Virgin Money UK PLC Interim Results 2022

David Duffy, Chief Executive Officer:

 

"We've made good progress against our strategy, while delivering a significant increase in profit. We have positive momentum in attracting new customers to Virgin Money through record credit card sales, good growth in personal current account openings and a strong uptake of our new digital fee-free business current account.

 

"We have upgraded our net interest margin guidance given strong growth in unsecured lending, combined with the rising interest rate environment. Looking ahead, while the macroeconomic outlook is uncertain and there are increased cost pressures on consumers, we remain prudently provisioned and are confident in the quality of our loan portfolio."

 

Summary financials

						6 months to		6 months to				6 months to
						31 Mar 2022		31 Mar 2021		Change		30 Sep 2021				Change
						£m			£m	%				£m		%
Underlying net interest income (NII)							782		677	16				735		6
Underlying non-interest income							83		66	26					94	(12)
Total underlying operating income							865		743	16				829		4
Underlying operating and administrative expenses							(456)		(460)	(1)				(442)		3
Underlying operating profit before impairment losses							409		283	45				387		6
Impairment (losses)/credit on credit exposures							(21)		(38)	(45)				169		n/a
Underlying profit on ordinary activities before tax							388		245	58				556		(30)
Adjusting items							(73)		(173)	(58)				(211)		(65)
Statutory profit on ordinary activities before tax							315		72	338				345		(9)
Key performance indicators(1)
Net interest margin (NIM)							1.83%		1.56%	27bps				1.69%		14bps
Statutory return on tangible equity (RoTE)							9.1%		2.2%	6.9%pts				17.9%		(8.8)%pts
Common Equity Tier 1 (CET1) ratio (IFRS 9 transitional)							14.7%		14.4%	0.3%pts				14.9%		(0.2)%pts
(1)    For definitions of the KPIs, refer to 'Measuring financial performance - glossary' on pages 322 to 323 of the Group's 2021 Annual Report and Accounts. The KPIs include statutory, regulatory and alternative performance measures. Where applicable certain KPIs are calculated on an annualised basis for the periods to 31 March.

 

 

Momentum in our financial performance; NIM guidance for FY upgraded

·      Significantly improved underlying PBT compared to H1 2021; underlying profit increased 58% YoY to £388m (H1 2021: £245m) primarily reflecting stronger income. This drove improvement in statutory PBT and statutory RoTE of 9.1% (H1 2021: 2.2%)

·      NIM expanded further to 1.83% in H1 (H1 2021: 1.56%) due to the benefit of higher rates, lower deposit costs from ongoing repricing and mix benefit, and a higher yielding lending mix, offsetting mortgage spread pressures

·      Underlying non-interest income of £83m, up 26% YoY reflecting higher card spending and business activity levels

·      Underlying costs of £456m were 1% lower YoY, as expected cost savings from ongoing digital transformation and restructuring were offset by inflation, including agreed pay rises, along with targeted growth and planned higher digital development costs

·      Impairment charge of £21m (6bps cost of risk) reflects updated macroeconomics and judgements; limited specific provisions and changes in asset quality metrics in the period, with a defensively positioned portfolio as the outlook becomes more uncertain

 

Strong early delivery against our digital strategy - attracting new customers and progress on digital transformation

·      Customer and propositions: Strong reaction to new digital products with sales of BCAs & PCAs doubling QoQ, record quarterly card sales & 97% of personal sales (ex. mortgages) are digital. 42% of key customer journeys now automated (FY21: 27%)

·      Colleagues and property: A Life More Virgin supporting higher engagement; property and branch footprint reduced c.20%

·      Digital: Mobilising cloud migration and removal of legacy applications; adoption of Agile approach to change is giving customers faster delivery of new features at a lower overall unit cost

 

Balance sheet well positioned; continued to optimise deposits and growth in target segments

·      Strong relationship deposits growth, increasing 4.2% to £31.9bn, reflecting new current account customer acquisition; overall deposits managed lower, down 3.7% to £64.4bn with continued successful optimisation of deposit mix and funding costs

·      Targeted volume growth saw a stable loan book at £71.9bn:

o  Unsecured lending grew 7.0% to £5.8bn driven by strong cards growth, reflecting customer demand and new propositions

o  Business lending declined 2.5% to £8.3bn; BAU returned to growth in Q2, and government lending ran off as expected

o  Stable mortgage balances at £57.8bn with volumes managed tactically, prioritising margin in a competitive environment

·      Solid credit quality maintained across portfolios with robust coverage of 66bps (FY21: 70bps); above pre-pandemic levels

·      Strong capital base: transitional CET1 ratio of 14.7% (FY21: 14.9%) and 14.4% fully loaded with underlying capital generation during the half offset by the planned removal of the software intangible benefit

 

FY22 outlook upgraded

·      Expect FY22 NIM between 180 and 185bps based on current rate expectations

·      Costs anticipated to remain broadly stable compared to FY21 level

·      Expect cost of risk to rise towards through the cycle range

 

Updated capital framework and distribution policy

·      CET1 target range of 13 - 13.5% in the long-term; expect to operate above the range for the time being

·      Expect a 30% full year dividend pay-out level; given strong capital position, declaring an interim dividend of 2.5p per share

·      Dividends supplemented by buybacks, subject to ongoing assessment of surplus capital, market conditions and regulatory approval

 

Contact details

 

For further information, please contact:

 

 

Investors and Analysts
Richard Smith 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 Senior 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
Simon Hall	+44 7855 257 081
Senior Media Relations Manager	simon.hall@virginmoney.com
Press Office	+44 800 066 5998
	press.office@virginmoneyukplc.com
Citigate Dewe Rogerson
Caroline Merrell	+44 7852 210 329
Media (Australia)
P&L Communications
Ian Pemberton Sue Frost	+61 402 256 576 +61 409 718 572

 

Virgin Money UK PLC will today be hosting a presentation for analysts and investors covering the 2022 interim financial results starting at 08:30 BST (17:30 AEST) with a pre-recorded presentation followed by live Q&A call:

 

https://webcast.openbriefing.com/vmuk-interim22/ 

 

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

 

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

 

A call for fixed income investors will be held at 10:00 BST on Monday 9 May 2022: Dial-in details: UK: 0800 640 6441; All other locations: +44 20 3936 2999; Access code: 107091

 

The Group will publish its inaugural interim Pillar 3 on Friday 27 May 2022.

 

Business and financial review

Financial performance - summary

 

Summary income statement

						6 months to	6 months to					6 months to
						31 Mar 2022	31 Mar 2021			Change		30 Sep 2021				Change
						£m			£m	%				£m		%
Underlying net interest income (NII)						782			677	16				735		6
Underlying non-interest income						83		66		26					94	(12)
Total underlying operating income						865			743	16				829		4
Underlying operating and administrative expenses						(456)			(460)	(1)				(442)		3
Underlying operating profit before impairment losses						409			283	45				387		6
Impairment (losses)/credit on credit exposures						(21)			(38)	(45)				169		n/a
Underlying profit on ordinary activities before tax						388			245	58				556		(30)
-  Restructuring charges						(46)			(49)	(6)				(97)		(53)
-  Acquisition accounting unwinds						(14)			(47)	(70)				(41)		(66)
-  Legacy conduct costs						(5)			(71)	(93)				(5)		-
-  Other items						(8)			(6)	33				(68)		(88)
Statutory profit on ordinary activities before tax						315			72	338				345		(9)
Tax (expense)/credit						(77)			8	n/a				49		n/a
Statutory profit after tax						238			80	198				394		(40)

 

Key performance indicators⁽¹⁾

				6 months to	6 months to		6 months to
				31 Mar 2022	31 Mar 2021	Change	30 Sep 2021	Change
Profitability:
Net interest margin (NIM)				1.83%	1.56%	27bps	1.69%	14bps
Underlying return on tangible equity (RoTE)				11.7%	10.1%	1.6%pts	25.7%	(14.0)%pts
Underlying cost to income ratio (CIR)				53%	62%	(9)%pts	53%	-%pts
Underlying earnings per share (EPS)				17.6p	12.6p	5.0p	35.3p	(17.7)p
Statutory RoTE				9.1%	2.2%	6.9%pts	17.9%	(8.8)%pts
Statutory CIR				60%	84%	(24)%pts	78%	(18)%pts
Statutory EPS				13.7p	2.8p	10.9p	24.5p	(10.8)p
(1) For a definition of each of the KPIs, refer to 'Measuring financial performance - glossary' on pages 322 to 323 of the Group's 2021 Annual Report and Accounts. The KPIs include statutory, regulatory and alternative performance measures. Where applicable certain KPIs are calculated on an annualised basis for the periods to 31 March.

 

 

Business and financial review

Financial performance - summary

 

Key performance indicators (continued)

As at:					31 Mar 2022	31 Mar 2021	Change		30 Sep 2021			Change
Asset quality
Cost of risk(1)					0.06%	0.11%	(5)bps		(0.18)%			24bps
Total provision to customer loans					0.66%	1.00%	(34)bps		0.70%			(4)bps
Indexed loan to value ratio (LTV) of mortgage portfolio(2)					54.4%	55.2%	(0.8)%pts		55.3%			(0.9)%pts
Regulatory Capital:
CET1 ratio (IFRS 9 transitional)					14.7%	14.4%	0.3%pts		14.9%			(0.2)%pts
CET1 ratio (IFRS 9 fully loaded)					14.4%	13.2%	1.2%pts		14.4%			-%pts
Total capital ratio					21.8%	21.2%	0.6%pts		22.0%			(0.2)%pts
Minimum requirement for own funds and eligible liabilities (MREL) ratio					31.7%	29.3%	2.4%pts		31.9%			(0.2)%pts
UK leverage ratio					5.1%	5.2%	(0.1)%pts		5.2%			(0.1)%pts
Tangible net asset value (TNAV) per share					313.2p	257.5p	55.7p		289.8p			23.4p
Funding and Liquidity:
Loan to deposit ratio (LDR)					112%	105%	7%pts		108%			4%pts
Liquidity coverage ratio (LCR)					139%	151%	(12)%pts		151%			(12)%pts
(1)	Cost of risk is calculated on an annualised basis.
(2)	LTV of the mortgage portfolio is defined as mortgage portfolio weighted by balance.

Summary balance sheet

									As at
									31 Mar 2022	30 Sep 2021			Change
									£m			£m	%
Customer loans									71,854			71,996	(0.2)%
of which Mortgages									57,798			58,104	(0.5)%
of which Unsecured									5,793			5,415	7.0%
of which Business									8,263			8,477	(2.5)%
Other financial assets									14,676			15,035	(2.4)%
Other non-financial assets									2,079		2,069		0.5%
Total assets									88,609			89,100	(0.6)%
Customer deposits									64,386			66,870	(3.7)%
of which relationship deposits(1)									31,887			30,596	4.2%
of which non-linked savings									20,784			21,285	(2.4)%
of which term deposits									11,715			14,989	(21.8)%
Wholesale funding									15,497			13,596	14.0%
Other liabilities									3,158			3,161	(0.1)%
Total liabilities									83,041			83,627	(0.7)%
Ordinary shareholders' equity									4,871			4,558	6.9%
Additional Tier 1 (AT1) equity									697			915	(23.8)%
Equity									5,568			5,473	1.7%
Total liabilities and equity									88,609			89,100	(0.6)%
Risk Weighted Assets (RWAs)									24,184			24,232	(0.2)%

(1)   Current account and linked savings balances

 

 

 

 

 

 

Business and financial review

Chief Executive Officer's statement

Delivering our Digital First strategy

"We've made good progress against our strategy, while delivering a significant increase in profit. We have positive momentum in attracting new customers to Virgin Money through record credit card sales, good growth in personal current account openings and a strong uptake of our new digital fee-free business current account.

"We have upgraded our net interest margin guidance given strong growth in unsecured lending, combined with the rising interest rate environment. Looking ahead, while the macroeconomic outlook is uncertain and there are increased cost pressures on consumers, we remain prudently provisioned and are confident in the quality of our loan portfolio."

David Duffy, CEO

 

Dear stakeholder,

Since we announced our Digital First strategy alongside our FY21 results, we have made a strong start in delivering our key objectives of profitable growth and greater cost-efficiency. We're already seeing early signs of a positive response as personal and business customers take advantage of our new digital propositions and loyalty programmes. We have good early momentum in delivering the gross cost savings set out, with the reduction in our physical footprint on track. The launch of key initiatives, which will drive improved customer experience through greater automation and digitisation of the bank's core customer journeys, is also progressing well.

Although it is still early in the delivery of our Digital First strategy, we are seeing signs of our strategic delivery starting to support improved financial performance, including growth in our key focus segments, and well-controlled operating expenses. Over the course of the half, we've also benefited from an improving rate backdrop, which has supported our net interest margin as we've continued to reduce deposit costs further in supportive market conditions, and seen improved income from our structural hedge. We have also benefited from lower impairment levels compared to a year ago and, taken together, these factors have underpinned a significant increase in profitability. I'm pleased to be able to update our capital framework today, giving investors clarity about future returns, while also announcing an interim dividend of 2.5p. As we look to the remainder of the year, the Group is well placed to continue to deliver innovative propositions and profitable growth in our target segments, despite a more uncertain environment.

Our strategy remains the right one against a macroeconomic backdrop that has become more uncertain over the course of the six months. Following a period of strong recovery in Gross Domestic Product (GDP) as COVID restrictions were lifted and consumer spending levels improved, the impact of higher inflation has seen expectations for further growth start to temper. As a domestic UK bank, the Group doesn't have direct lending exposure in Ukraine or Russia, but we are monitoring carefully for any second-order impacts arising from the conflict, particularly upon inflationary pressures in the UK. We have seen only limited changes in asset quality across the portfolios to date but have taken steps to factor the higher cost of living into our affordability assessments. It remains too early to assess the full implications of the changing backdrop and we will continue to help customers where needed. Our thoughts are with all of those impacted by the conflict, and I'm incredibly proud of the way our colleagues responded to launch a basic bank account for refugees fleeing the conflict in just 8 days, while the Group has also donated £300k to the Disasters Emergency Committee (DEC) appeal.

 

Strategic delivery - Growth in our target segments

As we continue to focus on digital-led growth in key target segments, we've made a good start to the year with relationship deposits and unsecured balances continuing to benefit from strong demand, the launch of new propositions and extended loyalty programmes. Our relaunch of the Business bank ensures we are well placed for growth over the remainder of the year as sector volumes recover.

Relationship deposits grew 4.2% in H1, benefitting from higher new sales of our Virgin Money Personal and Business Current Accounts (BCA). Personal Current Account (PCA) sales continue to be supported by attractive switching offers and we added the option for debit card cashback to PCAs in January, with c.120k customers already signing up and earning on average c.7.5% cashback on qualifying purchases. In March, we refreshed the proposition further, enhancing the interest rates on offer, following the recent Bank of England rate increases. PCA sales in Q2 were double those of Q1, and since the launch of the re-branded Virgin Money PCA in late 2020, we have opened c.180k new PCAs. The latest offer, launched in Q3, will give customers 20,000 Virgin Points to switch (equivalent to a flight to New York) for each current account opened and leaves the Group well placed to continue to drive PCA sales. We're replicating the same rewards model for businesses with our new, fee-free digital BCA, the M-Account, which was launched in November offering debit card cashback. The strength of this new proposition has driven new BCA accounts in Q2 to double those achieved in Q1, supported by ongoing improvements to the digital sales channel which are delivering improved conversion rates. The M-account also offers businesses access to other proposition developments which will include M-Track and Marketplace.

 

 

 

Business and financial review

Chief Executive Officer's statement

 

Unsecured lending grew 7.0% over the half, supported by record new credit card account opening levels - Q2 saw c.175k opened, beating the previous record set in Q1. Our overall proposition remains strong, with prudent underwriting, and offers customers good value and competitively priced and versatile credit cards, including cashback on purchases, for which c.350k customers have now signed up (FY21: c.230k). To this we have added Instalment Credit capability, allowing our customers access to 'Buy Now Pay Later' functionality in the credit card mobile app, offered within customers' existing, fully underwritten and affordability-stressed credit limit. The strength of our proposition has seen us deliver above-market growth, and we now have a c.8% share of the UK cards market.

In Business banking, we expected to build momentum throughout the year as the sector recovered and in Q2 we have seen growth returning to the BAU segment, alongside the anticipated run-off of government scheme lending. BAU business lending saw a 20% increase in drawdowns QoQ as the lending pipeline builds into H2. This supported BAU business balance growth of c.1% in Q2, although the overall book reduced 2.5% in the half, reflecting a 13% reduction in the government scheme lending book. The government lending book is performing as expected; some customers have chosen to pay back their loans in full, while others have begun making monthly repayments as per their schedule. Currently whilst there has been a modest increase in stage 3 Bounce back loans (BBLs), claims for defaults have been paid in full by HMT, and incidences of fraud are very low.

Strategic delivery - Delivering digital efficiency

We have made a positive start against all three of our key themes laid out at FY21: Customer and Propositions, Colleagues and Property, and Digital. Within Customer and Propositions, we are making progress in offering customers an improved, digital-first customer experience. From a starting point of 70% of customer service interactions being voice-led at FY21, we've already seen a 10%pt reduction, as digital solutions such as chatbots are being introduced to enhance the customer service experience. Chatbots were first deployed in January and have now dealt with c.650k customer queries, resolving 55% of these queries without colleague intervention, freeing up colleagues and delivering stronger customer service. We have more work to do to improve customer service through greater automation and we are rapidly digitising key customer journeys, with 42% now fully digitised, up from 27% at FY21. Digital sales of personal banking products (ex. mortgages) are now 97% of total sales, and PCA digital adoption has picked up from 62% to 64%, driving towards our 80% target by FY24.

We are continuing to make progress in the Colleagues and Property workstream as VMUK transforms its colleague operating model, building on capabilities introduced over the last year, to embed fully the new A Life More Virgin (ALMV) flexible working model. ALMV features harmonised working terms, enhanced colleague benefits and enables flexible, remote working, allowing us to tap into new, more diverse talent pools. These changes have been very well received by colleagues, reflected in improved engagement scores in the period, up to 73% from 68% at FY21, and external commentators continue to be very keen to talk to us to understand the changes we've made to give our colleagues greater flexibility and freedom. In order to drive productivity, we continue to implement new IT infrastructure and have initiated programmes that will use the full power of Microsoft's Cloud computing product-suite, enhancing the way we work and supporting colleague collaboration. Greater remote working is also enabling the Group to reduce its property footprint, reducing costs and supporting the environment. The property footprint is down more than 20% since FY21, and branch numbers reduced as announced in September 2021, reflecting the changes in customer demand seen during the pandemic.

Our Digital investment continues to focus on driving our three-year transformation programme to deliver a scalable, more efficient digital growth platform, featuring migration to Cloud infrastructure and the deployment of Agile methodology and tools to increase the pace and delivery of change, at lower cost. We are still in the mobilisation phase of our Cloud migration in partnership with Microsoft, with significant planning underway, and this is set to commence in FY23, enabling us to begin exiting physical data centres in late FY23. In the meantime, we are making progress on the digitisation of the bank and the Agile delivery of change. We are in the process of starting to de-commission legacy applications, while building the new applications required to support the new Cloud infrastructure. We are deploying Microsoft tools, such as AI and robotics, and rolling out Agile methodology across our new change programmes. This is delivering new functionality for customers at greater pace at an average of c.20% lower unit costs.

Improving financial momentum and capital framework

We have seen a strong improvement in our financial performance compared to a year ago, supported by early strategic delivery combined with an improved rate environment. Statutory profit before tax of £315m was significantly higher (H1 2021: £72m), with stronger underlying profit of £388m which improved 58% (H1 2021: £245m).    

The loan book remained broadly stable in the period, but with improved momentum in our key target segments including the strong growth in unsecured lending and the stabilisation of BAU business lending balances discussed above, which broadly offset the decline in government scheme lending and a small reduction in mortgages where we continued to trade tactically in a competitive market. We continued to optimise the deposit book, which reduced 3.7% over the period but with growing relationship deposit balances, which were up 4.2%, and now represent half of all deposits.

Total income improved 16% vs H1 2021 with a stronger contribution from both net interest income and other income, driven by a stronger rate environment supporting hedge income and ongoing deposit cost optimisation, along with a continued improvement in customer activity levels. Our net interest margin strengthened significantly in the half to 183 basis points (bps) (H1 2021: 156bps) and we now expect a stronger outlook for FY22 NIM of between 180 and 185bps. Other income of £83m also improved 26% compared to a year ago reflecting higher customer and business activity, including increased card spending as the cards book grew significantly in H1.

Business and financial review

Chief Executive Officer's statement

 

Underlying costs of £456m were broadly stable year-on-year (H1 2021: £460m), tracking in line with expectations as the benefit of gross savings from ongoing digital transformation and restructuring were offset by the costs of growth, ongoing planned investment in new propositions, and the impacts of inflation, including agreed pay rises and the harmonisation of colleague terms. Despite the higher inflationary backdrop than at the time we set our plan, we continue to be well placed to achieve our broadly stable guidance for FY22 and our objective of £175m of gross cost savings by FY24. The delivery of these gross savings will be enabled by restructuring charges, with £46m incurred in H1 2022 and we continue to expect to incur c.£275m across FY22-FY24 with around half in FY22.

Overall adjusting items of £73m in H1 were much improved year-on-year (H1 2021: £173m) given the reduction in legacy conduct costs. 

Asset quality remained robust in the period, with a low impairment charge of £21m or 6bps cost of risk. Since FY21, the UK initially saw a continued recovery post-COVID, although more recently the Ukraine conflict has seen greater uncertainty in the outlook and some reduction of forecasts. Overall, forecasts for unemployment remain below pre-COVID levels, albeit with a slightly lower pace of GDP growth. We have not yet seen the impacts of higher inflation on our customers, but have already taken actions to ensure we tighten affordability criteria, and our track record of prudent underwriting across our portfolios leaves the loan book well positioned. Our coverage remains strong at 66bps (FY21: 70bps), and above pre-pandemic levels, despite the modest reduction in the period.

Having returned to paying a dividend alongside our FY21 results, and following the Group's successful participation in its inaugural stress test last year, we're able to update the market on our capital framework and returns policy. The Group will operate in a CET1 target range of 13 - 13.5% in the long term, although we will operate above this level for the time being due to heightened macroeconomic uncertainty. The Group will target a 30% full year dividend payout ratio and the interim dividend is expected to represent around 1/3^rd of the prior year's total dividend, beginning H1 2023. Dividends will be supplemented by buybacks, subject to ongoing assessment of surplus capital, market conditions and regulatory approval. Given a strong capital position and robust H1 performance, the Board has announced an interim dividend of 2.5p.

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

Recognising the challenges that Ukrainian people may face when trying to open an account in the UK, I was very proud of how quickly our colleagues responded, delivering an updated account opening process for refugees within 8 days. We've donated £300k to the DEC Ukraine Humanitarian Appeal and are supporting our staff who are offering up their homes to Ukrainian families and using volunteering days to support fundraising activities. We've achieved c.£200k in fundraising for our charity partner Macmillan and rolled out our national Macmillan Guides support service to support people living with or affected by cancer.

In November, we launched our new purpose-driven 'A Life More Virgin' employment package, offering equal, gender neutral family leave, 30 days' holiday and an additional five paid wellbeing days to all colleagues from day one of their employment. As we continue to evolve our senior leadership team for our digital future, we continue to focus on the diversity of our senior leadership. Women continued to comprise 42% of senior management roles and 4% of these roles are undertaken by colleagues from an ethnic background (FY21: 2%). There remains more to do here to achieve our 2025 targets which include senior gender diversity of 45-55%, ethnicity of 10%, LGBTQ+ of 4%, and disability of 8%, but we are continuing to make progress.

From a financial inclusion perspective, we continue to work with Smart Data Foundry to define a national measure for the poverty premium and, in partnership with Turn2Us, are helping people across the UK make sure they are not missing out on benefits they are entitled to. Our social media campaign, which targeted over 65's, has reached over 175,000 people, and resulted in more than 1,000 benefit calculator assessments being completed.

We are continuing to make progress in embedding our climate strategy and in developing baselines, roadmaps and targets to net zero in line with the Net-Zero Banking Alliance commitment made in September 2021. We included climate-related financial disclosures within the Group's 2021 Annual Report and Accounts and will make disclosures aligned to the Task Force on Climate-related Financial Disclosures (TCFD) recommendations in the 2022 Annual Report and Accounts. Recognising the increased relevance and materiality to the Group's risk profile, we've elevated climate risk to principal risk status.

Developing our leadership to deliver our strategy

I'd like to welcome Syreeta Brown, who joined the Group in November 2021 as Group Chief People and Communications Officer. Syreeta joined from Citi, where she spent 11 years in a number of HR roles, the most recent of which was Managing Director, Head of HR for Global Functions, Operations and Technology, and led the HR strategy for 20,000 employees across Europe, Middle East and Africa. She brings a wealth of experience in cultural transformation, talent development and in building a workforce that is fit for the future and has hands-on, senior-level experience embedding a digital agenda within a major financial services business.

 

 

Business and financial review

Chief Executive Officer's statement

 

I would also like to welcome Susan Poot who joined the Group in January 2022 as Group Chief Risk Officer following Mark Thundercliffe's retirement. Susan joined from ING Bank, where she spent over 20 years in a number of commercial and risk roles, the most recent of which was Chief Risk Officer, Retail Banking, where she was responsible for credit risk, compliance and operational risk management across all of ING's retail markets, managing a team of over 1,000 people and overseeing a lending book of €400 billion.  Susan brings with her a wealth of experience across a range of risk disciplines, with broad banking experience across both retail and wholesale banking. 

 

I would like to take this opportunity to thank Kate Guthrie, Mark Thundercliffe and Helen Page for their contributions to my leadership team during their time with the Group, which spanned the acquisition of Virgin Money Holdings and the significant integration and rebrand activity that has laid the platform for our exciting future. In addition, Amy Stirling will leave the Board today and I thank her for her contribution to the Board since joining as part of the Virgin Money acquisition. Finally, Paul Coby will leave the Board in June and I'd also like to thank him for his significant contribution over the past 6 years.

Outlook

Over the first half of the year, we've made good initial progress delivering against the accelerated digital strategy launched alongside our FY21 results. We will continue to focus in H2 on growing in our target segments and delivering exciting new digital propositions for customers, while continuing to improve our efficiency and customer service.

It's encouraging to see our strategy, and an improving rate environment, are combining to drive stronger financial performance. The improved NIM outlook, well controlled costs and low impairment charge have driven a significant improvement compared to a year ago underpinning all other guidance for FY22 and adding to our conviction in achieving our medium-term targets. The announcement of our updated capital framework provides a clear guide for capital returns going forwards, while we maintain a robust balance sheet.

The macroeconomic outlook has become more uncertain over the course of the six months. Following a positive recovery in expectations post-COVID, recent events have seen forecasts moderate. As we enter a more uncertain environment, we are monitoring carefully the impacts of higher inflation on the cost of living and implications for customers, as well as the second-order impacts from the conflict in Ukraine, but aren't yet seeing signs of significant stress in the book. We enter this period with prudent coverage, robust underwriting and a defensive portfolio.

We will say more on the Group's outlook and prospects for profitable growth alongside our FY22 results in November and I strongly believe the Group is well placed to deliver its strategy. We have a unique brand, and access to a complementary set of partner companies in the Virgin Group, while our deepening relationship with Virgin Red offers exciting possibilities for our customers to earn and spend Red points, with Virgin Money products and propositions at the heart of deeper, more loyal customer relationships. We will continue to make progress in developing our digital wallet over the second half of the year combining many of these unique features with instalment credit, loyalty and payment capabilities.

Overall, we continue to have the right strategy and are executing on the key components that will underpin our delivery of improved returns and profitable growth over the coming years, as we fulfil our purpose to Make You Happier About Money.

 

 

 

David Duffy, Chief Executive Officer - 4 May 2022
 

Business and financial review

Chief Financial Officer's review

Driving sustainable improvements in returns

 

"The Group has made good initial progress on its Digital First strategy and it's pleasing to see strategic delivery supporting a strong financial performance to start 2022. Profitability improved substantially in the period with continued financial momentum across the business." 

Clifford Abrahams, Group CFO

 

Financial Highlights

 

Statutory profit before tax £315m H1 2021: £72m		Underlying profit before tax £388m H1 2021: £245m		Statutory RoTE 9.1% H1 2021: 2.2%
NIM 1.83% H1 2021: 1.56%		Underlying CIR 53% H1 2021: 62%		Cost of risk 6bps H1 2021: 11bps
CET1 ratio 14.7% 2021: 14.9%		Loan growth (0.2)% H1 2021: (0.3)%		Relationship deposit growth 4.2% H1 2021: +12.0%

 

 

 

 

Business and financial review

Chief Financial Officer's review

 

Strong start to Digital First delivery

The Group has built good momentum in the first half of the financial year, with a strong set of financial results and initial delivery against the accelerated digital strategy. We are continuing to invest in our Digital First strategy, driving cost efficiency and unlocking our growth potential in key target segments. We have a clear opportunity to digitise further and accelerate profitable growth, and remain committed to delivering double digit returns. Following our successful inaugural participation in the BoE Solvency Stress Test (SST) exercise last year, we are also able to update the market on our capital framework and the outlook for capital returns.

Delivering growth in target segments

The Group has had a strong start to the year with ongoing improvement in customer propositions supporting growth in key target segments. The investment we are making in further digitising customer journeys, adding innovative new customer offerings and expanding product features, is encouraging for our future growth prospects. Relationship deposit growth has been strong year-to-date and will continue to be a key area of focus for the Group, providing a low-cost base for above-market lending growth in target segments over time. The further development of our proposition in the PCA market, including debit card cashback and a compelling linked saver account, saw us reach c.180k new PCA sales since the launch of the new PCA proposition in late 2020, while the launch of the digital fee-free BCA in November has resulted in a 100% increase in sales QoQ and will continue to support the growth of a lower cost funding base. In unsecured lending, we delivered record sales for new credit cards in Q2 and have consistently seen our market share grow. We continue to expect good momentum in this area supported by our innovative new digital propositions. In Business, the strength of our developing proposition, supported by the fee-free digital BCA as well as the broader improvement in activity, give us confidence in delivering future above-market growth in this sector.

Strong financial performance in H1

The Group delivered an underlying profit in H1 of £388m, a significant improvement compared to last year (H1 2021: £245m), resulting in underlying RoTE of 11.7% (H1 2021: 10.1%) driven primarily by improved income and lower impairments. NIM of 1.83% (H1 2021: 1.56%) was significantly improved year-on-year due to the higher rate environment, supportive conditions in the deposit market and improved liability mix, offsetting mortgage spread pressure, with the second quarter NIM increasing to 1.89%. Non-interest income of £83m was 26% higher year-on-year driven by improved customer activity. Overall, this resulted in total income that was 16% higher compared to a year ago. Operating costs were 1% lower at £456m compared to H1 2021 as expected gross cost savings were largely offset by inflation, growth and planned higher digital development costs. The improvement in income resulted in a 9%pts reduction in the cost: income ratio to 53% and drove a 45% increase in pre-provision profit year-on-year. Impairments remained low in the first half of the year at £21m, resulting in a cost of risk of 6bps.

The Group also reported an improved statutory profit before tax in the period delivering £315m (H1 2021: £72m) and a statutory RoTE of 9.1% (H1 2021: 2.2%). This reflected the improved underlying profit, and that £100m fewer adjusting items were incurred in H1 2022, due primarily to the non-recurrence of legacy conduct charges for payment protection insurance (PPI) and a lower level of acquisition accounting unwind. H1 2022 saw £73m of adjusting items: £46m of restructuring charges, £14m of acquisition accounting unwind, £5m of legacy conduct costs, and £8m of other charges.

As a result of the strong performance in the first half, the Board has announced an interim dividend of 2.5p.

Resilient balance sheet with robust capital, liquidity and funding position

Given higher uncertainty in the outlook, the Group has reduced the weighting to the upside scenario and maintained elevated PMAs. The Group maintained a conservative balance sheet position with credit provisions totalling £479m (FY21: £504m) equivalent to a coverage ratio of 0.66% (FY21: 0.70%), which remains above pre-pandemic levels. The Group continues to have a defensive portfolio comprising 80% low-risk mortgages, 12% business lending and 8% in our high-quality, higher affluence-focused unsecured book. Macroeconomic assumptions from our 3^rd party provider Oxford Economics have been fully refreshed in the period.

During the period, lending volumes were 0.2% lower at £71.9bn. Deposit balances reduced 3.7% to £64.4bn given ongoing optimisation of the funding base as relationship deposits grew by 4.2%. The CET1 ratio remains strong having reduced from 14.9% at FY21 to 14.7% at H1, including the removal of the Capital Requirements Regulation (CRR)2 software benefit of c.50bps.

I was pleased with the Group's performance in its inaugural PRA stress test where VMUK remained above all reference rates and performed well relative to peers. Our updated capital framework provides flexibility to support sustainable payouts to investors, while allowing for capital generation to support our growth plans. We will operate in a target range of 13 - 13.5% in the long term, although we will operate above this level for the time being due to heightened macroeconomic uncertainty. The Group will target a 30% full year dividend payout ratio and the interim dividend is expected to represent around 1/3^rd of the prior year's total dividend, beginning H1 2023. Dividends will be supplemented by buybacks, subject to ongoing assessment of surplus capital, market conditions and regulatory approval.

Outlook

We have made good initial progress on driving our accelerated Digital First strategy, which will deliver value for investors over time. The Group continues to invest in digitally-led customer propositions, driving growth in key target segments and is supporting strong financial momentum in H1. With continued digital investment, the Group is creating the key elements to deliver strong profitable growth at low incremental costs and I'm looking forward to helping drive the business towards those ambitions.

Business and financial review

Chief Financial Officer's review

 

Underlying income
						6 months to	6 months to						6 months to
						31 Mar 2022	31 Mar 2021						30 Sep 2021
						£m			£m		Change				£m			Change
Underlying net interest income						782			677		16%				735			6%
Underlying non-interest income						83		66		26%						94			(12)%
Total underlying operating income						865			743		16%				829			4%
NIM						1.83%			1.56%		27bps				1.69%			14bps
Average interest earning assets						85,729			87,134		(2)%				86,751			(1)%

 

 

Overview

 

Operating income of £865m was 16% higher compared with H1 2021 and 4% higher than H2 2021 as the Group continued to build financial momentum. NII improved 16% year-on-year as NIM increased 27bps to 1.83%, with a Q2 NIM of 1.89%. Other income of £83m was 26% higher compared to H1 2021 driven by higher activity levels in Business and a continued improvement in consumer spending.

 

NII and NIM

Asset yields increased 14bps compared to H1 2021 at an aggregate level. Within this, mortgage yields declined 10bps given the competitive backdrop impacting headline mortgage pricing. The Group remained selective in terms of participation in the market in the first half, with lower average balances also driving a reduction in NII.

In Business, a 25bps increase in yields was driven by a reduction of lower-yielding government-backed lending, and the benefit of bank base rate increasing. NII was broadly stable as an increase in the yield was offset by lower average balances.

In Unsecured, average balances increased by 10% relative to H1 2021, while yields contracted 64bps. The key driver of the reduction in yield compared to H1 2021 was the credit card book which was impacted by mix changes as customers paid down higher-yielding unsecured balances and new business was written at lower yields. Elsewhere, the average yield on the Group's liquid assets increased 18bps reflecting the higher rate environment.

Liability rates decreased 14bps relative to H1 2021, with the reduction driven broadly across lower savings costs and lower term deposit costs more than offsetting higher current account and wholesale funding costs. We continued to see an increase in average balances across lower-cost current accounts and savings products. Term deposits fell as a proportion of the book and were also 32bps cheaper, while savings costs reduced by 15bps in the period to 33bps (H1 2021: 48bps), reflecting the impact of repricing activity. Wholesale funding costs increased in the period, driven mainly by an increase in average balances with the continued optimisation of overall funding.

In FY22 we now anticipate a full year NIM of 1.80% to 1.85%. This reflects the benefit of a higher proportion of low-cost relationship deposits, a higher-yielding asset mix, structural hedge contributions and the higher rate environment partially mitigated by competitive pressure on mortgage spreads.

 

 

 

Business and financial review

Chief Financial Officer's review

 

Underlying net interest income

		6 months ended 31 March 2022				6 months ended 31 March 2021
		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		57,976	641	2.22		58,303	673	2.32
Unsecured lending		5,902	195	6.62		5,344	194	7.26
Business lending(2)		8,314	149	3.59		8,916	149	3.34
Liquid assets		12,563	24	0.38		12,860	13	0.20
Due from other banks		970	-	0.05		1,707	-	(0.03)
Swap income/other		-	9	n/a		-	(55)	n/a
Other interest earning assets		4	-	n/a		4	-	n/a
Total average interest earning assets		85,729	1,018	2.38		87,134	974	2.24
Total average non-interest earning assets		3,218				3,450
Total average assets		88,947				90,584
Interest bearing liabilities:
Current accounts		15,467	(13)	(0.17)		14,000	(4)	(0.06)
Savings accounts		31,388	(52)	(0.33)		29,284	(71)	(0.48)
Term deposits		13,348	(68)	(1.02)		19,892	(133)	(1.34)
Wholesale funding		15,059	(102)	(1.36)		13,767	(87)	(1.27)
Other interest earning liabilities		150	(1)	n/a		168	(2)	n/a
Total average interest bearing liabilities		75,412	(236)	(0.63)		77,111	(297)	(0.77)
Total average non-interest bearing liabilities		7,987				8,477
Total average liabilities		83,399				85,588
Total average equity		5,548				4,996
Total average liabilities and average equity		88,947				90,584
Net interest income			782	1.83			677	1.56
(1)	Average yield is calculated by annualising the interest income/expense for the period.
(2)	Includes loans designated at fair value through profit or loss (FVTPL).

 

 

Underlying non-interest income

 

Non-interest income improved £17m relative to H1 2021 to £83m. The key drivers of the improvement were £7m stronger performance in Personal as activity levels recovered, a £4m benefit from improved business fee performance, and £6m benefit from fair value movements. The improvement in Personal fee income was driven by the benefit of easing lockdown restrictions and higher  interchange fees as consumer spending increased.

Following the rebound of non-interest income to more normalised pre-COVID levels, the delivery of the Group's strategic initiatives are targeted to drive a further improvement over the coming years.

 

 

Business and financial review

Chief Financial Officer's review

 

Underlying costs

							6 months to	6 months to				6 months to
							31 Mar 2022	31 Mar 2021(1)				30 Sep 2021(1)
Operating and administrative expenses							£m		£m	Change			£m	Change
Staff costs							184		176	5%			172	7%
Property and infrastructure							20		21	(5)%			22	(9)%
Technology and communications							57		61	(7)%			52	10%
Corporate and professional services							54		49	10%			52	4%
Depreciation, amortisation and impairment							67		81	(17)%			74	(9)%
Other expenses							74		72	3%			70	6%
Total underlying operating and administrative expenses							456		460	(1)%			442	3%
Underlying CIR							53%		62%	(9)%pts			53%	-%pts
(1)	In the Group's 2021 Annual Report and Accounts, the methodology for categorising operating and administrative expenses before impairment losses was refined to provide a more accurate reflection of what these costs represent. The 6 months to 31 March 2021 and the 6 months to 30 September 2021 comparatives have been amended to conform with the current period's presentation. Refer to note 2.4 for further detail.

 

Underlying operating expenses reduced 1% relative to H1 2021 to £456m with the cost: income ratio reducing 9% pts to 53% compared with H1 2021 due primarily to the higher income, which benefitted from strategic delivery and the higher rate environment. The Group delivered gross cost savings of c.£30m in the first half of the year relative to H1 2021. These benefits were broadly offset by higher wage inflation and costs linked to balance sheet growth, as well as increased digital development costs, in line with our guidance at FY21. The Group continues to expect broadly stable costs for FY22 compared to FY21.

 

 

Impairments

 

As at 31 March 2022		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		66	58.1	11	(7)	9.1%	1.1%
Unsecured:		221	6.2	404	257	10.5%	1.3%
of which credit cards		199	5.1	422	330	11.1%	1.3%
of which personal loans and overdrafts		22	1.1	297	(157)	7.3%	1.3%
Business		192	8.1	258(2)	(64)	24.8%	3.7%
Total		479	72.4	66	6	11.0%	1.4%
of which Stage 2		247	7.9	315
of which Stage 3		101	1.0	1,070
(1)	Cost of risk is calculated on an annualised basis.
(2)	Government-guaranteed element of loan balances excluded for the purposes of calculating the Business and total coverage ratio.

 

As at 30 September 2021		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		87	58.5	15	(7)	12.3%	1.1%
Unsecured:		194	5.8	380	(64)	9.7%	1.2%
of which credit cards		160	4.7	379	5	10.7%	1.3%
of which personal loans and overdrafts		34	1.1	386	(386)	5.0%	1.1%
Business		223	8.3	306(1)	(62)	29.2%	2.8%
Total		504	72.6	70	(18)	14.1%	1.3%
of which Stage 2		302	10.2	302
of which Stage 3		91	1.0	959
(1)	Government-guaranteed element of loan balances excluded for the purposes of calculating the Business and total coverage ratio.

 

 

 

Business and financial review

Chief Financial Officer's review

 

Total credit provisions reduced to £479m at H1 2022 (FY21: £504m), resulting in aggregate coverage of 66bps (FY21: 70bps) which remains in excess of coverage levels prior to the pandemic. 

The key macroeconomic inputs and weightings have been updated based on scenarios provided by our 3rd party provider Oxford Economics with more conservative weightings applied than previously assumed, to adjust for the more uncertain economic backdrop. These include a 10% weighting to the Upside scenario, 55% to the Base scenario and 35% to the Downside. The weighted economic scenarios include a 2.5% recovery in GDP in 2022, peak unemployment of 4.8% and a decline in House Price Index (HPI) across 2023 and 2024.

The model updates and overlays have resulted in limited adverse portfolio stage migration, with loans classified as Stage 2 reducing from 14.1% of the portfolio to 11.0% at H1 2022. Although this is higher relative to pre-pandemic levels, 98% of Stage 2 lending balances remain <30 days past due (DPD), with most not past due. Stage 3 assets increased modestly from 1.3% to 1.4% of Group lending driven primarily by movements in the business book. Modelled provisions were broadly stable in the period at £262m (30 September 2021: £266m), as reductions in the mortgage and business portfolios offset an increase in cards.

To supplement the modelled expected credit loss (ECL) provision, the Group applied expert credit risk judgement through post-model adjustments (PMAs), designed to account for factors that the models cannot incorporate. Through this process, the Group applied PMAs of £179m (FY21: £207m) which are deemed appropriate for our portfolio at the current time. This includes a new affordability stress PMA of £26m across the Retail portfolios in order to account for potential impacts of the current cost of living shock that is likely to be underestimated in the modelled outcome.

Across all portfolios, the Group has adequate provision coverage that remain ahead of pre-pandemic levels. In Mortgages, the coverage ratio of 11bps is deemed appropriate for the conservative loan book. The mortgage portfolio continues to evidence strong underlying credit performance, with no notable deterioration in asset quality.

Our Unsecured lending book coverage ratio of 404bps includes 422bps of coverage for our high-quality credit card portfolio which focuses on more affluent customers, and 297bps of coverage for our smaller personal loans and overdrafts book. The modelled provision increased due to a modest increase in early stage arrears and updated credit appetite as well as a return to more normalised customer indebtedness model inputs, which together more than offset the positive impact of current macroeconomics. Overall arrears levels remain modest across the portfolio with 98% of Unsecured balances in stage 1 or stage 2 not past due.

In Business, the coverage ratio of 258bps reflects a 48bps decrease in the period. There has been limited change in underlying asset quality performance and, as yet, no significant increase in specific provision recognition. The lending book continues to be biased away from sectors likely to experience more disruption from higher cost of living such as hospitality and retail, towards sectors expected to be resilient, such as agriculture and health and social care.

 

 

 

Business and financial review

Chief Financial Officer's review

 

Adjusting items and statutory profit

							6 months to
							31 Mar 2022	31 Mar 2021		30 Sep 2021
							£m		£m		£m
Underlying profit on ordinary activities before tax							388		245		556
Adjusting items
-  Restructuring charges							(46)		(49)		(97)
-  Acquisition accounting unwinds							(14)		(47)		(41)
-  Legacy conduct costs							(5)		(71)		(5)
-  Other items							(8)		(6)		(68)
Statutory profit on ordinary activities before tax							315		72		345
Tax (expense)/credit							(77)		8		49
Statutory profit for the period							238		80		394
Underlying RoTE							11.7%		10.1%		25.7%
Statutory RoTE							9.1%		2.2%		17.9%
TNAV per share							313.2p		257.5p		289.8p

 

Overview

The Group made a statutory profit before tax of £315m after deducting £73m of adjusting items. The adjusting items charged in H1 2022 reflect the Group's investment in its digital growth strategy as well as acquisition accounting unwind costs, legacy conduct charges and other items. Overall adjusting items were £100m lower than those incurred in H1 2021, primarily reflecting the non-recurrence of legacy conduct charges for PPI and lower acquisition accounting unwinds.

TNAV per share increased 23.4p in H1 2022 relative to H2 2021, to 313.2p. The key drivers of the increase were 18.2p of retained earnings and a further 3.3p of positive reserve movements.

Restructuring charges

The Group incurred £46m of costs reflecting the Digital First investment programme and associated severance and property closure costs. Overall, the Group still anticipates a total of c.£275m of costs to support the digital strategy between FY22-24, with around half incurred in FY22.

Acquisition accounting unwinds

The Group recognised fair value accounting adjustments at the time of the Virgin Money acquisition that unwind through the income statement over the remaining life of the related assets and liabilities (c.5 years). £14m was reflected in H1 2022. The Group expects a further c.£40m of total acquisition accounting unwind charges by end of FY24.

Legacy conduct

Charges of £5m were incurred in H1 2022, mainly in respect of a number of non-PPI customer redress matters, legal proceedings, and claims arising in the ordinary course of the Group's business.

Other items

The Group incurred £8m of other one-off adjusting costs during the first half of the year, primarily relating to the investment joint venture.

 

Taxation

In respect of a statutory pre-tax profit of £315m, there was a £77m tax charge reflecting an effective tax rate of 24%.

 

 

Business and financial review

Chief Financial Officer's review

 

Balance sheet

										As at
										31 Mar 2022	30 Sep 2021
										£m			£m	Change
Mortgages										57,798			58,104	(0.5)%
Unsecured										5,793			5,415	7.0%
Business(1)										8,263		8,477		(2.5)%
Total customer lending										71,854			71,996	(0.2)%
Relationship deposits(2)										31,887			30,596	4.2%
Non-linked savings										20,784			21,285	(2.4)%
Term deposits										11,715			14,989	(21.8)%
Total customer deposits										64,386			66,870	(3.7)%
Wholesale funding										15,497		13,596		14.0%
of which TFS										-		1,244		(100)%
of which TFSME										7,200		4,650		54.8%
LDR										112%			108%	4%pts
LCR										139%		151%		(12)%pts
(1)	Of which, £1,148m government lending (30 September 2021: £1,318m)
(2)	Current account and linked savings balances.

Overview

At an aggregate level, Group lending reduced by 0.2% to £71.9bn as growth in Unsecured lending was more than offset by a reduction in Mortgages and Business lending. Total customer deposits reduced by 3.7% to £64.4bn reflecting careful management, while relationship deposits grew 4.2% to £31.9bn as the Group continued to successfully improve its deposit mix.

Mortgage balances reduced by 0.5% to £57.8bn as the Group continued to prioritise margin in an increasingly competitive environment. With slower market demand post the Stamp Duty holiday in the first half of the financial year, market competition intensified as increases in customer rates being offered were more than offset by higher swap rates, reducing spreads.

Unsecured balances increased by 7.0% to £5.8bn led by above-market growth in credit card balances. The Group has benefitted from improved customer activity following the significant removal of pandemic-related restrictions, with competitive pricing, innovative product features and ongoing investment in the overall, digitally-led proposition.

Business lending reduced 2.5% to £8.3bn, driven by reductions in government-guaranteed lending schemes as borrowers continued to repay balances following the expiry of the 1-year interest free period. BAU balances were broadly stable given generally subdued market activity, though with growth in Q2 in line with the broader economic recovery and improved business confidence.  

Customer deposits reduced 3.7% in the period to £64.4bn. The Group continued to optimise the deposit base with a 21.8% reduction in term deposits and a 4.2% growth in relationship deposits, supported by the strength of the PCA and BCA propositions, including compelling new Brighter Money Bundles, added product features such as the launch of debit card cashback and an improved customer experience, supported by the further roll-out of digital on-boarding.  

 

Wholesale funding and liquidity

The Group maintains a robust funding and liquidity position. The Group's LDR increased 4% points in the period to 112% (FY21: 108%), primarily as a result of the continued reduction in more expensive term deposits. While opting to manage liquidity slightly lower, the Group's LCR of 139% (FY21: 151%) continues to comfortably exceed both regulatory requirements and our more prudent internal risk appetite metrics, ensuring a substantial buffer in the event of any outflows due to the cost of living squeeze.

The Group made further drawings of £2.6bn from the BoE's Term Funding Scheme with additional incentives for small or medium sized enterprises (TFSME) during the period ahead of its closure, taking the total outstanding amount to £7.2bn at H1 2022, while at the same time repaying its remaining £1.2bn of TFS drawings. The incremental TFSME drawings, along with a successful £600m 5-year covered bond transaction during the period, meant wholesale funding increased to £15.5bn as at H1 2022 (FY21: £13.6bn), offsetting the reduction in term deposits.

 

 

 

 

 

Business and financial review

Chief Financial Officer's review

 

Capital										As at
										31 Mar 2022	30 Sep 2021		Change
CET1 ratio (IFRS 9 transitional)										14.7%		14.9%		(0.2)%pts
CET1 ratio (IFRS 9 fully loaded)										14.4%		14.4%		-%pts
Total capital ratio										21.8%		22.0%		(0.2)%pts
MREL ratio										31.7%		31.9%		(0.2)%pts
UK leverage ratio										5.1%		5.2%		(0.1)%pts
RWAs (£m)										24,184		24,232		(0.2)%
of which Mortgages (£m)										10,023		10,010		0.1%
of which Unsecured (£m)										4,602		4,311		6.8%
of which Business (£m)										6,007		6,040		(0.5)%
(1)	Unless where stated, data in the table shows the capital position on a Capital Requirements Directive (CRD) IV 'fully loaded' basis with International Financial Reporting Standard (IFRS) 9 transitional adjustments applied.
(2)	The capital ratios include unverified profits.

 

Overview

The Group has maintained a robust capital position with a CET1 ratio (IFRS 9 transitional basis) of 14.7%, which includes the removal of the CRR2 software benefit of 53bps and a total capital ratio of 21.8%. The Group's CET1 ratio on an IFRS 9 fully loaded basis remained stable at 14.4%. The Group's latest Pillar 2A requirement has a CET1 element of 1.7%. Overall, the Group's CRD IV minimum CET1 capital requirement (or MDA threshold) remains 8.7%.

 

CET1 capital

CET1 reduced by 18bps in the period with the movements set out in the table below. The removal of the software benefit that was introduced as part of the CRR Quick Fix reduced the CET1 ratio by 53bps. 

 

CET1 Capital movements		6 months to 31 Mar 2022
		%/bps
Opening CET1 ratio		14.9%
Capital generated (bps)		103
RWA growth (bps)		(6)
AT1 distributions (bps)		(10)
Underlying capital generated (bps)		87
Restructuring charges (bps)		(14)
Acquisition accounting unwind (bps)		(4)
Conduct (bps)		(2)
Foreseeable ordinary dividends (bps)		(25)
Other (bps)		(7)
Impact of intangible asset relief (bps)		(53)
Net capital absorbed (bps)		(18)
Closing CET1 ratio		14.7%

 

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

 

MREL

The Group's transitional MREL ratio remained broadly stable during the period at 31.7% (FY21: 31.9%), representing prudent headroom of 7.0% or c.£1.7bn over the Group's 2022 end-state MREL (plus buffers) requirement of 24.7% of RWAs. Given the surplus to end state requirements and with no maturities in FY22, the Group is not planning any MREL issuance over the remainder of the year.

 

 

 

 

 

 

 

 

 

 

 

 

Business and financial review

Chief Financial Officer's review

 

Outlook and guidance 

 

FY22 financial guidance

NIM NIM expected to be 180-185bps

Underlying costs Underlying costs expected to be broadly stable in FY22

Cost of risk Expect cost of risk to rise towards through the cycle range

Capital return Dividend pay-out 30% at FY22; buybacks subject to ongoing assessment of surplus capital, market conditions and regulatory approval

 

Medium-term outlook:

The Board believes that, assuming no significant further deterioration in expectations for the economic outlook, Virgin Money has a clear path to delivering sustainable double digit statutory returns on tangible equity in FY24

 

Based on the latest outlook and good momentum in NIM in H1, the Group expects NIM for FY22 to be around 180-185bps, assuming three further rate increases during FY22.

The Group expects underlying operating expenses to be broadly stable reflecting higher costs from inflation, targeted growth and digital development, which are expected to be broadly offset by gross savings from ongoing digital transformation and restructuring. The Group continues to anticipate c.£275m of restructuring costs relating to the Digital First strategy across FY22-24, with around half in FY22.

Cost of risk is expected to rise towards the through the cycle range.

The Group will operate in a CET1 target range of 13 - 13.5% in the long term, although we will operate above this level for the time being due to heightened macroeconomic uncertainty. The Group will target a 30% full year dividend pay-out ratio and the interim dividend is expected to represent around 1/3^rd of the prior year's total dividend, beginning H1 2023. Dividends will be supplemented by buybacks, subject to ongoing assessment of surplus capital, market conditions and regulatory approval.

The Board will review the timing of possible buybacks on an ongoing basis when it assesses that the Group has excess capital. Given the importance of the Annual Cyclical Scenario (ACS) stress test results, and subsequent calibration of capital buffers in assessing excess capital, it is anticipated that any distributions via buybacks would ordinarily be aligned to interim results from FY23. Any buyback considerations in FY22 would be conducted in line with the framework announced, with due consideration to the current uncertain environment, and would remain subject to regulatory approval. 

In the medium term, the Board believes that, assuming no significant further deterioration in expectations for the economic outlook, Virgin Money has a clear path to delivering sustainable double digit statutory returns on tangible equity in FY24. The improvement in returns will be underpinned by above-market growth in Business (non-government) and Unsecured, mix driven NIM expansion, with OOI to rise as a proportion of total income and a cost to income ratio of c.50% by FY24.

 

 

 

Clifford Abrahams, Chief Financial Officer - 4 May 2022

 

 

Business and financial review

Financial review - statutory basis

Summary income statement

 

						6 months to	6 months to						6 months to
						31 Mar 2022	31 Mar 2021				Change		30 Sep 2021				Change
						£m			£m		%				£m			%
Net interest income						777			646		20				711			9
Non-interest income						67		49		37						83			(19)
Total operating income						844			695		21				794			6
Operating and administrative expenses						(508)			(585)		(13)				(618)			(18)
Operating profit before impairment losses						336			110		205				176			91
Impairment (losses)/credit on credit exposures						(21)			(38)		(45)				169			n/a
Statutory profit on ordinary activities before tax						315			72		338				345			(9)
Tax (expense)/credit						(77)			8		n/a				49			n/a
Statutory profit after tax						238			80		198				394			(40)

 

The Group has recognised a statutory profit before tax of £315m (31 March 2021: profit before tax of £72m). The increase in statutory profit is largely reflective of a significant increase in operating income and a reduction in operating and administrative expenses. The Group continues to expect that the difference between underlying and statutory profit will reduce over time as we deliver our strategy and adjusting items reduce.

 

Key performance indicators⁽¹⁾

 

				6 months to	6 months to		12 months to
				31 Mar 2022	31 Mar 2021	Change	30 Sep 2021(2)	Change
Profitability:
Statutory RoTE				9.1%	2.2%	6.9%pts	10.2%	(1.1)%pts
Statutory CIR				60%	84%	(24)%pts	81%	(21)%pts
Statutory EPS				13.7p	2.8p	10.9p	27.3p	(13.6)p
(1)	For a definition of each of the KPIs, refer to 'Measuring financial performance - glossary' on pages 322 to 323 of the Group's 2021 Annual Report and Accounts. The KPIs include statutory, regulatory and alternative performance measures. Where applicable certain KPIs are calculated on an annualised basis for the periods to 31 March.
(2)	Profitability KPIs are provided with a full year to 30 September 2021 comparative in line with the statutory income statement presentation in the financial statements and as previously reported in the Group's 2021 Annual Report and Accounts.

 

 

 

 

 

Business and financial review

Reconciliation of statutory to underlying results

The statutory basis presented within this section reflects the Group's results as reported in the financial statements. The underlying basis reflects the Group's financial performance prepared on an underlying basis as presented to the CEO, Executive Leadership Team and Board and exclude certain items that are part of the statutory results. The table below reconciles the statutory results to the underlying results, and full details on the adjusted items to the underlying results are included on page 91.

 

	Statutory results	Restructuring charges	Acquisition accounting unwinds	Legacy conduct	Other	Underlying basis
6 months to 31 Mar 2022	£m	£m	£m	£m	£m	£m
Net interest income	777	-	5	-	-	782
Non-interest income	67	-	8	-	8	83
Total operating income	844	-	13	-	8	865
Total operating and administrative expenses before impairment losses	(508)	46	1	5	-	(456)
Operating profit before impairment losses	336	46	14	5	8	409
Impairment losses on credit exposures	(21)	-	-	-	-	(21)
Profit on ordinary activities before tax	315	46	14	5	8	388
Financial performance measures
RoTE	9.1%	1.6%	0.5%	0.2%	0.3%	11.7%
CIR	60.2%	(4.7)%	(1.4)%	(0.5)%	(0.9)%	52.7%
Basic EPS	13.7p	2.5p	0.7p	0.3p	0.4p	17.6p

 

	Statutory results	Restructuring charges	Acquisition accounting unwinds	Legacy conduct	Other	Underlying basis
6 months to 30 Sep 2021	£m	£m	£m	£m	£m	£m
Net interest income	711	-	24	-	-	735
Non-interest income	83	-	11	-	-	94
Total operating income	794	-	35	-	-	829
Total operating and administrative expenses before impairment losses	(618)	97	6	5	68	(442)
Operating profit before impairment losses	176	97	41	5	68	387
Impairment credit on credit exposures	169	-	-	-	-	169
Profit on ordinary activities before tax	345	97	41	5	68	556
Financial performance measures
RoTE	17.9%	3.6%	1.5%	0.2%	2.5%	25.7%
CIR	77.8%	(11.2)%	(4.8)%	(0.6)%	(7.9)%	53.3%
Basic EPS	24.5p	4.9p	2.1p	0.3p	3.5p	35.3p

 

	Statutory results	Restructuring charges	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%
Basic EPS	2.8p	2.8p	2.7p	4.0p	0.3p	12.6p

 

 

 

 

 

Risk management

Risk Report

 

 

 

Risk overview	22
Credit risk	24
Financial risk	52

 

 

Risk management

Risk overview

 

Effective risk management is critical to realising the Group's strategy of pioneering growth. The safety and soundness of the Group is aligned to Our Purpose and is a fundamental requirement to enable our customers and stakeholders to be 'happier about money'.

Risk exists in everything we do, from day-to-day operational activities to strategic change initiatives; without risk we will never achieve our strategic goals but when taking risks, we must ensure we do so in an appropriate way.

A strong risk culture, grounded in the understanding of the Group's risks, is key to enabling our strategy to disrupt the status quo. Our Purpose and Values play a big part in our risk culture by setting out what we want to do and how we want to do it. Personal accountability is at the heart of this and is enabled through the risk management accountability model and formal delegation framework, which supports us in making risk-based decisions and fulfilling our obligations under the Senior Managers and Certification Regime.

The Group identifies and manages risk in line with the Risk Management Framework (RMF). The RMF is the totality of systems, structures, policies, processes and people that identifies, measures, evaluates, controls, mitigates, monitors and reports all internal and external sources of material risk. The RMF aligns to Our Purpose by establishing a single and complete view of the end to end risk lifecycle, in order to protect the interests of all customers and stakeholders. The RMF applies to all areas of the Group and is the responsibility of the Board. It is approved formally on an annual basis and is subject to ongoing review to ensure that it remains fit for purpose.

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

 

Principal risks

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

The Group's principal risks are listed below and remain as disclosed in the 2021 Annual Report and Accounts, with the exception of climate risk, which has been reclassified from a cross-cutting risk to a principal risk due to its increasing relevance and materiality to the Group's risk profile. Operational resilience is now included within Operational and resilience risk.

 

Principal risks	Definitions
Credit risk	The risk that a borrower or counterparty fails to pay the interest or capital due on a loan or other financial instrument. Credit risk manifests in the financial instruments and products that the Group offers and in which it invests and can arise in respect of both on- and off-balance sheet exposures.
Financial risk	Financial risk includes capital risk, funding risk, liquidity risk, market risk and pension risk, all of which have the ability to impact the financial performance of the Group, if managed improperly.
Model risk	The potential for adverse consequences from decisions based on incorrect or misused model outputs and reports.
Regulatory and compliance risk	The risk of failing to comply with relevant laws and regulation, failing to implement new regulatory requirements, or not keeping the regulators informed of relevant issues or responding effectively to regulatory requests, leading to regulatory sanction.
Conduct risk	The risk of undertaking business in a way that is contrary to the interests of customers, resulting in customer harm, regulatory censure, redress costs and reputational damage.
Operational and resilience risk	The risk of loss or customer harm resulting from inadequate or failed internal processes, people and systems or from external events, incorporating the inability to maintain critical services, recover quickly and learn from unexpected/adverse events.
Technology risk	The risk of loss or customer harm resulting from inadequate or failed information technology processes. Technology risk includes cyber security, IT resilience, information security, data risk and payment risk.
Financial crime and fraud risk	The risk that products and services will be used to facilitate financial crime, resulting in harm to customers, the Group, or third parties. This includes money laundering, counter terrorist financing, sanctions, fraud and bribery and corruption.
Strategic and enterprise risk	The risk of significant loss of earnings or damage from decisions or actions that impact the long-term interests of the Group's stakeholders or from an inability to adapt to external developments, including potential execution risk as a result of transformation activity.
People risk	The risk of not having sufficiently skilled and motivated colleagues, who are clear on their responsibilities and accountabilities and behave in an ethical way.
Climate risk	The risk of exposure to physical and transition risks arising from climate change.

 

Further detail on the Group's principal risks and how they are managed is available in the 2021 Annual Report and Accounts. 
 

Risk management

Risk overview

 

Emerging risks

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

The emerging risk classifications reported in the Group's 2021 Annual Report and Accounts have been retained. In addition, a new emerging risk, New Digital Asset Classes, has been included. Risk summaries have been refreshed since the year-end disclosure, with important developments and areas most relevant to the Group's strategy shown. 

 

Emerging risks	Trend	Description
External emerging risks
Political and economic risk	▲	Geopolitical tensions, including the war in Ukraine, are creating volatility within domestic and global markets, leading to wide ranging impacts affecting inflation, global trade and consumer confidence. These risks in aggregate, alongside the substantial increase in the cost of living in the UK, could impact customer resilience and consequently debt affordability. Uncertainty remains over the ability for economies and society to adapt to future variants of existing viruses or new strains. An increase in restrictions could pose a range of social, economic and technological risks.
Regulatory change	►	The Group remains subject to high levels of oversight and a complex programme of regulatory change from a number of different regulatory bodies. The regulatory landscape continues to evolve, needing ongoing responses to the emerging prudential and conduct driven developments and delivery of associated implementation requirements.
ESG risk	▲	Previously positioned solely around climate risk, this broader ESG risk acknowledges the uncertainty around the exact nature and impact of climate change on the Group's strategy, performance and operating model, as well as capturing the increased focus on how companies report the impact of their activities on the environment and on the social challenges to which company business models must respond.
Third-party risk	►	The Group's accelerated digitisation strategy could lead to complex and significant dependencies on third party services, requiring effective assessment and management of the levels of reliance that will be placed on these suppliers.
Internal emerging risks
Data stewardship	►	The Group's accelerated digitisation strategy, combined with changing regulatory requirements and technological advancements such as Cloud solutions, places increasing importance on the effective and ethical use of data.
Resilience risk	►	The rapid pace of technological change, coupled with changing customer requirements, creates increasing demand on systems resilience and our people. This could be heightened by the Group's accelerated digital strategy given the volume and pace of change required.
Changing skill requirements	▲	Against the backdrop of the Group's digitisation strategy, challenges remain in respect to recruiting talent, with skill shortages affecting a number of areas and uncertainty over future talent attraction. The Group has implemented its a Life More Virgin Model to help support colleagues and to strengthen our proposition in the market.
New digital asset classes	►	There is a risk of industry transformation due to digital asset and transaction innovation, which generates competition risk and uncertainty as to the future digital customer proposition and market landscape. The Group horizon scans external developments in the financial technology landscape to mitigate risks and to identify strategic opportunities.

 

Further detail on the Group's emerging risks and how they are managed is available in the 2021 Annual Report and Accounts. 

 

 

 

Risk management

Credit risk

 

Section	Page	Tables	Page
Credit risk overview	25
Managing credit risk within our asset portfolios	25
Risk appetite	25
Measurement	25
Mitigation	26
Monitoring	26
Forbearance	26
Measuring credit risk within our asset portfolios	27
Individually assessed	27
Collectively assessed	27
Group credit risk exposures	28	Maximum exposure to credit risk on financial assets, contingent liabilities and credit-related commitments	28
Key credit metrics	29	Key credit metrics	29
		Gross loans and advances ECL and coverage	30
		Stage 2 balances	31
		Credit risk exposure, by internal probability of default (PD) rating, by IFRS 9 stage allocation	32
		Movement in gross balances and impairment loss allowance	33
Mortgage credit performance	34	Breakdown of mortgage portfolio	34
Collateral	35	Average LTV of mortgage portfolio by staging	35
Forbearance	36	Forbearance	36
IFRS 9 staging	37	IFRS 9 staging	37
Unsecured credit performance	38	Breakdown of unsecured credit portfolio	38
Forbearance	39	Forbearance	39
IFRS 9 staging	40	IFRS 9 staging	40
Business credit performance	41	Breakdown of business credit portfolio	41
Forbearance	43	Forbearance	43
IFRS 9 staging	44	IFRS 9 staging	44
Macroeconomic assumptions, scenarios, and weightings	45
Macroeconomic assumptions	45	Scenarios	45
		Five-year simple averages for the most sensitive inputs of unemployment, GDP and HPI	46
The use of estimates, judgements and sensitivity analysis	47
The use of estimates	47	Economic scenarios	47
		ECL impact of HPI changes	48
		ECL impact of unemployment rate changes	48
The use of judgements	48	Impact of changes to significant increase in credit risk (SICR) thresholds on staging	49
		Impact of PMAs on the Group's ECL allowance and coverage ratio	50
		Macroeconomic assumptions	51

 

 

Risk management

Credit risk

 

Credit risk overview

Credit risk is the risk that a borrower or counterparty fails to pay the interest or capital due on a loan or other financial instrument. Credit risk manifests itself in the financial instruments and products that the Group offers and in which it invests and can arise in respect of both on- and off-balance sheet exposures.

Close monitoring, clear policies and a disciplined approach to credit risk management support the Group's operations and have underpinned its resilience in recently challenging times. While the effects of COVID-19 have eased considerably, we still expect the emergence of some delayed COVID-19 impacts. This, together with the significant inflationary headwinds, have the potential to affect both Retail and Business customers' resilience and debt affordability. The Group is taking a number of steps to support customers through this period of heightened affordability pressure and ensure that the credit risk framework and associated policies remain effective and appropriate. 

 

Managing credit risk within our asset portfolios

 

Risk appetite

The Group controls its levels of credit risk by placing limits on the amount of risk it is willing to take in order to achieve its strategic objectives. This involves a defined set of qualitative and quantitative limits in relation to its credit risk concentrations to one borrower, or group of borrowers, and to geographical, product and industry segments. The management of credit risk within the Group is achieved through ongoing approval and monitoring of individual transactions, timely changes to application scorecards and supporting credit strategies, regular asset quality reviews and the independent oversight of credit decisions and portfolios.

The FY22 RAS continues to recognise some of the delayed impacts of COVID-19 and updates have been made to tighten underwriting criteria and review metric calibration, to reflect the uncertain economic environment and the significant inflationary headwinds and cost of living pressures that are expected to emerge. The RAS is positioned to ensure a controlled approach to portfolio management and new lending origination.

Climate risk is considered an important component of the broader RMF and is reflected through the inclusion of climate-related risk factors within the FY22 RAS. The framework embeds climate risk considerations across various aspects of customer lending and credit risk management practices. Further detail is provided in the TCFD report, on pages 218 to 234 of the Group's 2021 Annual Report and Accounts.

 

Measurement

The Group uses a range of statistical models, supported by both internal and external data, to measure credit risk exposures. These models underpin the internal ratings-based (IRB) capital calculation for the Mortgage and Business portfolios and account management activity for all portfolios.

Further information on the measurement and calculation of ECLs and the Group's approach to the impairment of financial assets can be found on page 27.

The Group's portfolios are subject to regular stress testing, including participation in the BoE SST exercise for the first time during 2021. Stress test scenarios are regularly prepared to assess the adequacy of the Group's impairment provision and the potential impact on RWA and capital. Management will consider how each stress scenario may impact on different components of the credit portfolio. The primary method applied uses migration matrices, modelling the impact of PD rating migrations and changes in portfolio default rates to changes in macroeconomic factors to obtain a stressed position for the credit portfolios. Loss given default (LGD) is stressed based on a range of factors, including property price movements.

As highlighted on page 23, Political and economic risk is an emerging risk for the Group with specific focus on the heightened inflationary pressures prevalent in the UK. This includes the future impact of macroeconomic variables which are used in the calculation of the Group's modelled ECL output. Further detail on the Group's use of macroeconomic variables in the year can be found on pages 45 to 46.

 

 

 

Risk management

Credit risk

 

Mitigation

The Group maintains a dynamic approach to credit management and takes necessary steps if individual issues are identified or if credit performance has, or is expected to, deteriorate due to borrower, economic or sector-specific weaknesses.

The mitigation of credit risk within the Group is achieved through approval and monitoring of individual transactions and asset quality, analysis of the performance of the various credit risk portfolios, and independent oversight of credit portfolios across the Group. Portfolio monitoring techniques cover product, industry, geographic concentrations and delinquency trends.

There is regular analysis of the borrowers' ability to meet their interest and capital repayment obligations with early support and mitigation steps taken where required. Credit risk mitigation is also supported, in part, by obtaining collateral and corporate and personal guarantees where appropriate.

Further details on the Group's mitigating measures can be found on page 154 of the 2021 Annual Report and Accounts.

 

Monitoring

Credit policies and procedures, which are subject to ongoing review, are documented and disseminated in a form that supports the credit operations of the Group.

·  Credit Risk Committee: The Credit Risk Committee ensures that the credit RMF and associated policies remain effective. The Committee has oversight of the quality, composition and concentrations of the credit risk portfolio. It also determines and approves strategies to adjust the portfolio to react to changes in market conditions including the response to COVID-19, customer resilience, debt affordability concerns and climate risk.

·  RAS: Measures are reported monthly to ensure adherence to appetite. Formal annual review is carried out to ensure that the measures accurately reflect the Group's risk appetite, strategy and concerns relative to the wider macro environment. All measures are subject to extensive engagement with the Executive Leadership Team and the Board and are subject to endorsement from executive governance committees prior to Board approval. Regulatory engagement is also scheduled as appropriate.

·  Risk concentration: Concentration of risk is managed by counterparty, product, geographical region and industry sector. In addition, single name exposure limits exist to control exposures to a single counterparty. Concentrations are also considered through the RAS process, focusing particularly on the external environment, outlook and comparison against market benchmarks.

·  Single large exposure excesses: Excesses on exposures under the delegated commitment authority of the Transactional Credit Committee are reported to the committee where the amount of excess is >£250k (senior Business Credit Risk personnel have delegated authority to manage excesses <£250k). All excess reports include a proposed route to remediation. Exposures are also managed in accordance with the large exposure reporting requirements of the CRR.

·  Portfolio Monitoring: Continuous monitoring of the portfolio composition and performance is undertaken through weekly and monthly reviews.

 

Forbearance

Forbearance is considered to exist where customers are experiencing or about to experience financial difficulty and the Group grants a concession on a non-commercial basis. The Group's forbearance policies and definitions comply with the guidance established by the European Banking Authority (EBA) for financial reporting. Forbearance concessions include the granting of more favourable terms and conditions than those provided either at drawdown of the facility, or which would not ordinarily be available to other customers with a similar risk profile. Forbearance parameters are regularly reviewed and refined as necessary to ensure they are consistent with the latest industry guidance and prevailing practice, as well as ensuring that they adequately capture and reflect the most recent customer behaviours and market conditions. The Group also complies with the regulations of the Debt Respite Scheme which was implemented in 2021. The Debt Respite Scheme provides eligible individuals in England and Wales with problem debt the right to legal protection from their creditors, including almost all enforcement action, during a period of 'breathing space'. The Scheme, also referred to as the 'Breathing Space Regulations', does not apply to mortgages, except for arrears which are uncapitalised at the date of the application under the Breathing Space Regulations. In Scotland, eligible individuals are afforded similar legal protection under the Bankruptcy (Scotland) Act 2016.

 

 

 

Risk management

Credit risk

 

Measuring credit risk within our asset portfolios

The Group adopts two approaches to the measurement of credit risk under IFRS 9:

Individually assessed

A charge is taken to the income statement when an individually assessed provision has been recognised or a direct write-off has been applied to an asset balance. These loans will be classified as Stage 3.

Collectively assessed

The Group uses a combination of strategies and statistical models that utilise internal and external data to measure the exposure to credit risk within the portfolios and to calculate the level of ECL. This is supplemented by management judgement in the form of PMAs where necessary.

At each reporting date, the Group assesses financial assets measured at amortised cost, as well as loan commitments and financial guarantees not measured at FVTPL, for impairment. The impairment loss allowance is calculated using an ECL methodology and reflects: (i) an unbiased and probability weighted amount; (ii) the time value of money which discounts the impairment loss; and (iii) reasonable and supportable information that is available without undue cost or effort about past events, current conditions and forecasts of future economic conditions.

The ECL is then calculated as either 12 month (Stage 1) or lifetime (Stage 2 or Stage 3). Stage 2 is applied where there has been a SICR since origination. Stage 3 applies where the loan is credit impaired or is a purchased or originated credit impaired asset (POCI).

ECLs under IFRS 9 use economic forecasts, models and judgement to provide a forward-looking assessment of the required provisions. Adjustments have been made to address known limitations in the Group's models or data; this includes early adoption of a limited number of enhancements to better reflect the Group's assessment of risk. Due to the current economic conditions, government and Group interventions to support customers, reliance has not solely been placed upon modelled outcomes alone. Following detailed analysis, expert credit judgement has been applied, resulting in additional adjustments to ensure the ECL calculation reflects the full set of plausible circumstances including data limitations, customer support measures, and the rapidly changing nature customer behaviours.

Further details on the Group's measurement of credit risk can be found on page 157 of the 2021 Annual Report and Accounts.

Both the accounting and regulatory definitions of default are aligned with default being triggered at 90 DPD, with the exception of the heritage Virgin Money mortgage models which apply a 180 DPD regulatory default trigger under existing approved permissions. The definition of default will be fully aligned to 90 DPD when the regulatory models are updated in line with hybrid model adoption.

The Group aligns the regulatory cure periods for forborne exposures in its IFRS 9 staging criteria at a minimum period of either 24 (performing) or 36 (non-performing) months depending on the forbearance programme utilised. Where exposures are classified as Stages 2 or 3 as a result of not being in a forbearance programme, these can cure when the relevant staging trigger is removed and no longer applicable.

 

 

 

Risk management

Credit risk

 

Group credit risk exposures

The Group is exposed to credit risk across all of its financial asset classes, however its principal exposure to credit risk arises on customer lending balances. Given the relative significance of customer lending exposures to the Group's overall credit risk position, the disclosures that follow are focused principally on customer lending.

The Group is also exposed to credit risk on its other banking and treasury-related activities. It holds £9.5bn of cash and balances with central banks and £0.9bn due from other banks at amortised cost (30 September 2021: £9.7bn), with a further £4.4bn of financial assets at fair value through other comprehensive income (FVOCI). £7.7bn of cash is held with the BoE (30 September 2021: £7.9bn), and balances with other banks and financial assets at FVOCI are primarily held with senior investment grade counterparties. All other banking and treasury related financial assets are classed as Stage 1 with no material ECL provision held.

 

Maximum exposure to credit risk on financial assets, contingent liabilities and credit-related commitments

The following tables show the levels of concentration of the Group's loans and advances, contingent liabilities and credit-related commitments:

31 March 2022	Gross loans and advances to customers	Contingent liabilities and credit-related commitments	Total
	£m	£m	£m
Mortgages	58,130	3,575	61,705
Unsecured	6,151	10,856	17,007
Business	8,136	3,895	12,031
Total	72,417	18,326	90,743
Impairment provisions held on credit exposures(1)	(472)	(7)	(479)
Fair value hedge adjustment	(532)	-	(532)
Maximum credit risk exposure on lending assets	71,413	18,319	89,732
Cash and balances with central banks			9,527
Financial assets at FVOCI			4,423
Due from other banks			858
Other financial assets at fair value			120
Derivative financial assets			189
Maximum credit risk exposure on all financial assets(2)			104,849
30 September 2021
Mortgage	58,441	2,845	61,286
Unsecured	5,770	10,507	16,277
Business	8,340	3,769	12,109
Total	72,551	17,121	89,672
Impairment provisions held on credit exposures(1)	(496)	(8)	(504)
Fair value hedge adjustment	(179)	-	(179)
Maximum credit risk exposure on lending assets	71,876	17,113	88,989
Cash and balances with central banks			9,711
Financial assets at FVOCI			4,352
Due from other banks			800
Other financial assets at fair value			153
Derivative financial assets			140
Maximum credit risk exposure on all financial assets(2)			104,145

(1)  The total ECL provision covers both on and off-balance sheet exposures which are reflected in notes 3.1 and 3.7 respectively. All tables and ratios that follow are calculated using the combined on- and off-balance sheet ECL, which is consistent for all periods reported.

(2)   Unless otherwise noted, the amount that best represents the maximum credit exposure at the reporting date is the carrying value of the financial asset.

 

 

Risk management

Credit risk

 

Key credit metrics

	6 months to 31 Mar 2022 £m	12 months to 30 Sep 2021 £m	6 months to 31 Mar 2021 £m
Impairment charge/(credit) on credit exposures
Mortgage lending	(21)	(44)	(1)
Unsecured lending	69	(32)	27
Business lending	(27)	(55)	12
Total Group impairment charge/(credit)	21	(131)	38
Underlying impairment charge/(credit)(1) to average customer loans (cost of risk)	0.06%	(0.18)%	0.11%

 

		6 months to 31 Mar 2022	12 months to 30 Sep 2021
Key asset quality ratios
% Loans in Stage 2		11.03%	14.09%
% Loans in Stage 3		1.40%	1.32%
Total book coverage(2)		0.66%	0.70%
Stage 2 coverage(2)		3.15%	3.02%
Stage 3 coverage(2)		10.70%	9.59%
(1) (2)	Inclusive of gains/losses on assets held at fair value and elements of fraud loss. This includes the government-backed portfolio of BBLs, Recovery Loan Scheme (RLS), Coronavirus business interruption loan scheme (CBILs) and Coronavirus large business interruption loan scheme (CLBILs).

 

As the world marked the 2^nd anniversary of COVID-19 in this six-month period, the Group has continued to maintain a stable lending book with gross lending to customers of £72.4bn at 31 March 2022 (30 September 2021: £72.6bn). Modest growth in the Unsecured lending book was offset by a reduction in Mortgages and Business lending as consumer spending activity increased with the easing of restrictions, whilst more significant investment remained subdued.

Asset quality was robust in the period; most of the key asset quality ratios remained stable, with only the credit card portfolio showing signs of a shift in quality commensurate with the Group's risk appetite in this market. The overall stability has been influenced by the extended period of customer support measures provided by the government in response to COVID-19 and prudent action taken by customers, combined with the Group's controlled risk appetite and continued focus on continued customer support and responsible lending decisions.

The UK Government's approach for 'living with COVID' offers some economic optimism. However, other significant economic and geopolitical factors have the potential to impact the short to medium term performance of the portfolio, with the most significant of these anticipated to be the wide range of cost of living pressures. The Group continues to support customers through this challenging period.

While the lending portfolio continues to show resilience, the Group impairment provision has nevertheless been determined against a backdrop of global macro-economic uncertainty following the Russian invasion of Ukraine and a UK-wide cost of living crisis. It is likely that certain borrowers will suffer increased stress from the cost of living crisis, as such a temporary affordability stress PMA of £26m has been introduced across the retail portfolios. The Group has also retained certain other PMAs where deemed appropriate, following a full review in the period; further detail on the nature of each PMA is provided in the respective product performance section on the following pages.

Taking all these factors into account, the Group has recorded a total impairment provision of £479m at 31 March 2022, reflecting a small reduction of £25m from £504m at 30 September 2021 and a corresponding reduction in coverage from 70bps to 66bps. Within this, the modelled provision is broadly stable at £300m (30 September 2021: £297m) as the releases in the Mortgage and Business portfolios due to the more favourable macroeconomic inputs have been offset by growth in Unsecured lending. PMAs have reduced in the period to £179m (30 September 2021: £207m). 

The net reduction in provision has been offset by individually assessed impairments of £53m in the period (12 months to 30 September 2021: £79m), resulting in a net charge to the income statement of £21m (12 months to 30 September 2021: net credit of £131m), and an associated cost of risk for the period of 6bps (12 months to 30 September 2021: (18)bps).

 

 

 

Risk management

Credit risk

 

Credit quality of loans and advances

 

The following tables outline the staging profile of the Group's customer lending portfolios which is key to understanding their asset quality.

Gross loans and advances⁽¹⁾ ECL and coverage

31 March 2022			Unsecured
	Mortgages		Cards		Loans and Overdrafts		Combined		Business(2)		Total
	£m	%	£m	%	£m	%	£m	%	£m	%	£m	%
Stage 1	52,217	89.8%	4,484	87.6%	947	91.4%	5,431	88.3%	5,819	71.5%	63,467	87.6%
Stage 2 - total	5,283	9.1%	566	11.1%	75	7.3%	641	10.4%	2,020	24.8%	7,944	11.0%
Stage 2: 0 DPD	4,997	8.6%	530	10.3%	67	6.5%	597	9.6%	1,976	24.2%	7,570	10.4%
Stage 2: < 30 DPD	154	0.3%	18	0.4%	4	0.4%	22	0.4%	14	0.2%	190	0.3%
Stage 2: > 30 DPD	132	0.2%	18	0.4%	4	0.4%	22	0.4%	30	0.4%	184	0.3%
Stage 3(3)	630	1.1%	66	1.3%	13	1.3%	79	1.3%	297	3.7%	1,006	1.4%
	58,130	100.0%	5,116	100.0%	1,035	100.0%	6,151	100.0%	8,136	100.0%	72,417	100.0%
ECLs
Stage 1	7	10.6%	57	28.6%	9	40.9%	66	29.9%	58	30.2%	131	27.3%
Stage 2 - total	44	66.7%	109	54.8%	7	31.8%	116	52.5%	87	45.3%	247	51.6%
Stage 2: 0 DPD	42	63.7%	89	44.8%	4	18.2%	93	42.1%	87	45.3%	222	46.4%
Stage 2: < 30 DPD	1	1.5%	9	4.5%	1	4.5%	10	4.5%	-	-	11	2.3%
Stage 2: > 30 DPD	1	1.5%	11	5.5%	2	9.1%	13	5.9%	-	-	14	2.9%
Stage 3(3)	15	22.7%	33	16.6%	6	27.3%	39	17.6%	47	24.5%	101	21.1%
	66	100.0%	199	100.0%	22	100.0%	221	100.0%	192	100.0%	479	100.0%
Coverage
Stage 1		0.01%		1.39%		1.28%		1.38%		1.09%		0.21%
Stage 2 - total		0.81%		20.88%		12.66%		20.07%		4.64%		3.15%
Stage 2: 0 DPD		0.82%		18.21%		7.86%		17.24%		4.65%		2.95%
Stage 2: < 30 DPD		0.59%		55.83%		34.47%		52.38%		3.91%		6.34%
Stage 2: > 30 DPD		0.97%		62.82%		64.47%		63.09%		1.86%		8.86%
Stage 3(3)		2.40%		53.97%		66.74%		55.83%		19.93%		10.70%
		0.11%		4.22%		2.97%		4.04%		2.58%		0.66%

 

30 September 2021				Unsecured
		Mortgages		Cards		Loans and Overdrafts		Combined		Business(2)		Total
		£m	%	£m	%	£m	%	£m	%	£m	%	£m	%
Stage 1		50,596	86.6%	4,100	88.1%	1,048	94.0%	5,148	89.2%	5,672	68.0%	61,416	84.7%
Stage 2 - total		7,192	12.3%	497	10.7%	56	5.0%	553	9.6%	2,433	29.2%	10,178	14.0%
Stage 2: 0 DPD		6,918	11.9%	466	10.1%	46	4.2%	512	8.9%	2,390	28.7%	9,820	13.5%
Stage 2: < 30 DPD		128	0.2%	16	0.3%	5	0.4%	21	0.4%	25	0.3%	174	0.2%
Stage 2: > 30 DPD		146	0.2%	15	0.3%	5	0.4%	20	0.3%	18	0.2%	184	0.3%
Stage 3(3)		653	1.1%	58	1.2%	11	1.0%	69	1.2%	235	2.8%	957	1.3%
		58,441	100.0%	4,655	100.0%	1,115	100.0%	5,770	100.0%	8,340	100.0%	72,551	100.0%
ECLs
Stage 1		4	4.6%	32	20.0%	9	26.5%	41	21.1%	66	29.6%	111	22.0%
Stage 2 - total		64	73.6%	99	61.9%	19	55.9%	118	60.9%	120	53.8%	302	59.9%
Stage 2: 0 DPD		61	70.2%	82	51.3%	13	38.2%	95	49.0%	120	53.8%	276	54.8%
Stage 2: < 30 DPD		1	1.1%	8	5.0%	2	5.9%	10	5.2%	-	-	11	2.1%
Stage 2: > 30 DPD		2	2.3%	9	5.6%	4	11.8%	13	6.7%	-	-	15	3.0%
Stage 3(3)		19	21.8%	29	18.1%	6	17.6%	35	18.0%	37	16.6%	91	18.1%
		87	100.0%	160	100.0%	34	100.0%	194	100.0%	223	100.0%	504	100.0%
Coverage
Stage 1			0.01%		0.85%		1.13%		0.91%		1.35%		0.18%
Stage 2 - total			0.88%		22.12%		42.01%		23.92%		5.43%		3.02%
Stage 2: 0 DPD			0.87%		19.51%		33.66%		20.64%		5.48%		2.84%
Stage 2: < 30 DPD			0.85%		58.36%		52.88%		57.27%		1.51%		6.90%
Stage 2: > 30 DPD			1.36%		64.46%		99.65%		73.48%		2.85%		8.99%
Stage 3(3)			2.81%		54.13%		64.02%		55.65%		17.31%		9.59%
			0.15%		3.79%		3.86%		3.80%		3.06%		0.70%
(1)	Excludes loans designated at fair value through profit or loss (FVTPL), balances due from customers on acceptances, accrued interest and deferred and unamortised fee income.
(2)	Business and total coverage ratio excludes the guaranteed element of government-backed loans.
(3)	Stage 3 includes POCI for gross loans and advances of £63m for Mortgages and £1m for Unsecured (30 September 2021: £67m and £2m respectively); and ECL of (£1m) for Mortgages and (£2m) for Unsecured (30 September 2021: £Nil and (£2m) respectively). Nil for business in both periods.

 

Risk management

Credit risk

 

Credit quality of loans and advances (continued)

 

Stage 2 balances

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

31 March 2022			Unsecured
	Mortgages		Cards		Loans & Overdrafts		Combined		Business		Total
	£m	%	£m	%	£m	%	£m	%	£m	%	£m	%
PD deterioration	4,243	80%	341	60%	15	20%	356	56%	1,162	58%	5,761	73%
Forbearance	151	3%	8	1%	56	75%	64	10%	255	13%	470	6%
AFD or Watch List(1)	7	0%	-	-	-	-	-	-	573	28%	580	7%
> 30 DPD	132	2%	18	3%	4	5%	22	3%	30	1%	184	2%
Other(2)	750	15%	199	36%	-	-	199	31%	-	-	949	12%
	5,283	100%	566	100%	75	100%	641	100%	2,020	100%	7,944	100%
ECLs
PD deterioration	27	61%	55	50%	3	42%	58	51%	40	46%	125	51%
Forbearance	7	16%	2	2%	2	29%	4	3%	17	20%	28	11%
AFD or Watch List(1)	-	-	-	-	-	-	-	-	30	34%	30	12%
> 30 DPD	1	2%	11	10%	2	29%	13	11%	-	-	14	6%
Other(2)	9	21%	41	38%	-	-	41	35%	-	-	50	20%
	44	100%	109	100%	7	100%	116	100%	87	100%	247	100%

 

30 September 2021			Unsecured
	Mortgages		Cards		Loans & Overdrafts		Combined		Business		Total
	£m	%	£m	%	£m	%	£m	%	£m	%	£m	%
PD deterioration	6,100	85%	300	60%	48	86%	348	63%	1,445	59%	7,893	78%
Forbearance	176	2%	11	2%	3	5%	14	3%	374	15%	564	6%
AFD or Watch List(1)	11	-	-	-	-	-	-	-	584	24%	595	6%
> 30 DPD	146	2%	15	3%	5	9%	20	4%	18	1%	184	2%
Other(2)	759	11%	171	35%	-	-	171	30%	12	1%	942	8%
	7,192	100%	497	100%	56	100%	553	100%	2,433	100%	10,178	100%
ECLs
PD deterioration	43	67%	51	52%	14	74%	65	55%	52	43%	160	53%
Forbearance	4	6%	2	2%	1	5%	3	3%	24	20%	31	10%
AFD or Watch List(1)	-	-	-	-	-	-	-	-	32	27%	32	11%
> 30 DPD	2	3%	9	9%	4	21%	13	11%	-	-	15	5%
Other(2)	15	24%	37	37%	-	-	37	31%	12	10%	64	21%
	64	100%	99	100%	19	100%	118	100%	120	100%	302	100%
(1)	Approaching Financial Difficulty (AFD) and Watch markers are early warning indicators of Business customers who may be approaching financial difficulties. If these indicators are not reversed, they may lead to a requirement for more proactive management by the Group.
(2)	Other includes high indebtedness, county court judgement and previous arrears, as well as a number of smaller value drivers.

 

 

Risk management

Credit risk

 

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

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

		Gross carrying value
		Stage 1		Stage 2		Stage 3(1)		Total
31 March 2022		£m	%	£m	%	£m	%	£m	%
Mortgages	PD range
Strong	0 - 0.74	48,626	93%	3,582	68%	-	-	52,208	90%
Good	0.75 - 2.49	3,292	6%	1,004	19%	-	-	4,296	7%
Satisfactory	2.50 - 99.99	299	1%	697	13%	-	-	996	2%
Default	100	-	-	-	-	630	100%	630	1%
Total		52,217	100%	5,283	100%	630	100%	58,130	100%
Unsecured
Strong	0 - 2.49	4,937	91%	112	18%	-	-	5,049	82%
Good	2.50 - 9.99	486	9%	348	54%	-	-	834	14%
Satisfactory	10.00 - 99.99	8	-	181	28%	-	-	189	3%
Default	100	-	-	-	-	79	100%	79	1%
Total		5,431	100%	641	100%	79	100%	6,151	100%
Business
Strong	0 - 0.74	4,616	79%	1,010	50%	-	-	5,626	69%
Good	0.75 - 9.99	1,203	21%	947	47%	-	-	2,150	26%
Satisfactory	10.00 - 99.99	-	-	63	3%	-	-	63	1%
Default	100	-	-	-	-	297	100%	297	4%
Total		5,819	100%	2,020	100%	297	100%	8,136	100%

 

			Gross carrying value
			Stage 1		Stage 2		Stage 3(1)		Total
30 September 2021			£m	%	£m	%	£m	%	£m	%
Mortgages		PD range
Strong		0 - 0.74	46,984	93%	4,555	63%	-	-	51,539	88%
Good		0.75 - 2.49	3,313	6%	1,888	27%	-	-	5,201	9%
Satisfactory		2.50 - 99.99	299	1%	749	10%	-	-	1,048	2%
Default		100	-	-	-	-	653	100%	653	1%
Total			50,596	100%	7,192	100%	653	100%	58,441	100%
Unsecured
Strong		0 - 2.49	4,730	92%	85	15%	-	-	4,815	83%
Good		2.50 - 9.99	411	8%	325	59%	-	-	736	13%
Satisfactory		10.00 - 99.99	7	-	143	26%	-	-	150	3%
Default		100	-	-	-	-	69	100%	69	1%
Total			5,148	100%	553	100%	69	100%	5,770	100%
Business
Strong		0 - 0.74	3,298	58%	505	21%	-	-	3,803	46%
Good		0.75 - 9.99	2,374	42%	1,823	75%	-	-	4,197	50%
Satisfactory		10.00 - 99.99	-	-	105	4%	-	-	105	1%
Default		100	-	-	-	-	235	100%	235	3%
Total			5,672	100%	2,433	100%	235	100%	8,340	100%
(1)	Stage 3 includes POCI of £63m for Mortgages and £1m for Unsecured (30 September 2021: £67m and £2m respectively). Nil for Business in both periods.

 

 

 

Risk management

Credit risk

 

Movement in gross lending balances and impairment loss allowance

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

31 March 2022	Stage 1		Stage 2		Stage 3(1)		Total gross loans £m	Total provisions £m
	Gross loans £m	ecl £m	Gross loans £m	ecl £m	Gross loans £m	ecl £m
Opening balance at 1 October 2021	61,416	111	10,178	302	957	91	72,551	504
Transfers from Stage 1 to Stage 2	(4,614)	(17)	4,587	142	-	-	(27)	125
Transfers from Stage 2 to Stage 1	5,287	12	(5,316)	(79)	-	-	(29)	(67)
Transfers to Stage 3	(48)	-	(286)	(43)	332	49	(2)	6
Transfers from Stage 3	24	-	66	5	(91)	(6)	(1)	(1)
Changes to model methodology	-	-	-	-	-	-	-	-
New assets originated or purchased(2)	10,741	114	719	85	113	21	11,573	220
Repayments and other movements(3)	(1,129)	4	(284)	(51)	(43)	(5)	(1,456)	(52)
Repaid or derecognised	(8,210)	(93)	(1,720)	(114)	(200)	(55)	(10,130)	(262)
Write-offs	-	-	-	-	(62)	(62)	(62)	(62)
Cash recoveries	-	-	-	-	-	15	-	15
Individually assessed impairment charge	-	-	-	-	-	53	-	53
Closing balance at 31 March 2022	63,467	131	7,944	247	1,006	101	72,417	479

 

 

30 September 2021		Stage 1		Stage 2		Stage 3(1)		Total gross loans £m	Total provisions £m
		Gross loans £m	ecl £m	Gross loans £m	ecl £m	Gross loans £m	ecl £m
Opening balance at 1 October 2020		59,219	136	12,844	465	862	134	72,925	735
Transfers from Stage 1 to Stage 2		(11,131)	(62)	11,076	389	-	-	(55)	327
Transfers from Stage 2 to Stage 1		10,397	58	(10,484)	(284)	-	-	(87)	(226)
Transfers to Stage 3		(115)	(1)	(623)	(91)	734	108	(4)	16
Transfers from Stage 3		33	-	217	23	(253)	(25)	(3)	(2)
Changes to model methodology		-	-	-	-	-	-	-	-
New assets originated or purchased(2)		19,276	206	1,621	158	132	22	21,029	386
Repayments and other movements(3)		(2,955)	(59)	(933)	(140)	(16)	(72)	(3,904)	(271)
Repaid or derecognised		(13,308)	(167)	(3,540)	(218)	(376)	(55)	(17,224)	(440)
Write-offs		-	-	-	-	(126)	(126)	(126)	(126)
Cash recoveries		-	-	-	-	-	26	-	26
Individually assessed impairment charge		-	-	-	-	-	79	-	79
Closing balance at 30 September 2021		61,416	111	10,178	302	957	91	72,551	504
(1)	Stage 3 includes POCI for gross loans and advances of £63m for Mortgages and £1m for Unsecured (30 September 2021: £67m and £2m respectively), and ECL of (£1m) for Mortgages and (£2m) for Unsecured (30 September 2021: £Nil and (£2m) respectively). Nil for Business in both periods.
(2)	Includes assets where the term has ended, and a new facility has been provided.
(3)	'Repayments' comprises payments made on customer lending which are not yet fully paid at the reporting date and the customer arrangement remains live at that date. 'Repaid' refers to payments made on customer lending which is either fully repaid or derecognised by the reporting date and the customer arrangement is therefore closed at that date.

In addition to the above on-balance sheet position, the Group also has £18,326m of loan commitments and financial guarantee contracts (30 September 2021: £17,121m) of which £17,067m (93.1%) are held under Stage 1, £1,222m in Stage 2 and £37m in Stage 3 (30 September 2021: £16,001m (93.5%) held under Stage 1, £1,090m in Stage 2 and £30m in Stage 3). ECLs of £7m (30 September 2021: £8m) are included in the table above, of which £1m (30 September 2021: £2m) is held under Stage 1 and £6m (30 September 2021: £6m) under Stage 2.

The overall improvement in staging evidenced in a shift from Stage 2 to Stage 1 in the period is driven by a variety of factors at portfolio levels, with further detail provided in the following portfolio performance pages. Customer repayment activity remains strong as customers deleverage as much as possible. Low levels of default are evident across the portfolio.

The contractual amount outstanding on loans and advances that were written off during the reporting period or still subject to enforcement activity was £4.2m (30 September 2021: £2.6m). The Group has not purchased any lending assets in the year (30 September 2021: none). Further information on staging profile is provided at a portfolio level in the respective portfolio performance section on the following pages.

 

Risk management

Credit risk

 

Mortgage credit performance

 

The table below presents key information which is important for understanding the asset quality of the Group's Mortgage portfolio and should be read in conjunction with the supplementary data presented in the following pages of this section.

 

Breakdown of Mortgage portfolio

	Gross lending	Modelled ECL	PMA	Total ECL	Net lending	Coverage	Average LTV
31 March 2022	£m	£m	£m	£m	£m	%	%
Residential - capital repayment	35,005	14	10	24	34,981	0.06%	56.1%
Residential - interest only	8,296	4	1	5	8,291	0.07%	46.6%
Buy-to-let (BTL)	14,829	6	31	37	14,792	0.24%	54.4%
Total Mortgage portfolio	58,130	24	42	66	58,064	0.11%	54.4%
30 September 2021
Residential - capital repayment	35,192	19	21	40	35,152	0.10%	57.2%
Residential - interest only	8,341	6	2	8	8,333	0.10%	47.2%
BTL	14,908	8	31	39	14,869	0.24%	54.8%
Total Mortgage portfolio	58,441	33	54	87	58,354	0.15%	55.3%

 

Mortgage lending reduced in the period to £58.1bn (30 September 2021: £58.4bn) as the Group continued to prioritise margin in an increasingly competitive environment.

The portfolio continues to evidence strong underlying credit performance with 90% of loans held in Stage 1 (30 September 2021: 87%). During the period the volume and value of loans in forbearance has reduced to 4,771 / £662m from 6,743/£830m, this followed the completion of the probation period for some loans and a return to fully performing status. The relative stability in the book and low LTV mix of the portfolio mirrors conditions in the UK housing market, which continues to perform well following the easing of government restrictions applied during the COVID-19 pandemic. The weighted average LTV remains low at 54.4% (30 September 2021: 55.3%).  Further detail on LTV bandings and forbearance measures is provided on the following pages.

The stability in the Mortgage portfolio metrics together with the improvement in the applicable economic metrics, such as house prices, have contributed to a release of £9m in the modelled ECL, taking the provision to £24m at 31 March 2022 (from £33m at 30 September 2021). Total PMAs have similarly reduced in the period, as detailed below, from £54m at 30 September 2021 to £42m at 31 March 2022. The total Mortgage portfolio impairment provision therefore stands at £66m at 31 March 2022, down from £87m at 30 September 2021.

The Group has maintained PMA's for the Mortgage portfolio to address the ongoing heightened uncertainty over anticipated future default rates across the portfolio. The most significant of these is the PMA on the BTL portfolio which has held broadly stable at £29m (30 September 2021: £28m) and reflects that the Group continues to take a cautious approach on this component of the loan book. A PMA for payment holidays, which was introduced in 2020 at the outset of the COVID-19 pandemic, has continued to unwind as customers have successfully exited payment holiday arrangements and returned to normal repayment patterns; this PMA is now £8m at 31 March 2022 (30 September 2021: £22m). In the current environment, with high inflation and rising fuel costs, the Group considers that there is likely to be a group of borrowers who will suffer increased stress from the heightened cost of living pressure; a £3m temporary affordability stress PMA has been introduced in response to this. Other small PMAs totalling £2m (30 September 2021: £4m) have also been retained.

The release of modelled provisions and previously applied PMAs is the primary driver of the impairment credit in the income statement of £21m (12 months to 30 September 2021: credit of £44m) and associated cost of risk of (7)bps for the period (12 months to 30 September 2021: (7)bps). The total book coverage has reduced to 11bps but remains substantially higher than the pre-pandemic level of 7bps.

 

 

 

Risk management

Credit risk

 

Mortgage credit performance (continued)

 

Collateral

The quality of the Group's Mortgage portfolio can be considered in terms of the average LTV of the portfolio and the staging of the portfolio, as set out in the following tables:

 

Average LTV of Mortgage portfolio by staging

31 March 2022		Stage 1			Stage 2			Stage 3(2)			Total
LTV(1)		Loans £m	%	ECL £m	Loans £m	%	ECL £m	Loans £m	%	ECL £m	Loans £m	%	ECL £m
Less than 50%		20,451	39%	2	2,186	42%	6	282	44%	2	22,919	40%	10
50% to 75%		25,753	49%	3	2,700	51%	26	258	41%	3	28,711	50%	32
76% to 80%		3,450	7%	1	262	5%	3	37	6%	1	3,749	6%	5
81% to 85%		1,843	4%	1	111	2%	2	16	3%	1	1,970	3%	4
86% to 90%		523	1%	-	14	-	-	10	2%	1	547	1%	1
91% to 95%		151	-	-	2	-	1	8	1%	-	161	-	1
96% to 100%		11	-	-	3	-	-	4	1%	-	18	-	-
Greater than 100%		35	-	-	5	-	6	15	2%	7	55	-	13
		52,217	100%	7	5,283	100%	44	630	100%	15	58,130	100%	66

 

30 September 2021		Stage 1			Stage 2			Stage 3(2)			Total
LTV(1)		Loans £m	%	ECL £m	Loans £m	%	ECL £m	Loans £m	%	ECL £m	Loans £m	%	ECL £m
Less than 50%		19,907	39%	1	2,268	32%	6	274	41%	2	22,449	38%	9
50% to 75%		24,383	49%	1	3,648	51%	37	256	39%	3	28,287	49%	41
76% to 80%		3,123	6%	1	729	10%	9	49	8%	1	3,901	7%	11
81% to 85%		2,346	5%	1	426	6%	6	30	5%	1	2,802	5%	8
86% to 90%		715	1%	-	102	1%	3	17	3%	1	834	1%	4
91% to 95%		79	-	-	7	-	-	8	1%	1	94	-	1
96% to 100%		8	-	-	2	-	-	5	1%	-	15	-	-
Greater than 100%		35	-	-	10	-	3	14	2%	10	59	-	13
		50,596	100%	4	7,192	100%	64	653	100%	19	58,441	100%	87
(1)	LTV of the Mortgage portfolio is defined as Mortgage portfolio weighted by balance. The portfolio is indexed using the MIAC Acadametrics indices at a given date.
(2)	Stage 3 includes £63m (30 September 2021: £67m) of POCI gross loans and advances.

 

The Mortgage portfolio remains highly secured with 88.8% of mortgages, by loan value, having an indexed LTV of less than 75% (30 September 2021: 86.8%), and an average portfolio LTV of 54.4% (30 September 2021: 55.3%). New lending has increased the value of loans in stage 1 with an LTV between 91% to 95%. The increase from September 2021 is exacerbated as higher LTV lending was not available during most of the lockdown period.

 

 

 

Risk management

Credit risk

 

Mortgage credit performance (continued)

 

Forbearance

A key indicator of underlying Mortgage portfolio health is the level of loans subject to forbearance measures. Forbearance can occur when a customer experiences longer-term financial difficulty. In such circumstances, the Group considers the customer's individual circumstances, uses judgement in assessing whether SICR, an impairment or default event has occurred, and then applies tailored forbearance measures in order to support the customer in a route to stability. Customers may potentially be subject to more than one forbearance strategy at any one time where this is considered to be the most appropriate course of action.

The table below summarises the level of forbearance in respect of the Group's Mortgage portfolio at each balance sheet date. All balances subject to forbearance are classed as either Stage 2 or Stage 3 for ECL purposes.

	31 March 2022	Total loans and advances subject to forbearance measures			Impairment allowance on loans and advances subject to forbearance measures
		Number of loans	Gross carrying amount £m	% of total portfolio	Impairment allowance £m	Coverage %
Formal arrangements		1,160	137	0.24	5.8	4.26
Temporary arrangements		571	86	0.14	2.7	3.12
Payment arrangement		1,222	128	0.22	0.9	0.67
Payment holiday		281	27	0.05	0.1	0.28
Interest only conversion		1,322	264	0.46	0.9	0.33
Term extension		91	8	0.01	-	0.46
Other		17	2	-	-	0.60
Legal		107	10	0.02	0.2	2.11
Total mortgage forbearance		4,771	662	1.14	10.6	1.60
30 September 2021
Formal arrangements		1,115	133	0.23	4.9	3.66
Temporary arrangements		675	100	0.17	6.8	6.81
Payment arrangement		1,865	176	0.30	2.3	1.30
Payment holiday		1,436	123	0.21	0.5	0.41
Interest only conversion		1,390	273	0.47	1.3	0.47
Term extension		127	12	0.02	0.1	0.57
Other		19	2	0.01	-	0.68
Legal		116	11	0.02	0.3	3.09
Total mortgage forbearance		6,743	830	1.43	16.2	1.95

 

As at 31 March 2022, forbearance totalled £662m (4,771 customers), a decrease from the 30 September 2021 position of £830m (6,743 customers). This represents 1.14% of total mortgage balances (30 September 2021: 1.43%) with the decrease primarily driven by loans exiting the reporting probation period.

When all other avenues of resolution, including forbearance, have been explored, the Group will take steps to repossess and sell underlying collateral. In the 6 months to 31 March 2022, there were 28 repossessions of which 6 were voluntary (2021 Full year: 33 including 13 voluntary). The key driver of the increase was the removal of the possession moratorium, part of the government's measures to support borrowers throughout COVID-19, part way through 2021 rather than a change in policy as the Group remains committed to supporting the customer and place the right outcome for them at the centre of the strategy.

 

 

 

Risk management

Credit risk

 

Mortgage credit performance (continued)

 

IFRS 9 staging

The Group closely monitors the staging profile of the Mortgage portfolio over time which can be indicative of general trends in book health. Movements in the staging profile of the portfolio in the current and prior year are presented in the tables below.

31 March 2022	Stage 1		Stage 2		Stage 3(1)		Total gross loans £m	Total provisions £m
	Gross loans £m	ecl £m	Gross loans £m	ecl £m	Gross loans £m	ecl £m
Opening balance at 1 October 2021	50,596	4	7,192	64	653	19	58,441	87
Transfers from Stage 1 to Stage 2	(3,376)	(1)	3,354	29	-	-	(22)	28
Transfers from Stage 2 to Stage 1	4,643	2	(4,657)	(34)	-	-	(14)	(32)
Transfers to Stage 3	(24)	-	(102)	(3)	125	2	(1)	(1)
Transfers from Stage 3	15	-	52	3	(68)	(2)	(1)	1
Changes to model methodology	-	-	-	-	-	-	-	-
New assets originated or purchased(2)	4,409	-	8	-	1	-	4,418	-
Repayments and other movements(3)	(893)	2	(78)	(9)	(10)	(2)	(981)	(9)
Repaid or derecognised	(3,153)	-	(486)	(6)	(70)	(1)	(3,709)	(7)
Write-offs	-	-	-	-	(1)	(1)	(1)	(1)
Cash recoveries	-	-	-	-	-	-	-	-
Individually assessed impairment charge	-	-	-	-	-	-	-	-
Closing balance at 31 March 2022	52,217	7	5,283	44	630	15	58,130	66

 

 

	Stage 1		Stage 2		Stage 3(1)		Total gross loans £m
30 September 2021	Gross loans £m	ecl £m	Gross loans £m	ecl £m	Gross loans £m	ecl £m		Total provisions £m
Opening balance at 1 October 2020	49,970	14	8,166	95	516	22	58,652	131
Transfers from Stage 1 to Stage 2	(8,172)	(4)	8,140	113	-	-	(32)	109
Transfers from Stage 2 to Stage 1	7,479	5	(7,522)	(101)	-	-	(43)	(96)
Transfers to Stage 3	(64)	-	(367)	(9)	429	7	(2)	(2)
Transfers from Stage 3	24	-	108	13	(137)	(4)	(5)	9
Changes to model methodology	-	-	-	-	-	-	-	-
New assets originated or purchased(2)	9,662	2	76	2	2	-	9,740	4
Repayments and other movements(3)	(2,141)	(11)	(405)	(36)	(38)	(3)	(2,584)	(50)
Repaid or derecognised	(6,162)	(2)	(1,004)	(13)	(118)	(2)	(7,284)	(17)
Write-offs	-	-	-	-	(1)	(1)	(1)	(1)
Cash recoveries	-	-	-	-	-	1	-	1
Individually assessed impairment charge	-	-	-	-	-	(1)	-	(1)
Closing balance at 30 September 2021	50,596	4	7,192	64	653	19	58,441	87
(1) Stage 3 includes POCI for gross loans and advances of £63m (30 September 2021: £67m), and ECL of (£1m) (30 September 2021: £Nil). (2) Includes assets where the term has ended, and a new facility has been provided. (3) 'Repayments' comprises payments made on customer lending which are not yet fully paid at the reporting date and the customer arrangement remains live at that date. 'Repaid' refers to payments made on customer lending which is either fully repaid or derecognised by the reporting date and the customer arrangement is therefore closed at that date.

Despite the economic uncertainty, the Mortgage portfolio continues to evidence strong performance and benefits from relatively positive economic forecasts. This has combined to increase the level of mortgage lending classed as Stage 1 to 89.8% (30 September 2021: 86.6%), with a corresponding decrease of assets in Stage 2 from 12.3% to 9.1%. Of the Stage 2 category, 8.6% is not yet past due at the balance sheet date (30 September 2021: 11.8% not yet past due) but fall into the Stage 2 classification due predominantly to PD deterioration. The proportion of mortgages classified as Stage 3 remains modest at 1.1% (30 September 2021: 1.1%).

These conditions have also contributed to an increase in assets classed as 'Strong' from 88% at 30 September 2021 to 90% at 31 March 2022, with over 97% (30 September 2021: 97%) of the Mortgage portfolio now classed as 'Good' or 'Strong'.

The sustained quality in the internal PD ratings and high quality of collateral underpinning the book are key factors supporting the lower level of provision coverage required.

 

 

Risk management

Credit risk

 

Unsecured credit performance

 

The table below presents key information which is important for understanding the asset quality of the Group's Unsecured lending portfolio and should be read in conjunction with the supplementary data presented in the following pages of this section.

 

Breakdown of Unsecured credit portfolio

	Gross lending	Modelled ECL	PMA	Total ECL	Net lending	Coverage
31 March 2022	£m	£m	£m	£m	£m	%
Credit cards	5,116	163	36	199	4,917	4.22%
Personal loans	1,002	11	8	19	983	2.59%
Overdrafts	33	3	-	3	30	11.96%
Total Unsecured lending portfolio	6,151	177	44	221	5,930	4.04%
30 September 2021
Credit cards	4,655	142	18	160	4,495	3.79%
Personal loans	1,082	14	17	31	1,051	3.57%
Overdrafts	33	3	-	3	30	11.14%
Total Unsecured lending portfolio	5,770	159	35	194	5,576	3.80%

 

Unsecured gross lending balances increased to £6.2bn (30 September 2021: £5.8bn) led by above-market growth in credit card balances.  

The quality of the Unsecured portfolio remains high, with 98.0% of the portfolio in Stage 1 or Stage 2 not past due (30 September 2021: 98.1%), and a modest 1.3% in Stage 3 (30 September 2021: 1.2%). The level of customers in forbearance remains very low at 1.14% of the portfolio at 31 March 2022 (30 September 2021: 1.30%).

There has been an overall increase in the modelled provision to £177m (30 September 2021: £159m), primarily in the Cards portfolio where a number of drivers, such as a widening of risk appetite, an increase in early stage arrears and a return to more normalised customer indebtedness model inputs, combine to more than offset the positive impact of the current macroeconomics. PMAs continue to feature in this portfolio. As with the Mortgage portfolio, a COVID-19 related payment holiday PMA was established at the outset of the pandemic and, similar to Mortgages, has unwound as anticipated to £3m at 31 March 2022 (30 September 2021: £12m). Other PMAs introduced in prior periods to address specific factors not currently incorporated in the models have remained relatively stable at £18m (30 September 2021: £23m). Lastly, a new affordability PMA of £23m (£22m for Cards, £1m for Personal loans) has been introduced in the period to address the short-term  risk  of  customers suffering increased stress from the heightened cost of living pressure in the current environment. The overall PMAs in the unsecured portfolio have therefore increased to £44m at 31 March 2022 (30 September 2021: £35m).

As a result, the total ECL provision at 31 March 2022 is £221m (30 September 2021: £194m), giving rise to an impairment charge in the income statement in the period of £69m (12 months to 30 September 2021: credit of £32m).

The coverage ratio for the whole Unsecured portfolio has increased to 404bps (30 September 2021: 380bps), driven mainly by the increase in coverage for our high-quality credit card portfolio focused on more affluent customers, which has increased from coverage of 379bps at 30 September 2021 to 422bps at 31 March 2022 and reflects a considered shift in risk appetite.

 

 

 

Risk management

Credit risk

 

Unsecured credit performance (continued)

 

Forbearance

The table below summarises the level of forbearance in respect of the Group's Unsecured lending portfolios at each balance sheet date. All balances subject to forbearance are classed as either Stage 2 or Stage 3 for ECL purposes.

		Total loans and advances subject to forbearance measures			Impairment allowance on loans and advances subject to forbearance measures
31 March 2022		Number of loans	Gross carrying amount £m	% of total portfolio	Impairment allowance £m	Coverage %
Credit cards arrangements		14,247	58	1.22%	22.7	39.32%
Loans arrangements		836	5	0.65%	2.1	44.54%
Overdraft arrangement		73	-	0.04%	-	38.52%
Total Unsecured lending forbearance		15,156	63	1.14%	24.8	39.61%
	30 September 2021
	Credit cards arrangements	14,151	60	1.39%	23.9	39.88%
	Loans arrangements	1,174	6	0.78%	3.3	49.61%
	Overdraft arrangement	280	1	2.55%	0.4	51.89%
	Total Unsecured lending forbearance	15,605	67	1.30%	27.6	40.98%

 

The full credit card forbearance portfolio is now reported in line with the EBA financial reporting guidelines and accounts are retained in the reporting for a minimum of 2 years, previously 1 year for some heritage VM accounts, and the prior period shown has been restated to the current methodology. All portfolios are now reported on the EBA financial reporting requirements.

As at 31 March 2022, credit cards forbearance totalled £58m (14,247 accounts), a decrease from the 30 September 2021 position of £60m (14,151 accounts). This represents 1.22% of total credit cards balances (30 September 2021: 1.39%). The level of impairment coverage on forborne loans is stable at 39.3% from 39.9% at 30 September 2021. Limited forbearance is exercised in relation to Personal loans and overdrafts, with a modest reduction to £5m (0.63%) of the loans and overdrafts portfolio from £7m (0.85%) at 30 September 2021.

 

 

Risk management

Credit risk

 

Unsecured credit performance (continued)

 

IFRS 9 staging

The Group closely monitors the staging profile of its Unsecured lending portfolio over time which can be indicative of general trends in book health. Movements in the staging profile of the portfolio in the current and prior year are presented in the tables below:

	Stage 1		Stage 2		Stage 3(1)		Total gross loans £m	Total provisions £m
31 March 2022	Gross loans £m	ecl £m	Gross loans £m	ecl £m	Gross loans £m	ecl £m
Opening balance at 1 October 2021	5,148	41	553	118	69	35	5,770	194
Transfers from Stage 1 to Stage 2	(468)	(10)	468	94	-	-	-	84
Transfers from Stage 2 to Stage 1	232	6	(242)	(31)	-	-	(10)	(25)
Transfers to Stage 3	(9)	-	(57)	(35)	68	42	2	7
Transfers from Stage 3	1	-	1	1	(3)	(3)	(1)	(2)
Changes to model methodology	-	-	-	-	-	-	-	-
New assets originated or purchased(2)	994	12	11	4	6	5	1,011	21
Repayments and other movements(3)	(142)	24	(66)	(26)	(1)	(1)	(209)	(3)
Repaid or derecognised	(325)	(7)	(27)	(9)	(6)	(38)	(358)	(54)
Write-offs	-	-	-	-	(54)	(54)	(54)	(54)
Cash recoveries	-	-	-	-	-	12	-	12
Individually assessed impairment charge	-	-	-	-	-	41	-	41
Closing balance at 31 March 2022	5,431	66	641	116	79	39	6,151	221

 

30 September 2021	Stage 1		Stage 2		Stage 3(1)		Total gross loans £m	Total provisions £m
	Gross loans £m	ecl £m	Gross loans £m	ecl £m	Gross loans £m	ecl £m
Opening balance at 1 October 2020	4,660	70	823	194	67	37	5,550	301
Transfers from Stage 1 to Stage 2	(954)	(32)	951	209	-	-	(3)	177
Transfers from Stage 2 to Stage 1	859	21	(890)	(113)	-	-	(31)	(92)
Transfers to Stage 3	(19)	(1)	(100)	(68)	119	80	-	11
Transfers from Stage 3	2	-	3	2	(5)	(5)	-	(3)
Changes to model methodology	-	-	-	-	-	-	-	-
New assets originated or purchased(2)	1,319	17	38	6	1	-	1,358	23
Repayments and other movements(3)	(493)	(28)	(217)	(98)	15	(52)	(695)	(178)
Repaid or derecognised	(226)	(6)	(55)	(14)	(29)	(25)	(310)	(45)
Write-offs	-	-	-	-	(99)	(99)	(99)	(99)
Cash recoveries	-	-	-	-	-	24	-	24
Individually assessed impairment charge	-	-	-	-	-	75	-	75
Closing balance at 30 September 2021	5,148	41	553	118	69	35	5,770	194
(1) Stage 3 includes POCI for gross loans and advances of £1m (30 September 2021: £2m), and ECL of (£2m) (30 September 2021: (£2m)). (2) Includes assets where the term has ended, and a new facility has been provided. (3) 'Repayments' comprises payments made on customer lending which are not yet fully paid at the reporting date and the customer arrangement remains live at that date. 'Repaid' refers to payments made on customer lending which is either fully repaid or derecognised by the reporting date and the customer arrangement is therefore closed at that date.

The balance of unsecured lending in Stage 2 increased by 0.8% to 10.4% (30 September 2021: 9.6%), driven primarily by a conscious widening of risk appetite, an increase in early stage arrears and a return to more normalised customer indebtedness model inputs from that seen from the cyclical lows during lockdown. This resulted in a corresponding reduction in Stage 1 from 89.1% to 88.2% while Stage 3 remains modest at 1.3% (30 September 2021: 1.2%).

The short-term risk on credit performance attributable to the cost of living crisis has the potential to affect customers currently in Stage 1 and may lead to increased levels of arrears and defaults. The affordability PMA of £23m has been established to mitigate this risk on the book.

 

 

 

 

Risk management

Credit risk

 

Business credit performance

 

The table below presents key information which is important for understanding the asset quality of the Group's Business lending portfolio and should be read in conjunction with the supplementary data presented in the following pages of this section.

 

Breakdown of Business credit portfolio

			Gross lending	Govern-ment(1)	Total gross	Model-led ECL	PMA	Total ECL	Net lending	Cover-age(2)
31 March 2022			£m	£m	£m	£m	£m	£m	£m	%
Agriculture			1,323	72	1,395	6	5	11	1,384	0.80%
Business services			864	305	1,169	25	22	47	1,122	4.65%
Commercial Real Estate			612	10	622	2	1	3	619	0.58%
Government, health and education			1,032	64	1,096	8	11	19	1,077	1.75%
Hospitality			580	92	672	4	6	10	662	1.69%
Manufacturing			589	127	716	22	15	37	679	5.48%
Resources			106	8	114	2	3	5	109	4.34%
Retail and wholesale trade			634	222	856	12	12	24	832	3.41%
Transport and storage			280	72	352	4	3	7	345	2.13%
Other			930	214	1,144	14	15	29	1,115	3.04%
Total Business portfolio			6,950	1,186	8,136	99	93	192	7,944	2.58%
30 September 2021
Agriculture			1,361	80	1,441	7	5	12	1,429	0.89%
Business services			943	337	1,280	21	27	48	1,232	4.82%
Commercial Real Estate			667	13	680	4	3	7	673	1.00%
Government, health and education			1,031	73	1,104	7	10	17	1,087	1.62%
Hospitality			563	105	668	6	7	13	655	2.29%
Manufacturing			556	144	700	22	21	43	657	6.93%
Resources			95	8	103	3	4	7	96	6.85%
Retail and wholesale trade			623	248	871	14	14	28	843	4.13%
Transport and storage			300	80	380	4	4	8	372	2.50%
Other			883	230	1,113	17	23	40	1,073	4.42%
Total Business portfolio			7,022	1,318	8,340	105	118	223	8,117	3.06%
(1)	Government includes all lending provided to business customers under UK Government schemes including Bounce back loan scheme (BBLS), CBILS, CLBILS and RLS. When onboarding, some new borrowers for BBLS loans were coded as business services; a portion of these may be reclassified over time. This excludes £38m (30 September 2021: £Nil) of guarantee claim funds received from British Business Bank (BBB).
(2)	Coverage ratio excludes the guaranteed element of government-backed loan schemes.

 

 

 

Risk management

Credit risk

 

Business credit performance (continued)

 

Gross Business lending reduced to £8.1bn (30 September 2021: £8.3bn) principally driven by reductions in government-guaranteed lending schemes as borrowers continued to repay balances following the expiry of the 1-year interest free period. Excluding the government lending, balances were broadly stable given generally subdued market activity, with signs of growth in Q2 in line with broader economic recovery and improved business confidence. Growth is targeted to sectors and sub sectors where we have well established expertise.

There has been no deterioration in asset quality metrics across the portfolio and, as yet, no significant increase in specific provision recognition. The  lending book continues to be biased away from sectors likely to experience more disruption from higher cost of living such as hospitality and retail, and towards sectors expected to be resilient, such as agriculture and health and social care.  However, there are many external risks which could develop in 2022 including geopolitical, general inflationary pressures, interest rate rises, ongoing supply chain distribution and labour market disruption, in addition to our customers' increased debt burden and fatigue from crisis management.

The pressure on cash flow is expected to be a notable challenge in 2022 compared to 2021 when the positive impact of government and other support provided some breathing space.  Repayments on government support loans, together with deferred HMRC and other creditor payments, are now due, albeit Time to Pay and Pay as You Grow schemes can provide assistance.

The stable economic conditions experienced to date result in an increase in the proportion of loans in Stage 1  from 68.0% at 30 September 2021 to 71.5% at 31 March 2022. Total balances in Stage 1 and Stage 2 not past due is c.£7.8bn representing 95.8% of the portfolio (30 September 2021: £8.1bn representing 96.7% of the portfolio). Of the Stage 2 loans, 95% were rated 'Strong' or 'Good' (30 September 2021: 96%). Stage 3 loans remain modest at 3.7%. Government interventions, including the ongoing loan schemes, continue to result in a reduced requirement for granting of forbearance; low levels were maintained with only 5.33% of the total portfolio being forborne at 31 March 2022 (30 September 2021: 5.82%).

The refreshed macroeconomic scenarios resulted in a small reduction of £6m in modelled provisions to £99m. At 30 September 2021, the Group recognised PMAs for Sector stress (£80m) and PD neutralisation (£34m) together with other minor factors (£4m); each of these PMAs has been reviewed in the current period. While the removal of all practical COVID-19 restrictions is seen as a move away from the downside impact of the pandemic and is a rationale for a reduction in some sector stress, more recent geopolitical events in Ukraine and the widely publicised cost of living crisis in the UK contribute to ongoing uncertainty over the impact that these broader economic conditions could have on UK businesses. As a result, the same sectors have been reviewed and there is only a modest release of £3m to the Sector Stress PMA which is now £77m at 31 March 2022. The PD neutralisation PMA introduced in 2021 has been retained, however the methodology has been updated to be anchored to a pre-COVID PD of 2.01%, resulting in a provision release of £21m and a PMA of £13m at 31 March 2022  The other small PMAs are broadly unchanged at £3m. This results in an overall provision of £192m (30 September 2021: £223m) which has driven an impairment credit in the income statement of £27m in the period (12 months to 30 September 2021: credit of £55m).

Overall, portfolio coverage remains prudent at 258bps (30 September 2021: 306bps), reflecting the high quality of the portfolio and little evidence of deterioration in asset quality to date. A cautious position has been maintained through the targeted approach to PMAs, with coverage over those sectors most susceptible to further economic shocks remaining elevated.
 

Risk management

Credit risk

 

Business credit performance (continued)

 

Forbearance

Forbearance is considered to exist where customers are experiencing or about to experience financial difficulty and the Group grants a concession on a non-commercial basis. The Group reports business forbearance at a customer level and at a value which incorporates all facilities and the related impairment allowance, irrespective of whether each individual facility is subject to forbearance. Authority to grant forbearance measures for business customers is held by the Group's Strategic Business Services unit and is exercised, where appropriate, on the basis of detailed consideration of the customer's financial position and prospects.

Where a customer is part of a larger group, forbearance is exercised and reported across the Group at the individual entity level. Where modification of the terms and conditions of an exposure meeting the criteria for classification as forbearance results in derecognition of loans and advances from the balance sheet and the recognition of a new exposure, the new exposure shall be treated as forborne.

The tables below summarise the total number of arrangements in place and the loan balances and impairment provisions associated with those arrangements. All balances subject to forbearance are classed as either Stage 2 or Stage 3 for ECL purposes.

31 March 2022	Total loans and advances subject to forbearance measures			Impairment allowance on loans and advances subject to forbearance measures
	Number of loans	Gross carrying amount £m	% of total portfolio	Impairment allowance £m	Coverage %
Term extension	175	161	1.88	9.2	5.72
Payment holiday	79	145	1.68	24.3	16.81
Reduction in contracted interest rate	2	1	0.01	-	1.37
Alternative forms of payment	-	-	-	-	-
Debt forgiveness	1	-	-	-	1.60
Refinancing	11	3	0.04	0.3	8.24
Covenant breach/reset/waiver	48	148	1.72	8.5	5.74
Total Business forbearance	316	458	5.33	42.3	9.24

 

30 September 2021
Term extension	188	196	2.27%	10.2	5.19%
Payment holiday	86	130	1.51%	17.6	13.48%
Reduction in contracted interest rate	1	1	0.01%	-	0.02%
Alternative forms of payment	1	13	0.15%	5.6	43.14%
Debt forgiveness	2	4	0.04%	-	0.67%
Refinancing	10	3	0.04%	0.2	7.21%
Covenant breach/reset/waiver	44	155	1.80%	8.2	5.27%
Total Business forbearance	332	502	5.82%	41.8	8.31%

 

Business portfolio forbearance has reduced from £502m (332 customers) at 30 September 2021 to £458m (316 customers) at 31 March 2022. Forbearance remains an important metric, reflecting the volume and value of concessions granted to customers on a non-commercial basis. Changes to forbearance levels reflect the proportion of business customers requiring support on non-standard terms and evidencing financial difficulty. As a percentage of the Business portfolio, forborne balances have reduced to 5.33% (30 September 2021: 5.82%) with impairment coverage slightly increasing to 9.24% (30 September 2021: 8.31%). The majority of forbearance arrangements relate to term extensions allowing customers a longer term to repay their obligations in full than initially contracted.

Customers within the forbearance portfolio have received £31m of COVID-19 related support loans: £5m CLBIL, £16m CBIL, £5m BBL and £5m RLS.

The table includes a portfolio of financial assets at fair value. The gross value of fair value loans subject to forbearance as at 31 March 2022 is £5.3m (30 September 2021: £5.3m), representing 0.06% of the total business portfolio (30 September 2021: 0.06%). The credit risk adjustment on these amounts totalled £0.1m (30 September 2021: £0.1m). Coverage is 2.38% (30 September 2021: 2.32%).

 

 

Risk management

Credit risk

 

Business credit performance (continued)

 

IFRS 9 staging

The Group closely monitors the staging profile of its Business lending portfolio over time which can be indicative of general trends in book health. Movements in the staging profile of the portfolio in the current and prior year are presented in the tables below.

	Stage 1		Stage 2		Stage 3		Total gross loans £m	Total provisions £m
31 March 2022	Gross loans £m	ecl £m	Gross loans £m	ecl £m	Gross loans £m	ecl £m
Opening balance at 1 October 2021	5,672	66	2,433	120	235	37	8,340	223
Transfers from Stage 1 to Stage 2	(770)	(6)	765	19	-	-	(5)	13
Transfers from Stage 2 to Stage 1	412	4	(417)	(14)	-	-	(5)	(10)
Transfers to Stage 3	(15)	-	(127)	(5)	139	5	(3)	-
Transfers from Stage 3	8	-	13	1	(20)	(1)	1	-
Changes to model methodology	-	-	-	-	-	-	-	-
New assets originated or purchased(1)	5,338	102	700	81	106	16	6,144	199
Repayments and other movements(2)	(94)	(22)	(140)	(16)	(32)	(2)	(266)	(40)
Repaid or derecognised	(4,732)	(86)	(1,207)	(99)	(124)	(16)	(6,063)	(201)
Write-offs	-	-	-	-	(7)	(7)	(7)	(7)
Cash recoveries	-	-	-	-	-	3	-	3
Individually assessed impairment charge	-	-	-	-	-	12	-	12
Closing balance at 31 March 2022	5,819	58	2,020	87	297	47	8,136	192

 

30 September 2021	Stage 1		Stage 2		Stage 3		Total gross loans £m	Total provisions £m
	Gross loans £m	ecl £m	Gross loans £m	ecl £m	Gross loans £m	ecl £m
Opening balance at 1 October 2020	4,589	52	3,855	176	279	75	8,723	303
Transfers from Stage 1 to Stage 2	(2,005)	(26)	1,985	67	-	-	(20)	41
Transfers from Stage 2 to Stage 1	2,059	32	(2,072)	(70)	-	-	(13)	(38)
Transfers to Stage 3	(32)	-	(156)	(14)	186	21	(2)	7
Transfers from Stage 3	7	-	106	8	(111)	(16)	2	(8)
Changes to model methodology	-	-	-	-	-	-	-	-
New assets originated or purchased(1)	8,295	187	1,507	150	129	22	9,931	359
Repayments and other movements(2)	(321)	(20)	(311)	(6)	7	(17)	(625)	(43)
Repaid or derecognised	(6,920)	(159)	(2,481)	(191)	(229)	(28)	(9,630)	(378)
Write-offs	-	-	-	-	(26)	(26)	(26)	(26)
Cash recoveries	-	-	-	-	-	1	-	1
Individually assessed impairment charge	-	-	-	-	-	5	-	5
Closing balance at 30 September 2021	5,672	66	2,433	120	235	37	8,340	223
(1) Includes assets where the term has ended, and a new facility has been provided. (2) 'Repayments' comprises payments made on customer lending which are not yet fully paid at the reporting date and the customer arrangement remains live at that date. 'Repaid' refers to payments made on customer lending which is either fully repaid or derecognised by the reporting date and the customer arrangement is therefore closed at that date.

Despite the economic uncertainty, the level of Business lending classed as Stage 1 has remained relatively stable at 71.5% (30 September 2021: 68.0%), with a reduction in Stage 2 from 29.2% at 31 March 2022 to 24.8% at 30 September 2021. The proportion of the portfolio in Stage 2 does remain heightened, reflective of the Group's prudent approach to early deterioration and support measures such as forbearance. As at 31 March 2022, 58% of balances in Stage 2 are associated with a deterioration in PD (30 September 2021: 59%). Business loans in Stage 3 remain modest at 3.7% (30 September 2021: 2.8%).

The PDs for Business lending combine both internal ratings information and forward-looking economic forecasts. The material drivers of the PD and stage migrations in the period are the economic forecasts, rather than internal downgrades or the emergence of arrears or defaults. The proportion of assets classed as 'Strong' has increased to 69% (30 September 2021: 46%), with assets classed as 'Good' correspondingly decreasing to 26% (30 September 2021: 50%). 95% of the business portfolio is categorised as 'Strong' or 'Good' (30 September 2021: 96%).

 

 

Risk management

Credit risk

 

Macroeconomic assumptions, scenarios and weightings

The Group's ECL allowance at 31 March 2022 was £479m (30 September 2021: £504m).

 

Macroeconomic assumptions

The Group engages OE to provide a wide range of future macroeconomic assumptions which are used in the scenarios over the five-year forecast period, reflecting the best estimate of future conditions under each scenario. The Group has identified the following key macroeconomic drivers as the most significant inputs for IFRS 9 modelling purposes: UK GDP growth, inflation, house prices, base rates, and unemployment rates. The external data provided is assessed and reviewed on a quarterly basis to ensure appropriateness and relevance to the ECL calculation, with more frequent updates provided as and when the circumstances require them. Further adjustments supplement the modelled output when it is considered that not all the risks identified in a product segment have been accurately reflected within the models or for other situations where it is not possible to provide a modelled outcome.

As the UK economy continues to recover from the impact of COVID-19, and the effect of the Omicron variant does seem to have been as profound as had been anticipated in Q4 2021, the outlook continues to be more optimistic than it was at this point in 2021 especially with the ending of self-isolation restrictions. Recent bank base rate rises, concerns over energy prices, the increase in national insurance contributions, and the headwinds from higher inflation will all have an impact on household incomes in 2022. The potential impact on the UK economy of the Russian invasion of Ukraine is uncertain at this time. Against this environment, the Group has continued to assess the possible IFRS 9 economic scenarios to select appropriate forecasts and weightings. The selection of scenarios and the appropriate weighting to apply are considered and debated by an internal review panel each quarter with final proposed recommendations for use in the IFRS 9 models made to the Asset and Liability Committee (ALCO) for formal approval. The three scenarios selected, together with the weightings applied, have been updated to reflect the current economic environment and are:

Scenario	31 Mar 2022 (%)	30 Sept 2021 (%)
Upside	10	15
Base	55	50
Downside	35	35

The Group continued to select three scenarios with the largest weighting applied to the base scenario. In the current period, there is a 5% shift in the weightings from the Upside scenario towards the Base scenario, reflecting greater confidence in the Base scenario over the short term as a result of the updated macroeconomic assumptions. The Group are comfortable with the current weighting applied to the Downside scenario and see no compelling reasons why this should be adjusted at this time.

 

Upside (10%)⁽¹⁾

•  GDP increased sharply by 8.1% in the first quarter of 2022 (Q1 2022 v Q1 2021), before slowing down to a c.4.0% increase in each of the remaining quarters in 2022. Overall year-on-year growth in 2022 is forecast at 5.0% with a slight decrease to 4.4% in 2023 before reverting to more modest increases over the remainder of the forecast period.

•  Inflation rises steeply and peaks at 7.8% in Q2 2022 from a low base of 0.6% at Q1 2021. This reverts back to sub 2.0% levels from Q1 2024 for much of the remaining forecast period.

•  BoE base rate rises are anticipated throughout 2022 and are expected to continue through 2023 and into 2024, reaching 2.3% in Q1 2024. Base rate continues at that level for the remainder of the forecast period.  

•  HPI rises modestly in each quarter over the entire forecast period. Overall, HPI sees Q4 v Q4 growth of 9.7% in 2022 declining to 1.7% in 2023 before rising again to between 2.4% and 2.9% over the next three years.

•  Unemployment peaks in Q1 2022, at 4.1%, and drops to 3.5% in Q4 2022. From then, there is no significant movement over the remaining forecast period, reaching 3.7% in Q1 2025 where it remains until the end of 2026.

Base (55%)

•  GDP increases sharply by 8.1% in the first quarter of 2022 (Q1 2022 v Q1 2021) before contracting in Q2 2022, with overall year-on-year growth in 2022 forecast at 3.8%, and modestly falling to 2.6% in 2023. GDP settles over the remaining forecast period at between 1.7% and 1.9%.

•  Inflation peaks at 7.5% in Q2 2022 before scaling back and reverting to under 2% in Q2 2023. This rises slightly and remains at 2% from Q4 2025 for the remaining forecast period.

•  BoE base rate hits 1.2% in Q3 2022 and rise steadily over the forecast period reaching 1.7% in Q3 2025 and remaining there throughout 2026.

•  HPI sees steady rises between Q1 2022 to Q4 2022 before modestly declining from then until Q2 2024 when it rebounds slowly in each quarter after this until the end of the forecast period. Overall, HPI sees Q4 v Q4 year-on-year growth of 5.4% in 2022 which regresses to (14.7%) in 2023 and remains negative until 2026 where it reverts to positive growth of 4.4%.

•  Unemployment peaks at 4.1% in Q1 2022 and drops to 3.5% in Q3 2022. From then, there is no significant movement with unemployment averaging at 4% in 2022 and steadily declining and reaching 3.7% in 2025 and remaining there for 2026.

 

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

Risk management

Credit risk

 

Macroeconomic assumptions (continued)

 

Downside (35%)

•  GDP increases to 8.1% (Q1 2022 v Q1 2021) before turning negative for the three remaining quarters in 2022 to (3.7%) by the end of 2022 (Q4 2022 v Q4 2021) and remains sluggish over the remaining forecast period. The overall year-on-year negative growth of 0.3% in 2022 returns positive in 2024 at 1.2% and increases slightly over the next two years finishing at 1.9% in 2026.

•  Inflation peaks at 6.4% in Q2 2022 before declining and turning negative in Q2 2023 and remains negative for the remainder of 2023. From there, inflation rises steadily each quarter reaching 2.3% in Q3 2025 before falling back again and finishing in Q4 2026 at 1.6%.

•  The BoE base rate reaches 0.8% in Q2 2022 before steadily falling back to 0.3% in Q3 2023 where it is unchanged for the remaining forecast period.  

•  HPI falls steadily and deeply from Q1 2022 to Q1 2025 but then experiences modest increases in each quarter until the end of the forecast period but finishes well below the levels experienced in 2021. Overall, HPI sees a Q4 v Q4 decline of (5.5%) in 2022 worsening to (16.52%) by 2024 and not turning positive until 2026.

•  Unemployment peaks at 6.6% in Q1 2024 and remains at over 6.0% for the remainder of the forecast period. Overall, unemployment averages at 5.6% in 2022 rising to 6.6% by 2024 before falling modestly to finish at 6.3% in 2026.

 

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

31 March 2022	Unemployment %	GDP %	HPI %
Upside	3.7	3.1	3.9
Base	3.8	2.4	2.0
Downside	6.3	0.8	(6.9)
30 September 2021
Upside	3.9	4.6	4.6
Base	4.3	3.8	2.1
Downside	6.5	2.1	(5.8)

 

 

 

Risk management

Credit risk

 

The use of estimates, judgements and sensitivity analysis

 

The following are the main areas where estimates and judgements are applied to the ECL calculation:

 

The use of estimates

Economic scenarios

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

31 March 2022			Probability Weighted(1) £m		Upside £m		Base £m		Downside £m
Mortgages			16		12		13		27
Unsecured of which:			178		174		173		187
Cards			163		161		160		170
Personal loans and overdrafts			15		13		13		17
Business			68		44		52		123
Total			262		230		238		337
(1)	In addition to the probability weighted modelled provision shown in the table, the Group holds £179m relative to PMAs (30 September 2021: £207m) and £39m of individually assessed provision (30 September 2021: £31m).
30 September 2021		Probability Weighted £m		Upside £m		Base £m		Downside £m
Mortgages		24		16		19		37
Unsecured of which:		159		155		155		167
Cards		142		139		139		147
Personal loans and overdrafts		17		16		16		20
Business		83		47		61		127
Total		266		218		235		331

 

One of the criteria for moving exposures between stages is the PD which incorporates macroeconomic factors. As a result, the stage allocation will be different in each scenario and so the probability weighted ECL cannot be recalculated using the scenario ECL provided and the scenario weightings.

Certain asset classes are less sensitive to specific macroeconomic factors, showing lower relative levels of sensitivity. To ensure appropriate levels of ECL, the relative lack of sensitivity is compensated for through the application of PMAs, further detail of which can be found on page 49.

Within each portfolio, the following are the macroeconomic inputs which are more sensitive and therefore more likely to drive the move from Stage 1 to Stage 2 under a stress scenario:

  Mortgages: Unemployment and HPI

  Unsecured: Unemployment

  Business: Unemployment, HPI, GDP and interest rates 

 

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

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

Risk management

Credit risk

 

The use of estimates (continued)

 

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

	31 Mar 2022 £m	30 Sept 2021 £m
Mortgages +10%	(1)	(2)
Business +10%	(2)	(2)
Mortgages -10%	1	3
Business -10%	1	3

 

Unemployment is a key input that affects all of the Group's lending categories and the following table highlights the ECL impact of a one percent change in the unemployment rate:

	31 Mar 2022 £m	30 Sept 2021 £m
Mortgages +1%	1	1
Unsecured +1%	5	4
Business +1%	5	6
Mortgages -1%	-	(1)
Unsecured -1%	(5)	(4)
Business -1%	(3)	(4)

 

Altering the basis of how the changes are reflected would produce different results, with a sharper rise or decline in unemployment having a much more material ECL impact.

While the above sensitivities provide a view of how the ECL would be impacted based on these single changes, such changes would not ordinarily occur in isolation and the economic inputs used are linked within each chosen scenario.

 

The use of judgement

SICR

Judgement is required in determining the point at which a SICR has occurred, as this is the point at which a 12-month ECL is replaced by a lifetime ECL. The Group has developed a series of triggers that indicate where a SICR has occurred when assessing exposures for the risk of default occurring at each reporting date compared to the risk at origination. There is no single factor that influences this decision, rather a combination of different criteria that enables the Group to make an assessment based on the quantitative and qualitative information available. This includes the impact of forward-looking macroeconomic factors but excludes the existence of any collateral implications.

Indicators of a SICR include deterioration of the residual lifetime PD by set thresholds which are unique to each product portfolio, non-default forbearance programmes, and watch list status. The Group adopts the backstop position that a SICR will have taken place when the financial asset reaches 30 DPD.

The Group does not have a set absolute threshold by which the PD would have to increase by in establishing that a SICR has occurred, and has implemented an approach with the required SICR threshold trigger varying on a portfolio and product basis according to the origination PD.

 

 

 

Risk management

Credit risk

 

The use of judgement (continued)

 

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

	31 Mar 2022 £m	30 Sept 2021 £m
A 10% movement in the mortgage portfolio from Stage 1 to Stage 2(1)	+5	+6
A 10% movement in the credit card portfolio from Stage 1 to Stage 2(1)	+76	+69
A 10% movement in the business portfolio from Stage 1 to Stage 2(1)	+13	+13
A PD stress which increases PDs upwards by 20% for all portfolios	+91	+94

(1)   The comparative has been restated in line with current year presentation.

 

Definition of default

The PD of a credit exposure is a key input to the measurement of the ECL allowance. Default under Stage 3 occurs when there is evidence that a customer is experiencing significant financial difficulty which is likely to affect the ability to repay amounts due. The Group utilises the 90 DPD backstop for default purposes.

 

PMAs

At 31 March 2022, £179m of PMAs (30 September 2021: £207m) are included within the total ECL provision of £479m (30 September 2021: £504m).

These are management judgements which impact the ECL provision by increasing the collectively assessed modelled output where not all of the known risks identified in a particular product segment have been accurately reflected within the models and are described in more detail below:

Mortgages: as the impact of the wind-down in payment holidays recedes, a reduced adjustment is held for COVID-19 reasons. The Group continued to monitor the level of ECL held on BTL mortgages in the year due to uncertainty of the extended impact on landlords and that of their tenants. A new PMA is now held to reflect an impact on debt affordability as a result of rising energy prices and other inflationary effects.

Unsecured: as with Mortgages, reduced PMAs for the customer group who used payment holidays are held. This is more than offset with the new PMA for debt affordability and likely customers' reduced disposable incomes. As a result, PMAs rose as a proportion of ECLs for Unsecured lending.

Business: unlike Retail, the effects of the government measures put in place for businesses throughout COVID-19 are still thought to be a material dampening effect on the levels of insolvency and default compared to long-term UK trends, with concerns on how businesses will adapt once the economy fully reopens. The Group considers that certain sectors within its Business portfolio require additional ECL to more adequately reflect the strains observed and expected in those sectors that are not fully captured in the modelled output. This also includes a modest adjustment to address technical model corrections.

 

 

 

 

 

Risk management

Credit risk

 

The use of judgement (continued)

 

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

	Mortgages	Unsecured	Business	Total
31 March 2022	£42m	£44m	£93m	£179m
% of total ECL	64%	20%	49%	37%
Coverage - total	0.11%	4.04%	2.58%	0.66%
Coverage - total ex PMAs	0.04%	3.25%	1.33%	0.42%
30 September 2021	£54m	£35m	£118m	£207m
% of total ECL	62%	18%	53%	41%
Coverage - total	0.15%	3.80%	3.06%	0.70%
Coverage - total ex PMAs	0.06%	3.11%	1.44%	0.41%

 

PMAs are primarily directed towards Stages 1 and 2 and are discussed in more detail in the divisional commentary pages.

The Group assesses and reviews the need for and quantification of PMAs on a quarterly basis, with the CFO recommending the level of PMAs on a divisional basis to the Board Audit Committee twice a year at each external reporting period. The Group has strengthened the governance around PMAs in the year with the Model Risk Oversight and Group Credit Oversight teams reviewing the methodology supporting material PMAs and presenting their findings to the Board Audit Committee.

In the absence of significant events that might impact ECLs going forward, the Group expects the current level of PMAs to materially reduce over the next 18-24 months.

 

 

Risk management

Credit risk

 

Macroeconomic assumptions

Annual macroeconomic assumptions used over the five-year forecast period in the scenarios and their weighted averages are as follows:⁽¹⁾

 

 31 March 2022

Scenario	VMUK weighting	Economic measure(2)	2022 %	2023 %	2024 %	2025 %	2026 %
Upside	10%	Base rate	1.0	1.9	2.3	2.3	2.3
		Unemployment	3.7	3.6	3.6	3.7	3.7
		GDP	5.0	4.4	2.4	2.0	1.7
		Inflation	6.5	3.0	1.2	1.6	2.2
		HPI	9.7	1.7	2.5	2.4	2.9
Base	55%	Base rate	0.9	1.3	1.4	1.6	1.7
		Unemployment	4.0	3.9	3.8	3.7	3.7
		GDP	3.8	2.6	1.9	1.8	1.7
		Inflation	6.2	2.0	1.1	1.8	2.0
		HPI	5.4	(0.9)	0.2	2.0	3.1
Downside	35%	Base rate	0.6	0.3	0.3	0.3	0.3
		Unemployment	5.6	6.5	6.6	6.5	6.3
		GDP	(0.3)	(0.2)	1.2	1.6	1.9
		Inflation	5.0	(0.1)	0.8	2.0	1.5
		HPI	(5.5)	(14.7)	(16.5)	(2.2)	4.4
Weighted average		Base rate	0.8	1.0	1.1	1.2	1.3
		Unemployment	4.5	4.8	4.7	4.7	4.6
		GDP	2.5	1.8	1.7	1.7	1.8
		Inflation	5.8	1.3	1.0	1.9	1.9
		HPI	2.0	(5.5)	(5.4)	0.6	3.6

 

 

 30 September 2021

Scenario	VMUK weighting	Economic measure(2)	2021 %	2022 %	2023 %	2024 %	2025 %
Upside	15%	Base rate	0.2	0.6	1.2	1.5	1.6
		Unemployment	4.3	3.8	3.9	3.8	3.6
		GDP	8.1	8.8	2.8	1.8	1.5
		Inflation	2.4	3.7	2.5	1.6	1.8
		HPI	8.2	0.8	5.2	5.2	3.6
Base	50%	Base rate	0.1	0.1	0.1	0.3	0.5
		Unemployment	4.8	4.6	4.3	4.0	3.9
		GDP	7.3	6.7	2.1	1.5	1.5
		Inflation	2.1	2.7	1.9	1.8	1.8
		HPI	5.0	(1.6)	0.6	2.7	3.9
Downside	35%	Base rate	0.0	(0.5)	(0.5)	(0.5)	(0.3)
		Unemployment	5.6	6.7	6.8	6.8	6.4
		GDP	4.4	2.4	1.1	1.0	1.7
		Inflation	1.5	0.7	0.8	2.2	1.7
		HPI	(2.9)	(15.2)	(12.1)	(3.5)	4.9
Weighted average		Base rate	0.1	0.0	0.1	0.2	0.4
		Unemployment	5.0	5.2	5.1	4.9	4.7
		GDP	6.4	5.5	1.9	1.4	1.6
		Inflation	2.0	2.1	1.6	1.9	1.8
		HPI	2.7	(6.0)	(3.2)	0.9	4.2

(1) Economic assumptions are provided by Oxford Economics and reported on a calendar year basis unless otherwise stated.

(2) The percentages shown for base rate, unemployment and inflation are averages. GDP is the year-on-year movement, with HPI the Q4 v Q4 movement.

 

 

Risk management

Financial risk

 

Section	Page	Tables	Page
Financial risk summary	53
Capital risk	53
Regulatory capital developments	53
Capital resources	54	Regulatory capital	54
		Regulatory capital flow of funds	55
Risk weighted assets	56	Risk weighted assets	56
		RWA movements	56
IFRS 9 transitional arrangements	57	IFRS 9 transitional arrangements	57
Capital requirements	57	Capital requirements	57
Dividend	58
MREL	58	MREL	58
Leverage	59	Leverage ratio	59
Funding and liquidity risk	60
Sources of funding	60	Sources of funding	60
Liquid assets	61	Liquidity coverage ratio	61
		Liquid asset portfolio	61
		Analysis of debt securities in issue by residual maturity	61
External credit ratings	62	External credit ratings	62
Net interest income	62	Net interest income	62
London Interbank Offered Rate (LIBOR) replacement	63	Amounts yet to be transitioned	63

 

 

Risk management

Financial risk

 

Financial risk covers several categories of risk which impact the way in which the Group can support its customers in a safe and sound manner. They include capital risk, funding risk, liquidity risk, market risk and pension risk.

 

Capital risk

Capital is held by the Group to cover inherent risks in a normal and stressed operating environment, to protect unsecured creditors and investors and to support the Group's long-term strategy of pioneering growth. Capital risk is the risk that the Group has or forecasts insufficient capital and other loss-absorbing debt instruments to operate effectively, including meeting minimum regulatory requirements, operating within Board approved risk appetite and supporting its strategic goals.

 

Regulatory capital developments

The regulatory landscape for capital is subject to change, which can lead to uncertainty on eventual outcomes. In order to mitigate this risk, the Group actively monitors emerging regulatory change, assesses the impact and puts plans in place to address.

Impact of COVID-19 on regulatory capital developments

Following the BoE's announcements in 2020 regarding supervisory and prudential policy measures to address the challenges of COVID-19, the requirements relating to compliance with updates to definition of default, mortgage Hybrid PD and LGD were extended and the Group no longer expects the adoption of hybrid mortgage models in FY22.

The Group continues to apply relevant relief measures introduced by regulatory and supervisory bodies to help address and alleviate various COVID-19 driven financial impacts. These include amendments to the CRR introduced by the 'Quick Fix' package in June 2020, which introduced a number of beneficial modifications including changes to IFRS 9 transitional arrangements for capital and the accelerated implementation of revised small or medium-sized enterprises (SME) supporting factors under CRR II.

UK Leverage Ratio Framework

In June 2021 the Financial Policy Committee (FPC) and PRA published consultations (Consultation Paper 14/21) on their proposed changes to the UK leverage ratio framework, with feedback and final policy published in October (Policy Statement 21/21). The changes, effective from 1 January 2022, simplify the framework with the Group being subject to the UK leverage ratio only, rather than the two leverage ratio definitions that currently exist. The Group exceeds the 3.25% leverage ratio requirements.

IRB approach to UK mortgage risk weights

In July 2021, the PRA issued a policy statement in response to a consultation process setting out proposals to introduce certain floors in respect of the IRB approach to UK mortgage risk weights. In response to the feedback the PRA received, including useful quantitative data that enabled the PRA to better gauge the distribution of risk weights across mortgage exposures, the PRA made two changes to the draft policy: (1) it will not introduce the proposed 7% minimum risk weight expectation on individual UK mortgage exposures; and (2) mortgage exposures classified as in default are excluded from the 10% minimum risk weight expectation which took effect in January 2022.

Instead, the PRA will consider the calibration of the incoming PD and LGD parameter floors for mortgages as part of the PRA's Basel 3.1 implementation.

UK implementation of Basel Standards

In July 2021, the PRA published Policy Statement 17/21 which provided feedback to Consultation Paper 5/21 with the same title: 'Implementation of Basel standards'; the subsequent publication of Policy Statement 22/21 in October contained final rules. The policy statements cover a range of areas including: definition of capital; market risk; collective investment undertakings; counterparty credit risk; operational risk; large exposures; LCR; net stable funding ratio; reporting; and disclosure. These standards became effective in the UK from 1 January 2022.

The Group has assessed itself as a 'Large' institution and in accordance with the criteria set out within Article 433a of the final PRA Rulebook Instrument introduced by PS22/21, will make enhanced interim Pillar 3 disclosures for the first time and will begin reporting quarterly Pillar 3 disclosures. The Pillar 3 disclosures at 31 March 2022 is expected to be published at the end of May and will be available at https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/.

Policy Statement 22/21 confirms the PRA's treatment to fully deduct software assets from CET1 capital, applicable from 1 January 2022. This is a reversal of the preferential treatment permitted under the CRR Quick Fix which came into force from December 2020 whereby the CET1 deduction was replaced with a simple approach based on a prudential amortisation of software assets calibrated over a maximum period of three years. The PRA's view is that intangible assets are not sufficiently loss absorbent on a going concern basis to warrant recognition as CET1 capital. The Group has applied the revised treatment required under Policy Statement 22/21 from 1 January 2022.

 

 

 

Risk management

Financial risk

 

Regulatory capital developments (continued)

 

Basel 3.1

The Basel Committee published its final reforms to the Basel III framework in December 2017. The amendments include changes to the standardised approaches to credit and operational risks and the introduction of a new RWA output floor. There are a number of areas within Basel 3.1 subject to national discretion and choice. Taking into account the publicly announced implementation timetables in other major jurisdictions, and the need to provide firms with sufficient time to implement the final policies, the PRA's current intention is to release a Consultation Paper on UK implementation in the fourth quarter of 2022 with the proposal that these reforms will become effective on 1 January 2025. Uncertainties therefore remain for a number of topics and in response the Group has undertaken an assessment across a range of scenarios for potential outcomes to assist with planning. 

Solvency Stress Test

The Group participated in the BoE UK-wide SST for the first time during 2021. Results from the stress tests are used by the FPC to assess the stress severity required to threaten resilience and test the Group's ability to absorb losses and continue to lend. The BoE concluded that "the major UK banks are resilient", including VMUK.

 

Capital resources

The Group's capital position as at 31 March 2022 is summarised below:

 

		31 Mar 2022	30 Sep 2021
Regulatory capital(1)		£m	£m
Statutory total equity		5,568	5,473
CET1 capital: Regulatory adjustments(2)
Other equity instruments		(697)	(915)
Defined benefit pension fund assets		(645)	(551)
Prudent valuation adjustment		(4)	(5)
Intangible assets		(329)	(208)
Goodwill		(11)	(11)
Deferred tax asset relying on future profitability(3)		(241)	(258)
Cash flow hedge reserve		(60)	(10)
AT1 coupon accrual		(14)	(19)
Foreseeable dividend on ordinary shares		(59)	(14)
Excess expected losses		(27)	-
IFRS 9 transitional adjustments		84	134
Total regulatory adjustments to CET1		(2,003)	(1,857)
Total CET1 capital		3,565	3,616
AT1 capital
AT1 capital instruments		697	697
Total AT1 capital		697	697
Total Tier 1 capital		4,262	4,313
Tier 2 capital
Subordinated debt		1,020	1,019
Total Tier 2 capital		1,020	1,019
Total regulatory capital		5,282	5,332
(1)	This table shows the capital position on a CRD IV 'fully loaded' basis and transitional IFRS 9 basis as implemented by the PRA.
(2)	A number of regulatory adjustments to CET1 capital are required under CRD IV regulatory capital rules.
(3)	Comparative includes deferred tax on losses in relation to Virgin Money Unit Trust Managers Limited (UTM) which is proportionately consolidated under prudential rules.

 

 

 

 

Risk management

Financial risk

 

Capital resources (continued)

 

	31 Mar 2022 30CRD IV 2022	30 Sep 2021
Regulatory capital flow of funds(1)	£m	£m
CET1 capital(2)
CET1 capital at 1 October	3,616	3,271
Share capital and share premium	3	2
Retained earnings and other reserves (including special purpose entities)	274	449
Prudent valuation adjustment	1	1
Amendment to software asset deduction rules(3)	(151)	151
Intangible assets	30	118
Deferred tax asset relying on future profitability	17	(107)
Defined benefit pension fund assets	(94)	(81)
AT1 foreseeable distribution	5	2
Foreseeable dividend on ordinary shares	(59)	(14)
Excess expected losses	(27)	-
IFRS 9 transitional adjustments	(50)	(176)
Total CET1 capital	3,565	3,616
AT1 capital
AT1 capital at 1 October	697	915
Less other equity instruments not qualifying as AT1	-	(218)
Total AT1 capital	697	697
Total Tier 1 capital	4,262	4,313
Tier 2 capital
Tier 2 capital at 1 October	1,019	749
Capital instruments issued: subordinated debt	-	298
Capital instruments purchased: subordinated debt	-	(30)
Amortisation of issue costs	1	2
Tier 2 capital at 31 March	1,020	1,019
Total capital	5,282	5,332

 

(1)	Data in the table is reported under CRD IV as implemented by the PRA on a fully loaded basis with IFRS 9 transitional arrangements applied.
(2)	CET1 capital is comprised of shares issued and related share premium, retained earnings and other reserves less specified regulatory adjustments.
(3)	At September 2021 regulatory rules incorporated the amendments introduced by the CRR Quick Fix in December 2020, which applied the CET1 software asset deduction on a prudential amortisation basis over a period of three years. This relief was removed by the PRA in January 2022.

 

The Group's CET1 capital reduced by £51m during the period, primarily due to the removal of the software asset relief in January 2022 which reduced capital resources by £151m. After this one off movement, the main movements arose from increases in retained earnings and other reserves of £274m (driven mainly by statutory profit after tax of £238m), reductions in the intangible assets balance of £30m and in the deferred tax recognised on tax losses carried forward of £17m. Retained earnings and other reserves movements also included an increase in the defined benefit fund pension asset of £94m, which has been deducted from capital resources. The reduction in IFRS 9 provisions recognised in the period together with a tapering of relief reduced the IFRS 9 transitional adjustments by £50m.

In November 2021, £218m of AT1 securities were redeemed in full; as this had already been announced at the year end these were already excluded from the AT1 capital so have had no impact on AT1 capital in the period.

 

 

 

 

 

Risk management

Financial risk

 

Risk weighted assets

		31 March 2022			30 September 2021
Minimum capital requirements		Exposure	RWA	Minimum capital requirement	Exposure	RWA	Minimum capital requirement
		£m	£m	£m	£m	£m	£m
Retail mortgages		61,605	10,023	802	61,146	10,010	801
Business lending		11,629	6,007	481	11,670	6,040	483
Other retail lending		16,934	4,602	368	16,201	4,311	345
Other lending		14,953	234	19	15,467	326	26
Other(1)		590	667	53	765	856	69
Total credit risk RWA		105,711	21,533	1,723	105,249	21,543	1,724
Credit valuation adjustment			61	5		103	8
Operational risk			2,481	198		2,481	198
Counterparty credit risk			109	9		105	8
Total RWA		105,711	24,184	1,935	105,249	24,232	1,938
(1)	The items included in the Other exposure class that attract a capital charge include items in the course of collection, fixed assets, prepayments, other debtors and deferred tax assets that are not deducted.

 

 

RWA movements
	6 months to 31 March 2022					6 months to 30 September 2021
RWA movements	IRB RWA £m	STD RWA £m	Other(2) RWA £m	Total £m	Minimum Capital Required £m	IRB RWA £m	STD RWA £m	Other RWA £m	Total £m	Minimum Capital required £m
Opening RWA	15,699	5,844	2,689	24,232	1,938	15,710	5,581	2,861	24,152	1,932
Asset size	(61)	315	-	254	20	(455)	256	-	(199)	(16)
Asset quality	(460)	(2)	-	(462)	(37)	(133)	32	-	(101)	(8)
Model updates(1)	470	-	-	470	38	577	-	-	577	46
Methodology and policy	-	(173)	(32)	(205)	(16)	-	-	-	-	-
Other	-	(99)	(6)	(105)	(8)	-	(25)	(172)	(197)	(16)
Closing RWA	15,648	5,885	2,651	24,184	1,935	15,699	5,844	2,689	24,232	1,938
(1)	Model updates include the mortgage quarterly PD calibrations.
(2)	'Other' includes operational risk, credit valuation adjustment and counterparty credit risk.

 

RWA stayed relatively stable in the period, reducing by £48m (0.2%) to £24,184m.

Increases in mortgage RWAs is primarily due to quarterly PD re-calibrations which have been largely offset by improvements in the quality of the book following increases to HPI, due to the continued uplift witnessed in market house prices.

In the table above, methodology and policy movement is largely driven by the removal of the £151m RWA uplift in relation to the CRR Quick Fix amendments in respect of intangible assets, which was removed by the PRA in January 2022.

Other standardised RWA movements mainly arose from reductions in cash balances held with other institutions in relation to issued covered bonds, as a direct result of changes in the structure of our covered bond programme.

The updates to IRB and other capital regulations implemented by the PRA from 1 January 2022 have had little to no impact on the RWA position of the group.

 

 

 

Risk management

Financial risk

 

IFRS 9 transitional arrangements

This table shows a comparison of capital resources, requirements and ratios with and without the application of transitional arrangements for IFRS 9:

	31 March 2022 (£m)
Available capital (amounts)	IFRS 9 Transitional basis	IFRS 9 Fully loaded basis
CET1 capital	3,565	3,481
Tier 1 capital	4,262	4,178
Total capital	5,282	5,198
RWA (amounts)
Total RWA	24,184	24,111
Capital ratios
CET1 (as a percentage of risk exposure amount)	14.7%	14.4%
Tier 1 (as a percentage of risk exposure amount)	17.6%	17.3%
Total capital (as a percentage of risk exposure amount)	21.8%	21.6%
Leverage ratio
Leverage ratio total exposure measure	83,509	83,425
UK leverage ratio	5.1%	5.0%

 

Transitional arrangements in CRR mean the regulatory capital impact of ECL is being phased in over time. Following the CRR Quick Fix amendments package, which applied from 27 June 2020, relevant provisions raised from 1 January 2020 through to 2024 have a CET1 add-back percentage of 100% in 2021, reducing to 75% in 2022, 50% in 2023 and 25% in 2024.

At 31 March 2022, £84m of IFRS 9 transitional adjustments (30 September 2021: £134m) have been applied to the Group's capital position in accordance with CRR: £7m of static and £77m of dynamic adjustments (30 September 2021: £10m static and £124m dynamic).

 

Capital requirements

The Group measures the amount of capital it is required to hold by applying CRD IV as implemented in the UK by the PRA and supplemented through additional regulation under the PRA Rulebook. The table below summarises the amount of capital in relation to RWA the Group is currently required to hold, excluding any PRA Buffer.

		As at 31 March 2022
Minimum requirements		CET1	Total capital
Pillar 1(1)		4.5%	8.0%
Pillar 2A		1.7%	3.1%
Total capital requirement		6.2%	11.1%
Capital conservation buffer		2.5%	2.5%
UK countercyclical capital buffer		0.0%	0.0%
Total (excluding PRA buffer)(2)		8.7%	13.6%
(1)	The minimum amount of total capital under Pillar 1 of the regulatory framework is determined as 8% of RWA, of which at least 4.5% of RWA is required to be covered by CET1 capital.
(2)	The Group may be subject to a PRA buffer as set by the PRA but is not permitted to disclose the level of any buffer. A PRA buffer can consist of two components: −  a risk management and governance buffer that is set as a scalar of the Pillar 1 and Pillar 2A requirements; and −  a buffer relating to the results of the BoE's stress tests.

The Group continues to maintain a significant buffer of 6.0% (equivalent to c£1.5bn) over its CRD IV minimum CET1 requirement of 8.7%.

The Group's total capital Pillar 2A requirement has reduced from 3.9% at September 2021 to 3.1% at March 2022 following revisions made by the PRA during the year.

 

 

 

Risk management

Financial risk

 

Capital requirements (continued)

 

The UK countercyclical capital buffer (CCyB) is dependent upon the BoE's view of credit conditions in the economy and will be set between 1% and 2% in a standard risk environment. As part of a package of measures to support the economy from the impact of COVID-19, the FPC announced a reduction in the UK CCyB to 0%. Subsequently in December 2021, the FPC announced the UK CCyB would increase to 1%. The increase to the CCyB has a twelve month implementation period, therefore will take effect at the end of 2022.

Distributable reserves are determined as required by the Companies Act 2006 by reference to a company's individual financial statements. At 31 March 2022, the Company had accumulated distributable reserves of £1,024m (30 September 2021: £792m).

 

Dividend

The Board has recommended an interim dividend for the financial year ending 30 September 2022 of 2.5p per share. The Group will target a 30% full year dividend payout ratio and going forward the interim dividend is expected to represent around 1/3rd of the prior year's total dividend, beginning H1 2023. Dividends will be supplemented by buybacks, subject to ongoing assessment of surplus capital, market conditions and regulatory approval.

 

MREL

Under the Bank Recovery and Resolution Directive the Group is required to hold additional loss-absorbing instruments to support an effective resolution. The MREL establishes a minimum amount of equity and eligible debt to recapitalise the Group. An analysis of the Group's current MREL position is provided below:

		As at
		31 Mar 2022 £m	30 Sep 2021 £m
Total capital resources(1)		5,282	5,332
Eligible senior unsecured securities issued by Virgin Money UK PLC(2)		2,395	2,408
Total MREL resources		7,677	7,740
Risk-weighted assets		24,184	24,232
MREL Ratio		31.7%	31.9%
(1)	This table shows the capital position on a CRD IV 'fully loaded' basis and transitional IFRS 9 basis.
(2)	Excludes instruments with less than one year to maturity.

 

During 2022, the Group is subject to an end-state MREL requirement of 22.2% of RWA, or 24.7% of RWA when including its combined buffer requirements.

The Group's IFRS 9 transitional MREL ratio is 31.7% as at 31 March 2022 (30 September 2021: 31.9%). This represents prudent headroom of 7.0% or c.£1.7bn over the Group's MREL requirement including buffers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk management

Financial risk

 

Leverage

		31 Mar 2022	30 Sep 2021
Leverage ratio		£m	£m
Total Tier 1 capital for the leverage ratio
Total CET1 capital		3,565	3,616
AT1 capital		697	697
Total Tier 1		4,262	4,313
Exposures for the leverage ratio
Total assets		88,609	89,100
Adjustment for off-balance sheet items		3,000	2,884
Adjustment for derivative financial instruments		227	91
Adjustment for securities financing transactions		2,893	2,235
Adjustment for qualifying central bank claims		(9,180)	(9,094)
Other adjustments		(2,040)	(1,801)
UK leverage ratio exposure(1)		83,509	83,415
CRD IV leverage ratio exposure(2)		N/A	84,306
CRD IV leverage ratio(2)		N/A	5.1%
UK leverage ratio(3)		5.1%	5.2%
Average UK leverage ratio exposure(4)		82,695	83,213
Average UK leverage ratio(4)		4.9%	4.7%
(1)	As the UK leverage ratio is now the single leverage ratio exposure measure, the analysis of the CRD IV leverage ratio exposure has been replaced with the UK equivalent for this period and the comparative.
(2)	From 1 January 2022, the CRD IV leverage ratio is no longer applicable to UK banks.
(3)	IFRS 9 transitional capital arrangements have been applied to the leverage ratio calculation.
(4)	The fully loaded average leverage exposure measure is based on the daily average of on-balance sheet items and three month-end average of off-balance sheet items. The average leverage ratio is based on the average of the month end tier 1 capital position.

 

The UK leverage ratio framework is relevant to PRA regulated banks and building societies with consolidated retail deposits equal to or greater than £50bn. The Group exceeds this threshold and accordingly the average UK leverage ratio exposure and average UK leverage ratio are disclosed.

The PRA published its Policy Statement on the UK leverage ratio framework on 8 October 2021.  The Policy Statement confirms that UK banks will be subject to a single UK leverage ratio exposure measure from 1 January 2022 meaning that the CRD IV leverage ratio is no longer applicable to UK banks.

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

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

−      capital: Tier 1 capital defined on a CRD IV fully loaded and IFRS 9 transitional basis; and

−      exposures: total on- and off-balance sheet exposures (subject to credit conversion factors) as defined in the delegated act amending CRR article 429 (Calculation of the Leverage Ratio), which includes deductions applied to Tier 1 capital.

Other regulatory adjustments consist of adjustments that are required under CRD IV to be deducted from Tier 1 capital. The removal of these from the exposure measure ensures consistency is maintained between the capital and exposure components of the ratio.

The Group's UK leverage ratio of 5.1% (30 September 2021: 5.2%) exceeds the UK minimum ratio of 3.25%.

The Group's leverage ratio buffer currently stands at 0%. Following the FPC's announced increase to the CCyB, the leverage ratio buffer will increase to 0.4% from December 2022.

 

 

Risk management

Financial risk

 

Funding and liquidity risk

Funding risk occurs where the Group is unable to raise or maintain funds of sufficient quantity and quality to support the delivery of the business plan or sustain lending commitments. Prudent funding risk management reduces the likelihood of liquidity risks occurring, increases the stability of funding sources, minimises concentration risks and ensures future balance sheet growth is sustainable.

Liquidity risk occurs when the Group is unable to meet its current and future financial obligations as they fall due or at acceptable cost, or when the Group reduces liquidity resources below internal or regulatory stress requirements.

 

Sources of funding

The table below provides an overview of the Group's sources of funding as at 31 March 2022:

		31 Mar 2022		30 Sep 2021
		£m		£m
Total assets		88,609		89,100
Less: Other liabilities(1)		(3,086)		(3,060)
Funding requirement		85,523		86,040
Funded by:
Customer deposits		64,458		66,971
Debt securities in issue		7,908		7,678
Due to other banks		7,589		5,918
of which:
Secured loans	7,209		5,896
Securities sold under agreements to repurchase	350		-
Deposits with other banks	30		22
Equity		5,568		5,473
Total funding		85,523		86,040
(1)   Other liabilities include derivative financial instruments, current and deferred tax liabilities, provisions for liabilities and charges, and other liabilities as per the balance sheet line item.

 

The Group's funding objective is to prudently manage the sources and tenor of funds in order to provide a sound base from which to support sustainable lending growth. At 31 March 2022, the Group had a funding requirement of £85,523m (30 September 2021: £86,040m) with the majority being used to support loans and advances to customers.

Customer deposits

The majority of the Group's funding requirement was met by customer deposits of £64,458m (30 September 2021: £66,971m). Customer deposits are comprised of interest bearing deposits, term deposits and non-interest bearing demand deposits from a range of sources including Unsecured and Business customers. There has been a decrease in customer deposits of £2,513m in the year reflecting careful management, as the Group continued to successfully improve its deposit mix.

Equity

Equity of £5,568m (30 September 2021: £5,473m) was also used to meet the Group's funding requirement. Equity comprises ordinary share capital, retained earnings, other equity investments and a number of other reserves. For full details on equity refer to note 4.1 within the consolidated financial statements.

 

 

Risk management

Financial risk

 

Liquid assets

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

 

Liquidity coverage ratio	31 Mar 2022 £m	30 Sep 2021 £m
Eligible liquidity buffer	10,932	10,996
Net stress outflows	7,863	7,289
Surplus	3,069	3,707
Liquidity coverage ratio	139%	151%

 

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

The volume and quality of the Group's liquid asset portfolio is defined through a series of internal stress tests across a range of time horizons and stress conditions. The liquid asset portfolio is primarily comprised of cash at the BoE, UK Government securities (Gilts) and listed securities (e.g. bonds issued by supra-nationals and AAA-rated covered bonds).

 

		31 Mar 2022	30 Sep 2021	Change	Average at 31 Mar 2022(3)	Average at 30 Sep 2021(3)
Liquid asset portfolio(1)		£m	£m	%	£m	£m
Level 1
Cash and balances with central banks		6,978	7,060	(1.2)	7,323	7,232
UK Government treasury bills and gilts		1,187	771	54.0	892	779
Other debt securities		2,840	3,239	(12.3)	3,172	3,296
Total level 1		11,005	11,070	(0.6)	11,387	11,307
Level 2(2)		23	23	0.0	23	24
Total LCR eligible assets		11,028	11,093	(0.6)	11,410	11,331
(1)	Excludes encumbered assets.
(2)	Includes Level 2A and Level 2B.
(3)	Represents the rolling average balance over the previous 12 months.

 

Analysis of debt securities in issue by residual maturity 

The table below shows the residual maturity of the Group's debt securities in issue:

	3 months or less £m	3 to 12 months £m	1 to 5 years £m	Over 5 years £m	Total at 31 Mar 2022 £m	Total at 30 Sep 2021 £m
Covered bonds	27	-	2,368	-	2,395	1,852
Securitisation	287	1,454	440	-	2,181	2,389
Medium-term notes	19	1	2,329	-	2,349	2,422
Subordinated debt	13	1	969	-	983	1,015
Total debt securities in issue	346	1,456	6,106	-	7,908	7,678
Of which issued by Virgin Money UK PLC	32	2	3,298	-	3,332	3,437

 

 

 

Risk management

Financial risk

 

External credit ratings

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

		Outlook as at	As at
		31 Mar 2022(1)	31 Mar 2022	30 Sep 2021
Virgin Money UK PLC
Moody's		Stable	Baa2	Baa2
Fitch		Stable	BBB+	BBB+
Standard & Poor's		Stable	BBB-	BBB-
Clydesdale Bank PLC
Moody's(2)		Stable	Baa1	Baa1
Fitch		Stable	A-	A-
Standard & Poor's		Stable	A-	A-
(1)	For detailed background on the latest opinion by Standard & Poor's, Fitch and Moody's, please refer to the respective rating agency website.
(2)	Long-term deposit rating.

 

In December 2021, Moody's affirmed the long-term ratings of Virgin Money UK PLC and Clydesdale Bank PLC with an unchanged Stable outlook, citing the Group's low stock of problem loans, good risk-weighted capital and sound funding and liquidity.

In January 2022, Standard & Poor's affirmed the ratings of Virgin Money UK PLC and Clydesdale Bank PLC with an unchanged Stable outlook, citing the Group's solid market position, improving performance and sound capitalisation.

As at 4 May 2022, there have been no other changes to the Group's long-term credit ratings or outlooks since the report date.

 

Net interest income

Earnings sensitivity measures calculate the change in NII over a 12-month period resulting from an instantaneous and parallel change in interest rates. The +/- 25 bps shock represents the primary NII sensitivity assessed internally, though a range of scenarios are assessed on a monthly basis.

12 months NII sensitivity	31 Mar 2022 £m	30 Sep 2021 £m
+25 bps parallel shift	12	30
-25 bps parallel shift	(5)	(23)

 

The reduction in NII sensitivity since year end is primarily the result of an increase in the size of the structural hedge from £26bn to £32bn lowering the exposure to quantum and timing of Bank Base Rate (BBR) changes. The sensitivity has further reduced due to the impact of the increases in BBR on the mix, cost and pass through of the deposit book.

Sensitivities disclosed reflect the expected mechanical response to a movement in rates and represent a prudent outcome. The sensitivities are indicative only and should not be viewed as a forecast. The key assumptions and limitations are outlined below:

−      the sensitivities are calculated based on a static balance sheet and it is assumed there is no change to margins on reinvestment of maturing fixed rate products;

−      there are no changes to basis spreads with the rate change passed on in full to all interest rate bases;

−      administered rate products receive a full rate pass on in the rate fall scenario, subject to internal product floor assumptions. In the rate rise scenario administered products receive a rate pass on in line with internal scenario specific pass on assumptions;

−      additional commercial pricing responses and management actions are not included; and

−    while in practice hedging strategy would be reviewed in light of changing market conditions, the sensitivities assume no changes over the 12-month period.

 

 

Risk management

Financial risk

 

LIBOR replacement

The Group's LIBOR cessation programme successfully met the 2021 GBP regulatory and industry milestones. Group Treasury proactively transitioned all external transactions across issuance, hedging and liquid assets and over 90% of Business Lending customer transactions also switched from LIBOR to alternative reference rates (ARRs), with numbers continuing to reduce.

As at 31 March 2022, all market-facing derivative flows are executed against the Sterling Overnight Index Average (SONIA). The focus for 2022 is ongoing management of the small business lending tough legacy and USD cohort. Processes have been implemented to ensure continued effort to move customers off synthetic LIBOR to ARRs throughout 2022.

Financial instruments that have yet to transition to alternative benchmark rates are summarised below:

 

Amounts yet to be transitioned

	Non derivative financial assets - carrying value(2)	Non derivative financial liabilities - carrying value(5)	Derivatives - nominal amount(3)
31 March 2022	£m	£m	£m
GBP LIBOR	251	-	130
Other(4)	149	-	-
Cross currency swaps
GBP LIBOR to USD LIBOR			46
Total	400	-	176

 

		Non derivative financial assets - carrying value(1)(2)	Non derivative financial liabilities - carrying value(5)	Derivatives - nominal amount(1)(3)
30 September 2021		£m	£m	£m
GBP LIBOR		2,037	-	4,754
Other(4)		157	-	-
Cross currency swaps
GBP LIBOR to USD LIBOR				95
Total		2,194	-	4,849
(1)	Excludes exposures that are expected to expire or mature before the Interbank Offered Rate (IBOR) ceases.
(2)	Gross carrying amount excluding allowances for ECLs.
(3)	The IBOR exposures for derivative nominal amounts include undrawn loan commitments shown as GBP LIBOR. This is materially the case although some facilities allow drawdowns in a number of different currencies.
(4)	Comprises financial instruments referencing other IBOR rates yet to transition to alternative benchmark rates (Euro, USD, AUD, CHF).
(5)	In addition to the financial liabilities included in the table, at 30 September 2021 £742m issued Covered Bonds were fixed rate with an option to convert to GBP LIBOR if not redeemed on the scheduled maturity date. The option to convert was transitioned to SONIA on 22 October 2021. Also at 30 September 2021, Gosforth 2018-1 notes in issue of £788m were still based on LIBOR, but following a successful consent solicitation earlier in the year, the notes converted to SONIA effective from 25 February 2022.

 

The Group maintains engagement with the BoE's Working Group on Sterling Risk Free Reference Rates and other industry forums. The programme ensures that the risks of being unable to offer products with suitable reference rates will be mitigated and that full consideration is given to the other risks, including legal, conduct, financial and operational risks, that may arise. While no material changes to the Group's risk management strategy are expected, the programme will continuously monitor progress and amend the approach accordingly.