Group recognised fair value accounting adjustments at the time of the Virgin Money acquisition that unwind through the income statement over the remaining life of the related assets and liabilities (c.5 years). £47m was reflected in H1 2021. The Group expects a further c.£100m of total acquisition accounting unwind charges over the next five years, with the majority anticipated to be incurred in H2 2021 and FY22.

 

Legacy conduct

Charges of £71m were incurred in H1, the key element being a further £59m charge in relation to the finalisation of the Group's PPI programme. The Group has now dealt with complaints received in the period up to the time bar in August 2019 including the settlement of claims received from the Official Receiver which are currently being finalised. The Group is working towards closing down the operation later this year. The remaining provision is expected to be sufficient to cover all outstanding liabilities in respect of the mis-selling of PPI policies.

 

Other items

The Group incurred £6m of other one-off exceptional costs during the first half of the year, primarily costs relating to the Virgin Money Aberdeen Asset Management PLC (AAM) UTM joint venture (JV).

 

Taxation

On a statutory basis, on a pre-tax profit of £72m, there was an £8m tax credit as the current period tax charge was more than offset by a deferred tax credit for additional historical losses recognised in the period and the tax credit on AT1 distributions.

 

 

Business and financial review

Chief Financial Officer's review

 

Balance sheet

										As at
										31 Mar 2021	30 Sep 2020
										£m			£m	Change
Mortgages										58,270			58,290	-%
Personal										5,050			5,219	(3.2)%
Business										8,891		8,948		(0.6)%
of which Bounce Back Loan Scheme (BBLS)										972		809		20.1%
of which Coronavirus Business Interruption Loan Scheme (CBILS)										415		334		24.3%
Total customer lending										72,211			72,457	(0.3)%
Relationship deposits(1)										28,744			25,675	12.0%
Non-linked savings										21,506			20,729	3.7%
Term deposits										18,288			21,107	(13.4)%
Total customer deposits										68,538			67,511	1.5%
Wholesale funding										13,289		14,227		(6.6)%
of which TFS										2,608		4,108		(36.5)%
of which TFSME										3,050		1,300		134.6%
LDR										105%			107%	(2)%pts
LCR										151%		140%		11%pts
(1)	Current account and linked savings balances.

Overview

At an aggregate level, Group lending reduced by 0.3% to £72.2bn as the Group carefully managed volumes against an uncertain backdrop. The reduction was primarily due to a small contraction in the Personal book, whilst Business and Mortgage lending remained broadly stable. Total customer deposits increased by 1.5% to £68.5bn reflecting pandemic-related consumer and business behaviours as customers have built up additional savings balances and liquidity.

Mortgage balances were stable at £58.3bn as the Group maintained pricing discipline, prioritising margin over volume growth in an uncertain environment albeit with some strong temporary drivers. The extension of the Stamp Duty holiday and continued levels of Government support, as well as strong buyer demand, have seen a relatively buoyant market during H1. However, market competition increased in Q2 with reduced customer rates being offered whilst higher swap rates have eroded some of the stronger spreads seen earlier in the period. 

Personal balances reduced by 3.2% to £5.1bn against a challenging market environment with lower customer demand during the pandemic. Our credit card balances have been more resilient than the market due to our high proportion of balance transfer cards which make up a significant proportion (c.70%) of our portfolio and which are more stable than revolving credit facilities that rely on consumer spending. Personal loan volumes have also been impacted by lower demand through recent COVID-19 lockdown restrictions.

Business lending reduced 0.6% to £8.9bn, as growth in government-guaranteed lending schemes (BBLS/CBILS/Coronavirus Large Business Interruption Loan Scheme (CLBILS)) through which the Group has lent £1.4bn to businesses, was offset by lower non-government lending demand.

Customer deposit balances grew 1.5% in the period to £68.5bn. We continued to optimise the deposit base with a 13% reduction in term deposits, which also saw their cost to the Group reduce significantly. We saw continued growth in relationship deposits which rose 12% to £28.7bn as consumer spending slowed dramatically under tighter lockdown restrictions, and as we leveraged the successful launch of innovative new PCA propositions such as Brighter Money Bundles.

 

Wholesale funding and liquidity

The Group maintains a strong funding and liquidity position and has no reliance on short-term wholesale funding. The Group's LDR reduced 2% points in the period to 105% (FY20: 107%), principally as a result of the growth in customer deposits. At the same time, the Group's LCR of 151% (FY20: 140%) continues to comfortably exceed both regulatory requirements and our more prudent internal risk appetite metrics, ensuring a substantial buffer in the event of any sudden outflows and significant potential to support any increase in lending as the economy recovers.

The Group repaid a further £1.5bn of its TFS drawings, leaving £2.6bn outstanding. In addition to the £1.3bn drawn in FY20, the Group made further drawings of £1.8bn in H1 2021 from the BoE's new Term Funding Scheme with additional incentives for SMEs (TFSME), taking the total outstanding amount to £3.1bn at 31 March 2021. Overall, wholesale funding has reduced to £13.3bn in H1 2021 (FY20: £14.2bn) due to the increase in customer deposits meaning that maturing secured funding has not needed to be replaced.

 

 

Business and financial review

Chief Financial Officer's review

 

Capital										As at
										31 Mar 2021	30 Sep 2020		Change
CET1 ratio (IFRS 9 transitional)										14.4%		13.4%		1.0%pts
CET1 ratio (IFRS 9 fully loaded)										13.2%		12.2%		1.0%pts
Total capital ratio										21.2%		20.2%		1.0%pts
MREL ratio										29.3%		28.4%		0.9%pts
UK leverage ratio										5.2%		4.9%		0.3%pts
RWAs (£m)										24,152		24,399		(1.0)%
of which Mortgages (£m)										9,627		9,484		1.5%
of which Business (£m)										6,436		6,716		(4.2)%
of which Personal (£m)										4,018		4,151		(3.2)%
(1)	Unless where stated, data in the table shows the capital position on a CRD IV 'fully loaded' basis with IFRS 9 transitional adjustments applied.
(2)	The capital ratios include unverified profits.

 

Overview

The Group has maintained a robust capital position with a CET1 ratio (IFRS 9 transitional basis) of 14.4%, or 13.9% excluding software intangible assets, and a total capital ratio of 21.2%. The significant impairment provision charges recognised since the start of the pandemic have been largely offset by IFRS 9 transitional relief. The Group's CET1 ratio on an IFRS 9 fully loaded basis improved to 13.2%. The Group's latest Pillar 2A requirement has a CET1 element of 2.2%. Overall, the Group's CRD IV minimum CET1 capital requirement (or MDA threshold) reduced by 0.3% in the period to 9.2%.

 

CET1 capital

CET1 increased by 99bps in the period with the movements set out in the table below. A reduction of c.£0.2bn (1%) in RWAs during the period, largely reflecting the impact of Business model updates and stable lending volumes, contributed 22bps to CET1. The change in the treatment of intangible software assets introduced as part of the CRR Quick Fix increased the CET1 ratio by 46bps. 

 

CET1 Capital movements		6 months to 31 Mar 2021
		%/bps
Opening CET1 ratio		13.4%
Capital generated (bps)		100
RWA growth (bps)		22
AT1 distributions (bps)		(12)
Underlying capital generated (bps)		110
Integration and transformation costs (bps)		(15)
Acquisition accounting unwind (bps)		(13)
Conduct (bps)		(27)
Other (bps)		(2)
Impact of intangible asset relief (bps)		46
Net capital generated (bps)		99
Closing CET1 ratio		14.4%
Closing CET1 ratio excluding intangible asset relief		13.9%

 

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

 

MREL

The Group's MREL ratio increased to 29.3% in the period (FY20: 28.4%), comfortably exceeding both its interim and expected 2022 end-state MREL requirement. A further £0.5bn of MREL senior debt issuance is planned later in the year as the Group continues to build a prudent management buffer to regulatory requirements.

 

 

 

 

 

 

 

 

 

 

 

 

 

Business and financial review

Chief Financial Officer's review

 

Outlook and guidance 

 

FY21 financial guidance

NIM NIM expected to be around 160bps

Underlying costs Expect underlying costs of <£890m

Cost of risk Subdued in the near term through FY21

 

Medium-term outlook:

The Board believes that, assuming no significant further deterioration in expectations for the economic outlook or change in interest rates, Virgin Money has a clear path to delivering double digit statutory returns on tangible equity over time

 

Based on the latest outlook and good momentum in NIM in H1, the Group expects NIM for FY21 to be around 160bps, assuming no change in the rate environment. 

The Group expects underlying operating expenses of <£890m in FY21 reflecting the impact of COVID-19 restrictions and updated phasing. The Group remains committed to long-term cost reduction and will provide a further update on incremental cost opportunities from digital transformation alongside its full year results. The Group anticipates exceptional integration and transformation costs of c.£100m for the year.

Cost of risk is expected to remain subdued in the near term through FY21.

The CET1 ratio strengthened further in the half and the Group expects it will continue to exceed 13% (ex-software intangible benefit) at FY21.

Medium-term expectations

In the medium term, the Board believes that, assuming no significant further deterioration in expectations for the economic outlook or change in interest rates, Virgin Money has a clear path to delivering double digit statutory returns on tangible equity over time. The improvement in returns will be underpinned by continued cost reductions, the normalisation of impairments and exceptional costs, delivering capital efficiency, and optimising our balance sheet mix.

On capital, in the near term we expect to continue operating with a significant buffer in excess of our maximum distributable amount (MDA) threshold of 9.2%. Over the medium term, as economic conditions stabilise we expect the Counter Cyclical Buffer to be restored and therefore we intend to operate a dynamic CET1 ratio target. This will comprise an appropriate management buffer in excess of our end state MDA threshold that will be calibrated to ensure that the Group remains well capitalised. This assessment will take into account regulatory developments including the results of the SST later in the year and our view of the prevailing risk environment which will be calibrated to withstand our view of stressed conditions. The SST outcome in December and impairment outlook will be key inputs into our approach to considering dividends, and the Group expects to provide a further update on its capital framework post-SST.

 

 

 

 

Clifford Abrahams, Chief Financial Officer - 4 May 2021

 

 

Business and financial review

Financial review - statutory basis

Summary income statement- statutory basis

 

						6 months to	6 months to						6 months to
						31 Mar 2021	31 Mar 2020				Change		30 Sep 2020				Change
						£m			£m		%				£m			%
Net interest income						646			671		(4)				612			6
Non-interest income						49		96		(49)						64			(23)
Total operating income						695			767		(9)				676			3
Operating and administrative expenses						(585)			(537)		9				(567)			3
Operating profit before impairment losses						110			230		(52)				109			1
Impairment losses on credit exposures						(38)			(237)		(84)				(270)			(86)
Statutory profit/(loss) on ordinary activities before tax						72			(7)		n/a				(161)			n/a
Tax credit/(expense)						8			29		(72)				(2)			n/a
Statutory profit/(loss) after tax						80			22		264				(163)			n/a

 

The Group has recognised a statutory profit before tax of £72m (31 March 2020: loss before tax of £7m). The increase in statutory profit is largely reflective of a significant reduction in impairment charges. The Group continues to expect that the difference between underlying and statutory profit will reduce over time as we deliver our strategy and the exceptional charges reduce.

 

Key performance indicators⁽¹⁾

 

				6 months to	6 months to		12 months to
				31 Mar 2021	31 Mar 2020	Change	30 Sep 2020(2)	Change
Profitability:
Statutory RoTE				2.2%	(1.0)%	3.2%pts	(6.2)%	8.4%pts
Statutory CIR				84%	70%	14%pts	76%	8%pts
Statutory return on assets				0.09%	0.02%	0.07%pts	(0.16)%	0.25%pts
Statutory EPS				2.8p	(1.2)p	4.0p	(15.3)p	18.1p
(1)	For a definition of each of the KPIs, refer to 'Measuring financial performance - glossary' on pages 257 to 258 of the Group's 2020 Annual Report and Accounts. The KPIs include statutory, regulatory and alternative performance measures. Where applicable certain KPIs are calculated on an annualised basis for the periods to 31 March.
(2)	Profitability KPIs are provided with a full year to 30 September 2020 comparative in line with the statutory income statement presentation in the financial statements and as previously reported in the Group's 2020 Annual Report and Accounts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business and financial review

Reconciliation of statutory to underlying results

The statutory basis presented within this section reflects the Group's results as reported in the financial statements. The underlying 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 100.

 

	Statutory results	Integration and transformation costs	Acquisition accounting unwinds	Legacy conduct	Other	Underlying basis
6 months to 31 Mar 2021	£m	£m	£m	£m	£m	£m
Net interest income	646	-	31	-	-	677
Non-interest income	49	-	12	-	5	66
Total operating income	695	-	43	-	5	743
Total operating and administrative expenses before impairment losses	(585)	49	4	71	1	(460)
Operating profit before impairment losses	110	49	47	71	6	283
Impairment losses on credit exposures	(38)	-	-	-	-	(38)
Profit on ordinary activities before tax	72	49	47	71	6	245
Financial performance measures
RoTE	2.2%	2.2%	2.2%	3.2%	0.3%	10.1%
CIR	84.2%	(6.3)%	(6.1)%	(9.1)%	(0.8)%	61.9%
Return on assets	0.09%	0.11%	0.10%	0.16%	0.01%	0.47%
Basic EPS	2.8p	2.8p	2.7p	4.0p	0.3p	12.6p

 

	Statutory results	Integration and transformation costs	Acquisition accounting unwinds	Legacy conduct	Other	Underlying basis
6 months to 30 Sep 2020	£m	£m	£m	£m	£m	£m
Net interest income	612	-	37	-	-	649
Non-interest income	64	-	13	-	(1)	76
Total operating income	676	-	50	-	(1)	725
Total operating and administrative expenses before impairment losses	(567)	78	5	26	6	(452)
Operating profit before impairment losses	109	78	55	26	5	273
Impairment losses on credit exposures	(270)	-	1	-	-	(269)
(Loss)/profit on ordinary activities before tax	(161)	78	56	26	5	4

 

	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

 

 

 

 

Risk management

Risk Report

 

 

 

Risk overview	22
Credit risk	28
Financial risk	55

 

 

Risk management

Risk overview

Effective risk management is critical to realising the Group's strategy 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 internal stakeholders and provides a view on the risk-taking activities the Board is comfortable with, guiding decision-makers in their strategic and business decisions.

The Group identifies and manages risk in line with the Risk Management Framework (RMF), which is the totality of systems, structures, policies, processes and people that identifies, measures, evaluates, controls, mitigates, monitors and reports all internal and external sources of material risk. The RMF aligns to Our Purpose by establishing a single and complete view of the end to end risk lifecycle, in a clear concise manner, which provides an overarching framework for the identification, measurement, management and reporting of risk

 

Principal risks

The Group's principal risks are those which could result in events or circumstances that might threaten the Group's business model, future performance, solvency, liquidity and reputation.

COVID-19 continues to have a significant impact on all of the Group's principal risk types. The range of governmental, regulatory and central bank support measures introduced create new operational, conduct, enforceability and financial risks for the Group. These risks have a variety of implications and, as such, COVID-19 has not been classified as a principal or emerging risk, but rather a major external event, which triggers a cascade of risks that will be monitored and managed proactively over time.

The table below sets out the Group's principal risks, which remain as disclosed in the 2020 Annual Report and Accounts. The key impacts of COVID-19 on each risk and the mitigating actions taken are also shown.

Credit risk: The risk of loss of principal or interest stemming from a borrower's failure to meet contractual obligations to the Group in accordance with their agreed terms. Credit risk manifests at both a portfolio and transactional level.
COVID-19 impacts	COVID-19 mitigating actions
Although the impacts on the Group's retail and business credit portfolios are yet to fully manifest, it is clear that credit risk remains heightened, with default levels expected to increase over time, particularly once government support schemes come to an end.	The Group continues to participate in all regulatory and government support schemes, including the Recovery Loan Scheme, which was launched on 6 April 2021 to replace the previous business support schemes in place (CBILS, CLBILS and BBLS). The Group is also participating in the Mortgage Guarantee Scheme which aims to increase availability of 95% LTV mortgage products. A priority focus on supporting existing customers through COVID-19 is maintained. Capital repayment holidays, interest free overdrafts (for retail customers) and extensions of credit, as well as other flexible supporting measures, continue to be provided and monitored. Policies, risk appetite, credit decisioning and supporting frameworks have been rebased, reviewed and updated to reflect the changing environment and risk profiles.
Financial risk: Includes capital risk, funding risk, liquidity risk, market risk and pension risk, all of which have the ability to impact the financial performance of the Group, if managed improperly.
COVID-19 impacts	COVID-19 mitigating actions
Changing trends in customers' use of deposits and the impacts of loan payment holidays across mortgage, credit card and unsecured loan portfolios, have affected capital, liquidity and funding forecasting. The economic impact of COVID-19 has increased the likelihood of lower, or even negative, interest rates in the UK.  Changes to interest rates increase the potential for volatility in margins.	Additional monitoring and controls over capital, funding and liquidity risks resulting from COVID-19 have been put in place. The Group has early visibility of movements in RWA or potential impacts to capital from higher credit losses and stands ready to take a range of management actions. The Group increased impairment provisions at the end of FY20 reflecting a cautious approach to an uncertain economic environment. The BoE's TFSME provides an alternative source of funding to wholesale markets and is included in the Group's funding plans. The decision to restart the Group's structural hedging programme limits interest rate risk and supports NII going forward.

 

 

 

Risk management

Risk overview

 

Model risk: The potential for adverse consequences from decisions based on incorrect or misused model outputs and reports.
COVID-19 impacts	COVID-19 mitigating actions
The uncertain economic environment has affected all model components including input data, default markers, outputs, model accuracy and performance. The rapid application of COVID-19 model adjustments has increased the risk that particular implementations contain errors or unexpected outcomes.	Model Risk Oversight remain actively engaged with model owners, carrying out pre-emptive model assessments to recognise and address key model risks and to validate COVID-19 driven adjustments or recalibrations. Further oversight is provided by the Model Governance Committee. Due to the impact of COVID-19 government support measures and payment holidays the Group is operating with carefully managed PMAs.
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.
COVID-19 impacts	COVID-19 mitigating actions
The Group has deployed multiple new policies and processes to implement government, regulatory and central bank COVID-19 support measures. Additional regulatory and compliance risks are associated with adherence to both COVID-19 specific regulatory guidance and with existing regulation.	Additional risk assessments, governance processes and assurance activities have been deployed across the Group to ensure compliance with existing regulation and COVID-19 specific regulatory guidance.
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.
COVID-19 impacts	COVID-19 mitigating actions
There is an increased risk of failure to recognise and appropriately manage financial difficulties or vulnerabilities.	Additional monitoring and controls are in place to mitigate conduct risks arising from the execution of new customer support policies and processes deployed in response to COVID-19, and in the delivery and oversight of the government and regulatory support requirements that have continued to evolve over the last year. Significant work has gone into planning for impacts on personal customers that might result as support schemes such as payment deferrals and furlough are withdrawn. This has included increasing capacity within the operational areas supporting customers in financial difficulty. There are also ongoing areas of focus for supporting our business customers, including delivery of the government's 'Pay As You Grow' options and the new Recovery Loan Scheme. Risk assurance plans contain a significant focus on areas affected by COVID-19, including the impacts on customers in financial difficulties and vulnerable customers.
Operational risk: The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events.
COVID-19 impacts	COVID-19 mitigating actions
Increased remote working, amended processes and controls and pressure on customer support areas arising from changing customer needs all have the potential to increase the Group's operational risk profile, which could lead to increased errors or delays and subsequent loss. Operational readiness for negative interest rates is required by the BoE. This requires investment spend and system adaptations to allow pass-through of rates to relevant customers; if not carefully managed, these changes could increase operational risks.	Individual change assessments that were implemented as part of a temporary 'COVID-19 Process Change Risk' process are continually reviewed with business areas to understand the permanency of each change, the associated control changes and planned reversal timescales. Work to deliver operational readiness for negative interest rates is carefully controlled to ensure that timelines are met in a way that manages operational risks and prevents customer harm.

 

Risk management

Risk overview

 

Technology risk: The risk of loss resulting from inadequate or failed information technology processes. Technology risk includes cybersecurity, IT resilience, information security, data risk and payment risk.
COVID-19 impacts	COVID-19 mitigating actions
An increased risk of cyberattacks, due to phishing emails which use a COVID-19 theme, and breaches could have legal, regulatory or privacy implications. Reliance on the availability of digital banking and remote network access has increased with solutions implemented to address system constraints and safeguard our connections.	Additional fraud monitoring is in place and temporary process changes are being continually risk assessed. A significant number of colleagues continue to work from home. System monitoring, incident management and escalation processes are in place with regular oversight performed. There continues to be enhanced focus on supplier service level agreements and contingency plans.
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. This includes money laundering, counter-terrorist financing, sanctions, fraud and bribery and corruption.
COVID-19 impacts	COVID-19 mitigating actions
There remains a risk that criminals may take advantage of customer and organisational vulnerabilities created by COVID-19.	Additional risk assessments, governance processes and assurance activity continue to be undertaken across the Group, to ensure the ongoing balance between customer impacts and support and maintaining fraud loss within risk appetite.
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 transformation activity.
COVID-19 impacts	COVID-19 mitigating actions
COVID-19 has increased the pace of change and unpredictability within the external environment, including in relation to economic conditions, regulation, and culture. There is a risk that the Strategic and Financial Plan does not adequately reflect these changes, or that we respond ineffectively to the cultural and societal changes it has brought about.	The Strategic and Financial Plan is refreshed biannually to ensure the Group remains resilient and well placed to continue to support our customers and colleagues. Recent re-forecasting has accounted for measures announced at the March 2021 Budget and the anticipated profile of governmental and regulatory support schemes, noting the potential for an increase in impairments as support schemes come to an end. The Group's RAS has been reassessed alongside the refreshed plan, with changes made to account for the risk profile impacts of the initiatives being proposed.
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.
COVID-19 impacts	COVID-19 mitigating actions
An increased risk of colleague illness and absence, in addition to longer-term well-being risks, such as mental health impacts, may arise from the tighter restrictions introduced to curb the spread of COVID-19. These factors could increase pressure and reduce skills availability in key areas. The increase in remote working as a result of COVID-19 means there is often no longer a requirement to live in close proximity to an employer's office, which may result in increased competition for skilled and experienced colleagues.	The Group follows government advice with colleagues working from home where possible, and social distancing and additional cleaning measures in place to support key workers based in offices and branches. Vulnerable colleagues are being given additional support from our healthcare provider. The Group is moving to a 'Life More Virgin' model which will use colleague feedback to create working arrangements to optimise well-being, engagement and productivity. Opportunities afforded by our new ways of working mean we will be able to attract and hire candidates from across the UK in future.

Further detail on these risks and how they are managed is available in the Group's 2020 Annual Report and Accounts. 

 

 

 

Risk management

Risk overview

 

Cross-cutting risks

 

Operational resilience and climate risk are treated as cross-cutting risks in the Group's RMF, manifesting through the established principal risk framework.

 

Operational Resilience

Operational resilience is defined as the ability of the Group to protect and sustain its most critical functions and underlying assets, while adapting to expected or unexpected operational stress or disruption and having the capacity to recover from issues as and when they arise.

The Group assesses its operational resilience risk for the people, technology, third parties and premises that underpin the principal risks, ensuring that the Group aims to provide a superior level of support and services to customers and stakeholders on a consistent and uninterrupted basis. It is accepted that, on occasion, this will not be possible and, at such times, the Group aims to recover critical services within tight timelines to minimise customer disruption.

 

Climate Risk

The Group is exposed to physical, transition and reputational risks arising from climate change. Aligned with our wider ESG ambitions, the Group continues work to understand, evaluate and integrate the management of climate risks into our decision-making frameworks.

The Group is developing scenario analysis capability which will further inform strategy. Using scenario analysis will also improve the assessment of future risks across the Group's lending portfolios given the very long-term impacts of climate change and the high degree of uncertainty as to how the risks may crystallise. Outputs will be used to support Credit Policy and risk mitigation activities.

Transition risk within the mortgage portfolio has been considered with an assessment of the energy efficiency of properties. The portfolio is in line with market averages and the Group increasingly intends to use this information to support our customers to 'green' their homes.

Work has been completed to analyse transition risks within the business lending book. This assessment has been used to establish risk appetite for climate risk and is calculated and reported to the relevant governance committees. Where a heightened environmental or climate-related risk is identified during customer due diligence or credit processes, additional scrutiny under the Group's ESG policy is triggered which may lead to additional environmental reports being required.

 

Emerging risks

The Group considers an emerging risk to be any risk which has a material unknown and unpredictable component, with the potential to significantly impact the future performance of the Group. The Group's emerging risks are continually reassessed and reviewed through a horizon scanning process, with escalation and reporting to the Board. The horizon scanning process fully considers all relevant internal and external factors and is designed to capture those risks which are current but have not yet fully crystallised, as well as those which are expected to crystallise in future periods.

Emerging risks are allocated a status based on their expected impact (from low to very high) and time to fully crystallise (from >12 months to >3 years), in line with the definitions outlined in the RMF, and are subject to regular review across senior governance forums.

The emerging risk classifications reported in the Group's 2020 Annual Report and Accounts are retained. Following consideration of the current and future risk landscape, two additional emerging risks are included. These are data management and critical infrastructure. The table overleaf shows a summary of the Group's emerging risks.

 

 

Risk management

Risk overview

 

Key impacts	Mitigating actions
Geopolitical and macroeconomic environment
Due primarily to the impact of COVID-19 on the economy, the future trajectory of macroeconomic variables, such as GDP, unemployment, interest rates and the HPI, remains uncertain and subject to volatile change depending on a complex mix of outcomes. Higher levels of corporate and government indebtedness and the potential for negative interest rates create further uncertainty over the path to economic recovery. Changes to the UK's trading arrangements with the EU following the Brexit trade deal are beginning to emerge, with uncertainty around future levels of inward foreign investment having the potential to adversely affect certain sectors of the UK economy. There is an increased possibility of a second Scottish independence referendum. The direction this could take should become clearer following the outcome of the Scottish Parliamentary Elections being held on 6 May 2021.	The Group continues to monitor economic and political developments in light of the ongoing uncertainty, considering potential consequences for its customers, products and operating model, including its sources of funding. The Group actively monitors its credit portfolios and undertakes robust internal analysis to identify sectors that may come under stress as a result of an economic slowdown in the UK. Stress testing is performed to demonstrate the Group's financial resilience and to evidence its capability to withstand a range of severe but plausible economic scenarios.
Climate risk
There is significant uncertainty around the time horizon over which climate risks will materialise as well as the exact way in which they will occur. Stakeholder expectations and regulatory attention are developing at pace, impacting all of the Group's activities. Sudden shifts in sentiment, if not in line with the lending practices and customer profile of the Group at that time, could lead to increased scrutiny and reputational damage.	The Group continues to embed climate risk into its RMF and is working to understand how these risks can be monitored, managed and incorporated into planning, in order to support the Group's sustainability aspirations, as well as those of society. Climate risks are also considered by the Board in its review and challenge of the Strategic and Financial Plan and the Group's Sustainability Strategy.
Regulatory and governmental change
The Group remains subject to significant levels of regulatory change and scrutiny, with complex pieces of legislation being passed at pace by various bodies. The suite of government support measures introduced to help support the economy through the pandemic are multifaceted and nuanced. Changes to the rules and regulations governing the measures, for example eligibility criteria or the timing of scheme run-off, require careful management of potential conduct, reputational and fraud risks. Beyond COVID-19, there is continued evolution of the regulatory landscape, and the requirement to respond to ongoing prudential and conduct driven initiatives including the likely reintroduction of full capital deductions for intangible assets. The PRA has also commenced a consultation on mortgage risk weights that, if implemented, would increase RWAs. The Group is also participating in the BoEs annual SST in 2021.	The Group continues to monitor emerging regulatory initiatives to identify potential impacts on its business model and ensure it is well placed to respond with effective regulatory change management. The Group continues to work with regulators to ensure it meets all regulatory obligations, with identified implications of upcoming regulatory activity incorporated into the strategic planning cycle. The Group has put multiple new policies in place to help ensure COVID-19 related government, regulatory and Group customer support arrangements are deployed correctly.

 

 

 

 

 

Risk management

Risk overview

 

Key impacts	Mitigating actions
Technology and cyber risk
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. There is a rapid pace of technological change which, coupled with increasing digital demands from customers for the access and use of our products and services, means there is increased demand on systems resilience and our people. The resilience of systems security, payment and overall technology solutions is a focus of the Group. Fast-moving global cyber risk challenges, including those driven by large nation states, continue to pose risks to the security of company and government systems and protection of customer data.	The potential impacts from new technologies, and from the changing ways in which customers use the Group's services, are continuously risk assessed, with action pre-emptively taken to safeguard the end-to-end resilience of critical processes. The Group continues to invest in the security and resilience of its infrastructure in order to improve services and minimise the risk of disruption to customers. The Group has resilient continuity frameworks in place to support activities in an open banking, digitally reliant market.
Data management
The Group's digitisation strategy coupled with the changing regulatory requirements and advancements in technology, for example the increasing use of Cloud solutions or Big Data for analysis purposes, means there is a growing importance attached to the effective and ethical use, governance and protection of data. Failure to effectively mitigate data management risks could result in unethical decisions, regulatory breaches, poor customer outcomes, mistrust and loss of value to the Group.	The Group has a data management framework governing the creation, storage, distribution, usage and retirement of data. This framework also encompasses data ethics. The Group continues to invest in data management capabilities alongside the introduction of new technologies and services. New and existing data management regulations are continuously assessed with proactive action taken to ensure compliance.
Critical infrastructure
The Group is dependent on critical infrastructure provided by third parties to maintain its day-to-day operations without interruption. Important services include: ·   internet and telephone access; ·   credit rating agencies and decisioning; ·   software applications; ·   cloud systems; and ·   payment networks (Mastercard, LINK, FPS, CHAPS, SWIFT etc). Failure of one of these systems could result in colleagues or customers being unable to provide/receive fundamental banking services.	Dependencies on critical infrastructure assets are managed in line with the Group's third-party supplier risk management policies. The Group undertakes extensive scenario planning to assess potential dependencies in end-to-end systems processing. Safeguarding the operational resilience of services is of critical importance to the Group.

 

 

 

 

 

 

 

 

 

 

 

Risk management

Credit risk

Section	Page	Tables	Page
Credit risk summary	29	Group credit highlights	29
Managing risk within our credit portfolios	30
Risk appetite	30
Measurement	30
Mitigation	30
Monitoring	31
Forbearance	31
Measuring and calculating ECL	31
Portfolio performance	32
How our portfolios have performed	32	Concentration of lending assets	32
		Key credit metrics	33
Group credit performance	34
Credit quality of loans and advances	35	Gross loans and advances ECL and coverage	35
		Stage 2 balances	36
		Credit risk exposure, by internal probability of default (PD) rating, by International Financial Reporting Standard (IFRS) 9 stage allocation	37
		Reconciliation of movement in gross balances and impairment loss allowance	38
Mortgage credit performance	39	Mortgage credit performance	39
Portfolio and impairment	39	IFRS 9 staging	40
		Collateral and LTV	41
		Payment holidays	42
		Forbearance	43
Personal credit performance	44	Personal credit performance	44
Portfolio and impairment	44	IFRS 9 staging	45
		Payment holidays	46
		Forbearance	46
Business credit performance	47	Business credit performance	47
Portfolio and impairment	47	IFRS 9 staging	48
		Government-backed loan schemes	49
		Payment holidays	49
		Forbearance	50
Macroeconomic assumptions, scenarios and weightings	51	Scenarios	51
The use of estimates, judgements and sensitivity analysis	52	Macroeconomic assumptions - Five-year averages	52
The use of estimates	52	Economic scenarios	52
The use of judgement	53	Significant increase in credit risk (SICR)	53
		PMAs	54
		Macroeconomic assumptions	54

 

 

Risk management

Credit risk

 

The economic challenges and disruption from COVID-19 continue to impact the Group's customers. In response, the Group has continued to provide customer support and has maintained the defensive shape and credit quality of its well diversified lending portfolio, with 81% of the lending portfolio from a low LTV mortgage book, 12% from a diversified business lending portfolio and the remaining 7% from a high quality personal lending portfolio. The Group adhered to its principles, managing the lending portfolio within a controlled risk appetite alongside a prudent approach to underwriting with additional tightening of origination criteria introduced in response to economic events.

An unprecedented variety of support measures including furlough, payment holidays and government-backed loans for businesses, has buffered the observed linkage between economic stress and default. As a result of the effectiveness of those support measures, the emergence of default and impairment through the pandemic has to date been relatively muted. This is reflected in the underlying impairment charge of £38m for the six months to 31 March 2021, a reduction of £194m from the six months to 31 March 2020, a figure which did include an increase reflecting the Group's initial estimate of the pandemic driven provisioning requirement.

Arrears levels have remained largely stable across all portfolios as extensions to government interventions and payment holiday support have been granted. There has been an improvement in staging, with 83% of the Group's lending portfolio now in stage 1 at 31 March 2021 (30 September 2020: 81%). This is principally due to more optimistic economic forecasts driving an improvement in PD for the mortgage and business portfolios. Stage 2 balances have similarly improved, in particular the proportion <30 DPD which reduced to 16% at 31 March 2021 (30 September 2020: 17%). Stage 3 balances have remained broadly stable. In summary, while the proportion of the lending portfolio in Stage 2 reflects a level of financial challenge for many customers, stage migrations have moved in a positive direction reflective of more optimistic macroeconomic forecasts. The vast majority of customers who have taken advantage of the COVID-19 payment holiday options available have already resumed their normal payment patterns and the Group will continue to closely evaluate the performance of these customers going forward.

The Group's assessment of the economic environment, while more optimistic than six months ago, does remain cautious given the degree of uncertainty around customer performance when the broad suite of support measures is withdrawn. We recognise the need for additional customer support as furlough ceases, government-backed loan schemes are phased out, repayments commence and the economy normalises. The Group has planned for this and is operationally ready to deliver the support required. This normalisation in the economy will result in increased defaults and the potential for weaker recoveries from customers already in default, which has led to the Group broadly maintaining the level of provision coverage held for future ECL at 1.00% (30 September 2020: 1.02%). Management has applied adjustments to the Group's modelled ECL provision to capture the estimated impact of future risk in its lending portfolios. Where it has not been possible to fully quantify the impact of current and future risk in modelled outcomes, or we have assessed limitations in our models, expert judgement has been applied to determine an appropriate level of additional post-model adjustments (PMAs). The level of PMAs has increased to £222m (30 September 2020: £186m) due to the level of uncertainty prevailing. The combination of modelled ECL and PMA ensures the Group has suitably provided against expected future losses, with a provision of £721m at 31 March 2021 (30 September 2020: £735m). This level of provision and resultant coverage is considered to be balanced and appropriate for our portfolio at the present time.

Notwithstanding the recent positive progress in easing lockdown restrictions and the success in rolling out the COVID-19 vaccine, uncertainty in the economic outlook remains. The Group will continue to actively monitor and assess the performance of our credit portfolios as we navigate through these difficult times.

 

Group credit highlights

 

		31 Mar 2021 (unaudited) £m	30 Sep 2020 (audited) £m	31 Mar 2020 (unaudited) £m
Underlying impairment charge on credit exposures		38	501	232
Impairment provisions:	Modelled	462	496	303
	PMA	222	186	184
	Individually assessed	37	53	55
Impairment provisions held on credit exposures		721	735	542