Virgin Money UK PLC Interim Results 2023

David Duffy, Chief Executive Officer:

 

"More people are choosing to bank with Virgin Money. While the past six months have seen turbulence in the economy and in the financial system, we have continued to focus on our target areas, growing customer numbers and deposits thanks to our new and existing digital products. Further customer-centric product launches are coming in the second half of the year." 

 

"We have a strong capital position and we've significantly grown pre-provision profit, while continuing our prudent approach. As the UK economy stabilises in the months ahead, we have a high degree of confidence in our long-term plans."

 

Summary financials

						6 months to		Restated 6 months to				Restated 6 months to
						31 Mar 2023		31 Mar 2022		Change		30 Sep 2022				Change
						£m			£m	%				£m		%
Underlying net interest income (NII)							855		782	9				810		6
Underlying non-interest income(1)							78		66	18					84	(7)
Total underlying operating income							933		848	10				894		4
Underlying operating and administrative expenses							(477)		(456)	5				(458)		4
Underlying operating profit before impairment losses							456		392	16				436		5
Impairment losses on credit exposures							(144)		(21)	586				(31)		365
Underlying profit on ordinary activities before tax							312		371	(16)				405		(23)
Adjusting items(1)							(76)		(56)	36				(125)		(39)
Statutory profit on ordinary activities before tax							236		315	(25)				280		(16)
Performance metrics(2)
Net interest margin (NIM)							1.91%		1.83%	8bps				1.86%		5bps
Underlying cost: income ratio(1)							51%		54%	(3)%pts				51%		-%pts
Cost of risk (CoR)							0.40%		0.06%	34bps				0.09%		31bps
Statutory return on tangible equity (RoTE)							6.1%		9.1%	(3.0)%pts				11.3%		(5.2)%pts
Common Equity Tier 1 (CET1) ratio (IFRS 9 transitional)							14.7%		14.7%	-%pts				15.0%		(0.3)%pts
(1)    Hedge ineffectiveness is now presented as an adjustment to underlying earnings as detailed on page 90. The comparative periods have been adjusted accordingly. (2)    For definitions of the performance metrics, refer to 'Measuring the Group's performance' on pages 344 to 352 of the Group's 2022 Annual Report and Accounts.

 

Benefitting from higher rates and growth in customers; continuing to invest in our digital future 

·      NIM expanded further to 1.91% in H1 (Q223: 1.94%), supported by higher rates, structural hedge reinvestment and improved mix

·      Total income up 10%, reflecting 9% growth in NII and positive fair value movements benefitting non-interest income

·      Underlying costs 5% higher, driven by investment in service and mortgage digitisation; underlying C:I ratio down 3%pts to 51%

·      Underlying operating profit before impairment losses of £456m, up 16% on H122, reflecting stronger income

·      Impairment charge of £144m (CoR: 40bps), driven primarily by provision build from higher modelled ECL, including updated macroeconomics and credit bureau data in anticipation of an increase in arrears as the credit cycle continues to normalise

·      Underlying PBT 16% lower compared to a year ago reflecting the prior period's low impairment charge (£21m)

·      Restructuring charges of £53m broadly stable YoY. The Group slowed some restructuring activity in H1 to further underpin service

·      Statutory profit reduced compared to a year ago to £236m (H122: £315m), primarily reflecting the higher impairment charge

 

Robust balance sheet with continued strong deposit inflows and broadly stable customer lending

·      Continued relationship deposit growth, +2.9% to £35.6bn; overall deposits increased 2.6% to £67.0bn (with 72% FSCS insured)

·      CET1 remains strong at 14.7% (FY22: 15.0%) including the impact of the £50m buyback completed in H1; 3.3p interim dividend

·      Underlying credit quality remained resilient; coverage increased to 72bps (FY22: 62bps), primarily from higher modelled ECL

·      LCR increased 15%pts to 153% (FY22: 138%); NSFR stable in the period at 136% (FY22: 136%)

·      Overall lending stable (0.2)%; Mortgages (0.8)% to £57.7bn given lower market activity; Unsecured (0.2)%, including moderated growth in credit cards +1.9%; Business lending +4.2% as growth in BAU balances offset a reduction in Government lending

 

Continued strategic momentum with digital propositions driving growth in relationship accounts

·      c.69k growth in active relationship accounts during H1 (now 3.7m active relationship accounts)

·      Continued strong reception to new digital products including 52% increase in BCA sales YoY and 16% growth in PCA sales

·      c.10k new Slyce customers since launch as we test and learn; c.300k travel insurance sales since launch in March 2022

·      Launched Virgin Money Investments through abrdn JV, comprising a new digital platform and straightforward investment products

 

Enhancing customer and colleague support through Purpose-led delivery

·      Call waiting times down by c.75% compared to the position at FY22, following investment in resource to support service

·      Cost of Living hub, supporting customers with money saving suggestions, budgeting tools and links to external resources

·      Turn2us Benefits calculator supporting those who may be eligible for additional or top up benefits (29k people to date)

·      A Life More Virgin flexible working model supporting continued higher colleague engagement (+4%pts in H1)

 

FY23 outlook updated; NIM guidance for FY23 upgraded

·      Expect FY23 NIM to be c.190bps, with stable performance in H2 compared to H1

·      Underlying cost: income ratio expected to be in the range 51-52%

·      Expect cost of risk for FY23 to be in the range of c.35-40bps

·      Anticipate the majority of the remaining c.£140m restructuring charges to be incurred in H2

·      Maintain CET1 > 14% through FY23 during period of heightened macroeconomic uncertainty

·      30% dividend payout; buybacks subject to the outcome of ACS results and regulatory approval

Contact details

 

For further information, please contact:

 

 

Investors and Analysts
Richard Smith Head of Investor Relations & Sustainability	+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
Teneo
Iain Dey	+44 7976 295 906
Doug Campbell	+44 7753 136 628
Teneo (Australia)
Emily Blyth	+61 401 601 044

 

Virgin Money UK PLC will today be hosting a presentation for analysts and investors covering the 2023 interim financial results starting at 08:30 BST (17:30 AEST) with a presentation followed by live Q&A call:

 

https://webcast.openbriefing.com/vmuk-interim23/

 

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

 

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

 

A call for fixed income investors will be held at 09:30 BST on Friday 5 May 2023: Dial-in details: UK: 0808 189 0158; All other locations: +44 20 3936 2999; Access code: 423509

 

The Group will publish its interim Pillar 3 on Wednesday 31 May 2023.

Business and financial review

KPIs

 

Measuring strategic delivery

 

All figures as at H1 2023

 

Total active relationship customer accounts 3.7m FY22: 3.6m 2021*: 3.3m   * As at October 2021		Digital primacy 59% FY22: 56% H1 22**: 51%   ** New metric; as at March 2022		Target lending segment asset growth 4% in H1 FY22: 7% FY21: (3.3)%
Gross annualised cost savings £93m FY22: £69m FY22-FY24 target: £175m		Customer complaints per 1k accounts 4.2 FY22: 4.2 FY21: 3.7		Colleague engagement 83% FY22: 79% FY21: 68%
Group Smile score 44% FY22: 46% FY21: 51%

 

 

 

Business and financial review

Financial performance - summary

 

 

Summary income statement

						6 months to	Restated 6 months to					Restated 6 months to
						31 Mar 2023	31 Mar 2022			Change		30 Sep 2022				Change
						£m			£m	%				£m		%
Underlying net interest income (NII)						855			782	9				810		6
Underlying non-interest income(1)						78		66		18					84	(7)
Total underlying operating income						933			848	10				894		4
Underlying operating and administrative expenses						(477)			(456)	5				(458)		4
Underlying operating profit before impairment losses						456			392	16				436		5
Impairment losses on credit exposures						(144)			(21)	586				(31)		365
Underlying profit on ordinary activities before tax						312			371	(16)				405		(23)
-  Restructuring charges						(53)			(46)	15				(36)		47
-  Acquisition accounting unwinds						(3)			(14)	(79)				(21)		(86)
-  Legacy conduct costs						(4)			(5)	(20)				(3)		33
-  Hedge ineffectiveness(1)						(16)			17	n/a				(4)		300
-  Other items						-			(8)	(100)				(61)		(100)
Statutory profit on ordinary activities before tax						236			315	(25)				280		(16)
Tax (expense)/credit						(56)			(77)	(27)				19		n/a
Statutory profit after tax						180			238	(24)				299		(40)

 

Performance metrics⁽²⁾

					6 months to	Restated 6 months to		Restated 6 months to
					31 Mar 2023	31 Mar 2022	Change	30 Sep 2022	Change
Profitability:
Net interest margin (NIM)					1.91%	1.83%	8bps	1.86%	5bps
Underlying return on tangible equity (RoTE)(1)					8.3%	11.1%	(2.8)%	15.2%	(6.9)%
Underlying cost: income ratio(1)					51%	54%	(3)%pts	51%	-%pts
Underlying earnings per share (EPS)(1)					14.9p	16.7p	(1.8)p	25.1p	(10.2)p
Statutory RoTE					6.1%	9.1%	(3.0)%pts	11.3%	(5.2)%pts
Statutory cost: income ratio					58%	60%	(2)%pts	64%	(6)%pts
Statutory EPS					11.0p	13.7p	(2.7)p	18.7p	(7.7)p
(1) Hedge ineffectiveness is now presented as an adjustment to underlying earnings as detailed on page 90. The comparative periods have been adjusted accordingly. (2) For definitions of the performance metrics, refer to 'Measuring the Group's performance' on pages 344 to 352 of the Group's 2022 Annual Report and Accounts

 

Business and financial review

Financial performance - summary

 

Performance metrics (continued)

As at:					31 Mar 2023	31 Mar 2022	Change		30 Sep 2022			Change
Asset quality
Cost of risk(1)					0.40%	0.06%	34bps		0.07%			33bps
Total provision to customer loans					0.72%	0.66%	6bps		0.62%			10bps
Indexed loan to value ratio (LTV) of mortgage portfolio(2)					53.6%	54.4%	(0.8)%pts		52.7%			0.9%pts
Regulatory Capital:
CET1 ratio (IFRS 9 transitional)					14.7%	14.7%	-%pts		15.0%			(0.3)%pts
CET1 ratio (IFRS 9 fully loaded)					14.4%	14.4%	-%pts		14.6%			(0.2)%pts
Total capital ratio					21.2%	21.8%	(0.6)%pts		22.0%			(0.8)%pts
Minimum requirement for own funds and eligible liabilities (MREL) ratio					31.0%	31.7%	(0.7)%pts		32.1%			(1.1)%pts
UK leverage ratio					5.0%	5.1%	(0.1)%pts		5.1%			(0.1)%pts
Tangible net asset value (TNAV) per share					350.5p	313.2p	37.3p		383.0p			(32.5)p
Funding and Liquidity:
Loan to deposit ratio (LDR)					108%	112%	(4)%pts		111%			(3)%pts
Liquidity coverage ratio (LCR)					153%	139%	14%pts		138%			15%pts
(1)	Cost of risk for the 6 months to March 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 2023	30 Sep 2022			Change
									£m			£m	%
Customer loans									72,435			72,565	-
of which Mortgages									57,687			58,155	(1)
of which Unsecured									6,152			6,163	-
of which Business									8,596			8,247	4
Other financial assets									18,501			17,545	5
Other non-financial assets									1,560		1,797		(13)
Total assets									92,496			91,907	1
Customer deposits									67,030			65,360	3
of which relationship deposits(1)									35,643			34,649	3
of which non-linked savings									12,196			17,048	(28)
of which term deposits									19,191			13,663	40
Wholesale funding									16,896			17,012	(1)
Other liabilities									2,940			3,195	(8)
Total liabilities									86,866			85,567	2
Ordinary shareholders' equity									5,036			5,674	(11)
Additional Tier 1 (AT1) equity									594			666	(11)
Equity									5,630			6,340	(11)
Total liabilities and equity									92,496			91,907	1
Risk Weighted Assets (RWAs)									24,703			24,148	2

(1)   Current account and linked savings balances

 

 

 

 

 

Business and financial review

Chief Executive Officer's statement

Delivering our Digital First strategy

"More people are choosing to bank with Virgin Money. While the past six months have seen turbulence in the economy and in the financial system, we have continued to focus on our target areas, growing customer numbers and deposits thanks to our new and existing digital products. Further customer-centric product launches are coming in the second half of the year." 

 

"We have a strong capital position and we've significantly grown pre-provision profit, while continuing our prudent approach. As the UK economy stabilises in the months ahead, we have a high degree of confidence in our long-term plans."

David Duffy, CEO

 

Delivering our digital strategy

The Group is now halfway through the Purpose-led, digital strategy set out alongside FY21 results, and we are making good progress in executing our strategic priorities. Over the course of the last eighteen months, we've delivered innovative digital propositions that have driven strong growth in relationship customer numbers. Our capital ratios and funding position have continued to improve, with strengthening capital generation also supporting a growing level of distributions to investors. Our recent work to improve customer service leaves us well placed to digitise the bank further and support profitable growth. The continued diversification of both sides of our balance sheet, combined with the rising rate environment, has driven a reduction in our cost: income ratio, although there remains more work to do here. As we look out to FY24, we are well placed to deliver on our financial targets. There is still a significant amount to do during the second half of our three-year digital strategy, but I remain confident it is the right strategy despite the changing environment, and as we execute, this will increasingly translate into stronger financial performance.

 

Over the last six months, the economic backdrop in the UK has been subdued, with several economic indicators forecast to remain weak in the near term before improving into FY24. During the first half of our financial year, the Bank of England's (BoE) Monetary Policy Committee have progressively raised the main policy rate further. Swap rates have been volatile throughout the period, as market sentiment has been impacted by challenges at Silicon Valley Bank and other US regional banks, as well as some European banks. Recent rate rises and ongoing inflationary impacts have seen affordability tighten for many UK businesses and individuals, and the Group remains ready to support our customers as required. Pleasingly for now, the number of customers in financial distress remains low, but we continue to expect arrears numbers to increase as the credit cycle normalises, and have increased our provision coverage during H1. Overall, the Group continues to have a robust balance sheet, with a strong capital and funding position, whilst liquidity improved further driven by continued deposit inflows.

 

Our strategy, supported by the rate environment, is translating into improved financial momentum despite the weak backdrop. In H1, we've made good progress in executing the customer-focused elements of our digital strategy, and our programme of investment that is delivering compelling new digital propositions is continuing to see good levels of customer engagement and growth. Our successful execution is driving active customer account growth across business (BCA) and personal current accounts (PCA), including higher levels of sales to new customers, as well as continued growth in relationship deposits. We are also delivering strong growth in business lending as our sector expertise bears fruit, alongside a maturing of our position in the credit card market, where we now have a c.8% share. More recent proposition launches including Slyce, our response to the buy-now-pay-later market, and insurance and investment product relaunches have seen positive initial customer reactions, positioning us well for further profitable growth.

 

Over the course of H1, we've moderated the pace of restructuring activity and added additional resources to support customer experience across the Group, which has already seen a marked improvement in call waiting times and an 80% reduction in outstanding complaint volumes from peak levels. We have also continued to make progress developing our digital mortgage platform, although we now expect this to be delivered in 2024 as we extend the testing and development phase.  

 

Over the remainder of the year, we remain focused on delivering continued growth in customer numbers at good margins, delivery of enhancements to our product and competitive proposition, and further efficiency gains from restructuring and digitisation. Given the higher rate environment, and supported by the ongoing execution of our strategy to diversify the balance sheet, the outlook for NIM has strengthened further, and it is pleasing to be able to upgrade our NIM guidance. Our short-term additional investment this year will see a slower pace of reduction in our cost: income ratio in FY23 than previously expected, but we are laying the foundations for stronger profitable growth in the medium term.

 

We remain committed to further capital returns and have announced a 3.3p dividend in respect of H1 2023, and continue to expect to operate within our target capital range in FY24, with further buybacks subject to the outcome of the BoE's Annual Cyclical Scenario (ACS) stress test. We will continue to safeguard the bank, operating with a prudent risk appetite, while maintaining strong liquidity, funding and capital as we grow profitably. As the Group executes its digital strategy, it is increasingly well positioned to deliver on its FY24 targets for all our stakeholders, as our colleagues deliver innovative, valuable propositions which provide good outcomes to our customers, and drive strengthened returns for investors.  

 

 

 

Business and financial review

Chief Executive Officer's statement

 

Robust financial performance and balance sheet

Overall statutory profit of £236m was lower compared to a year ago (H1 2022: £315m), primarily due to a higher impairment charge, given a very low charge in H1 2022, as well as higher investment costs in the period. The higher rate environment and positive momentum from our digital strategy drove an improvement in income to £933m, up 10% compared to a year ago. NIM expanded further to 1.91% for the half, as we continued to optimise both sides of the balance sheet. The additional investment in our mortgage platform and customer experience, as well as inflation, saw a 5% increase in operating expenses. Our impairment charge in the period was £144m (H1 2022: £21m) with the increase primarily driven by updated economic assumptions as underlying credit quality generally remained stable, albeit with some signs of a modest increase in arrears in cards, from abnormally low pandemic levels.   

 

Lending volumes in the period were stable compared to FY22 with good growth in Business lending offset by the weaker Mortgage market backdrop and our prudent approach to the Unsecured market. We continued to attract new deposits at strong spreads with deposits increasing 3% to £67bn, benefitting from our trusted brand, scale as a Tier 1 bank, and strong digital propositions. Our relationship deposit base continued to expand, also increasing 3% in H1 and now comprises 53% of total deposits. This growth in relationship deposits has benefitted from our digital investment as we have leveraged our strong PCA and linked saver proposition, offering customers enduring good value products.

 

Capital remained robust throughout the period with 72bps of underlying capital generation, leaving our CET1 ratio at 14.7%, despite the c.30bps impact of higher RWAs from MAs reflecting the latest view of hybrid mortgage model impacts and the c.20bps impact from the buyback extension announced at FY22. The Group's funding position remained strong, with the LDR declining to 108% (FY22: 111%) as we maintained a well-diversified deposit base, which is around 72% Financial Services Compensation Scheme (FSCS) protected. Our LCR improved over the half to 153% driven by the strong deposit growth, and the Group has already completed all capital and MREL issuance required during FY23. We continue to expect to issue £1.5bn - £2.5bn of primarily secured funding as we refinance TFSME in advance of maturity, but given strong deposit inflows, we now expect to be at the low end of this range. The Group fully hedges its liquidity portfolio and all securities are held at fair value, with any valuation adjustments already reflected within the Group's CET1 position.

 

Delighting customers & colleagues

Over the first half of the year, we've invested heavily in our customer experience, with over 300 additional temporary colleagues working to address the elevated level of inbound calls and outstanding complaints. The Group also slowed the pace of restructuring activity to further underpin service levels. As a result, call waiting times have reduced by around three-quarters compared to the position at FY22, with the vast majority of processes now back within their required timescales. Our Group Smile score across H1 stabilised at 44% (FY22: 46%), with a 47% score reported for March. Complaints per 1,000 accounts have stabilised since FY22, remaining at 4.2 and we remain committed to reducing this level as we resume digitising customer journeys. We'll maintain the elevated levels of resourcing for our contact centres and branches in the near term to ensure the improvement is well embedded as we accelerate our restructuring programme. However, this improved position on service provides a strong platform to make further progress as we move in to H2.

 

Recognising that the current environment is challenging for some customers, we are offering a range of initiatives to provide support for those who need it. Our Cost of Living hub on the Group's website offers a single destination to find help and support, with tips, tools and expert advice for managing money. Recognising that the challenges of the rising cost of living are not just limited to retail customers, we've also recently added a new dedicated 'supporting your businesses' section. In terms of direct support, we have continued our partnership with Turn2Us through the benefits calculator which has to date delivered £1.7m of additional income to c.29k people who have used the tool. The tool and hub are available to everyone, whether a customer or not.

 

For colleagues, our A Life More Virgin approach to work continues to be well received, and we are continuing to shape our approach based on colleague feedback and business objectives. Accordingly, our latest colleague engagement score improved again to 83%, up 4% from FY22, and outperforming the UK financial services norm. The majority of colleagues will also receive a 10% pay increase over 2023 reflecting the increased cost of living. Diversity, Equality and Inclusion remains an ongoing focus for Virgin Money. Progress against our representation targets has been gradually improving, especially in respect of gender within our senior leadership population, but with less progress in respect of ethnicity representation at a senior leadership level.  The launch of our new allyship initiative 'Braver' over the summer this year will help accelerate awareness, understanding and action against both our representation and our inclusion goals.

 

Pioneering Growth

As we have continued to execute our digital strategy, total active relationship accounts (across personal and business transactional banking) increased 2% over the period to 3.7m. I've been particularly pleased with the strong growth in the deposit business, and we've continued to drive good inflows throughout the half. Deposit balances increased 3%, with corresponding growth in relationship deposits, as we offered customers good value products that have benefitted from our digital investment, supported by nimble pricing throughout the period. PCA sales were 16% higher in H1 2023 than H1 2022, supporting a 1% growth in active PCA accounts over the half. Sales benefitted from an ongoing competitive proposition, with the vast majority of PCA customers rewarded with credit interest and an attractive linked saver, distinguishing ourselves from high-street peers. PCA customers also continue to get access to rewards, cashback and exclusive product offerings.

 

BCA sales were even stronger, up 52% on H1 2022, which was a strong performance in a slowing market, and supported a 5% growth in active BCA accounts over the half. We've seen net growth in the number of BCA accounts for 17 consecutive months now, benefitting from sustained investment in the proposition and improvements to digital customer onboarding journeys. On the other side of the balance sheet, we've been really pleased to leverage the investment we've made in the Business franchise and our sectors of expertise, driving 7% growth in BAU business lending, offsetting the continued run-off of lower yielding government lending. We've seen particular strength in resilient segments such as Health & Social Care and Social Housing.

 

Business and financial review

Chief Executive Officer's statement

 

In our Unsecured business, as set out at FY22, we have moderated the rate of growth, by tightening underwriting and focusing on improved profitability against the weaker credit environment. Our Cashback proposition continues to resonate well with customers, with c.700k users at the end of March. We have seen some reduction in personal loan balances as expected, as we have withdrawn from the market for new customers, although this remains an area of future opportunity with a suitably refreshed customer proposition.

Slyce, our buy-now pay better proposition has seen volumes building steadily and in a responsible, controlled way. Over 10,000 customers have now accessed the product, to support over £5m of spending to date, with prudent average credit limits of less than £1k per account. We also continue to progress our new Digital Wallet proposition and have recently launched a beta version to a closed user group of Virgin Atlantic credit card customers as we continue to develop the functionality.

 

Currently the mortgage market backdrop remains subdued with new application spreads remaining lower than the backbook given elevated swap rates and continued competition in the market. We have continued to trade nimbly, focusing on margin and credit quality against this subdued backdrop, leading to a 0.8% reduction in balances over the half. While the market is likely to remain subdued in the near term, we've continued to invest in the development of our new digital mortgage platform which will support greater market access and our trading capability in the medium term. We now expect this to be delivered in 2024, as we have taken a pragmatic decision to extend the testing and development phase to ensure a better product for customers and brokers on launch; this won't impact our trading capability through the remainder of FY23.

 

Finally, our innovative new Virgin Money Investments proposition launched in early April, with our JV partner abrdn. We are aiming to take the fear out of investing, and offer customers simple, straightforward products and services, without jargon (our investment product Ts and Cs have been awarded Fairer Finance's Clear and Simple Mark). We've listened to customers throughout development, re-designing customer journeys and launching the new investment funds on a refreshed modern platform. Our existing Investments business has c.£3.6bn assets under management, which we will be looking to grow through the new proposition.

 

Super straightforward efficiency

Despite moderating the pace of some of our cost reduction activity earlier in the year, we have continued to benefit from efficiencies realised within the overall programme of work to digitise the bank, creating capacity to absorb inflation and re-investment. In the half, our total annualised savings increased to £93m against the planned £175m programme of savings that will be completed by FY24, as we benefit from digitisation activities, savings from 3^rd party spending and ongoing streamlining of property and organisational design. Over the course of the half, we've continued to embed Agile methodology into our change delivery which will support a continued improvement in the long-term pace of change. As we move into FY24, we will continue to generate run-rate savings from our digitisation activity.

 

Our digitisation activity and migration to a cloud-based operating environment continues to make progress using the Microsoft Azure platform, with applications being assessed and reviewed ahead of migration to the cloud and a number being retired as we simplify the digital estate. The new technology architecture has also underpinned the introduction of our new 'conversational banking' platform, with Redi, our digital host deployed to our credit card customers in March, before being rolled out across the bank in the future. Redi is available 24/7, and uses AI to understand customer intent and either execute customer instructions and make real-time changes to customer accounts or pass the query to a live agent. This complements our existing successful chatbot deployments which have now surpassed 1.2m chatbot conversations with retail customers, with the resolution rate within the chatbot at over 70%. As a result, the percentage of customer interactions through calls has reduced from c.70% at FY21 to 44% as at the end of H1 2023 (FY22: c.50%). Meanwhile, Digital Primacy, our key measure for assessing customer migration to digital only engagement with us, rose to 59% from 56% at FY22.

 

Discipline and sustainability

The Group continues to have a robust balance sheet position with little change in credit quality to date against the current backdrop. The higher cost of risk in the period of 40bps was primarily driven by modelled outcomes based on a weaker macroeconomic outlook and updated credit bureau data, in anticipation of a continued increase in arrears. Current arrears trends within mortgages and business show limited change, with unsecured arrears picking up from the abnormally low levels seen through COVID-19. 

 

The Group strengthened coverage over the early part of the year and now has aggregate provision coverage of 72bps across the lending book, up from 62bps at FY22, as we have refreshed our macroeconomic scenarios to reflect the worsening economic backdrop and the continued normalisation of the credit cycle. Our CET1 ratio remains towards the top of UK Tier 1 banks at 14.7%, despite incorporating a c.30bps management adjustment for mortgage hybrid models during Q2. Given the strong growth in deposits seen in the period our LCR improved further to 153%, with our net stable funding ratio (NSFR) stable at 136%, significantly above our regulatory and internal risk appetite thresholds. With no upcoming capital or MREL calls, our funding position and deposit franchise continue to show their strength in the current volatile backdrop, and we believe our approach to funding and liquidity positions us well.

 

From a sustainability perspective, we've also continued to make good progress through the first half. Embedding climate further into our risk framework will be an important step in our continued delivery and we remain focused on enhancing our data quality as we progress towards net zero. Following the publication of our initial net zero targets and roadmaps for our priority sectors at FY22, which cover 82% of Group lending, we've continued to execute against those plans and KPIs. Our Sustainable Business Coach app has been developed further, to support customers in their thinking around transition plans, with Sustainability Linked Loans and business sectoral tracking underpinning overall delivery. In Mortgages we were pleased to extend our Green Mortgage Reward proposition beyond the initial pilot period, and a retrofit product to enable mortgage customers to improve the efficiency of their homes is in development to go alongside the existing Green Mortgage offering. Work to develop our remaining Business sector roadmaps and targets, as well as our operational emissions roadmaps, is progressing well and we expect to update further at FY23.

 

 

 

Business and financial review

Chief Executive Officer's statement

 

In FY22, we commissioned an independent third party to conduct a risk assessment of our Modern Slavery processes and approach across the Group. The assessment highlighted clear examples of proactive risk management, with some opportunities to improve further. With the results of the assessment in mind, we refreshed our Modern Slavery Statement in March, and we continue to focus on implementing the recommendations for best practice.

 

Developing our leadership team for the future

I was delighted to welcome our new Chief Operating Officer (COO) Sarah Wilkinson to the team in January. Sarah's background in large scale change programmes covers 23 years in financial services, time as CEO of NHS digital and most recently as Chief Information Officer and Head of TR Labs at Thomson Reuters. She was also voted No 1 in the UK Tech50 for 2021, Computer Weekly's annual ranking of the Top 50 Most Influential Leaders in UK Tech. The new COO function that Sarah will lead brings together our Customer Experience and Digital & Innovation areas, to provide a more integrated technological and change delivery unit. I'd like to take this opportunity to thank these areas' former leaders, Fergus Murphy and Fraser Ingram, for their contributions to the Group.

 

From a Board perspective, we welcomed Sara Weller as the Virgin Group's new Representative Director on 3 October 2022, replacing Amy Stirling. Sara has extensive experience, including nine years as a non-executive director of Lloyds Banking Group, and she currently also serves on the Board of BT Group.

 

Outlook

While the macroeconomic outlook remains uncertain in the short term, we believe the Group's prudent risk appetite and positioning on liquidity, funding and capital, and our ongoing focus on customers and digitisation, position us for success. We have the scale and regulatory assurance of a Tier 1 bank, with the agility and ability to innovate of a challenger, all while we leverage the strength and entrepreneurial spirit of the Virgin brand.

 

Over the remainder of the year, the Group's outlook continues to be robust. NIM has continued to track above our expectations, and we now expect FY23 NIM to be c.190bps, with stable performance in H2 compared to H1. We will continue to invest in customer experience and digital propositions over the remainder of the year, while accelerating our cost saving programme, and we now anticipate a cost: income ratio of 51-52% in FY23, with short-term investment costs reducing into FY24. Updating for our economic outlook under IFRS 9 methodology, we now expect our cost of risk for the year to be in the range of 35-40bps.

 

The Group remains strongly capital generative and I'm pleased the Board has declared an interim dividend in line with the capital framework set out a year ago, of one-third of the prior year's full dividend. As we look forward over the remainder of the year, the Group expects that we'll be able to announce further buybacks, subject to the outcome of the ACS stress test, due to be reported in early July.

 

As we enter the second half of our three-year plan, our focus is firmly on the continued execution of our digital strategy. We have a clear ambition and are well placed to deliver on our targets for FY24, including a cost: income ratio below 50%, and a statutory RoTE above 10%. Alongside this, we anticipate significant further capital distributions as we return to operating within our target CET1 range of 13% - 13.5% by FY24.

 

 

 

 

David Duffy, Chief Executive Officer - 3 May 2023

 

Business and financial review

Chief Financial Officer's review

Delivering strategic and financial momentum

 

"The Group has had a good first half of the year, demonstrating ongoing strategic and financial momentum. Despite an uncertain economic environment, the Group is well positioned to deliver prudent and profitable growth, while controlling costs, maintaining robust capital and safeguarding and supporting our customers"

Clifford Abrahams, Group CFO

 

Financial Highlights

 

Statutory profit before tax £236m H1 2022: £315m		Underlying profit before tax £312m H1 2022 (restated)(1): £371m		Statutory RoTE 6.1% H1 2022: 9.1%
NIM 1.91% H1 2022: 1.83%		Underlying cost: income ratio 51% H1 2022 (restated)(1): 54%		Cost of risk 40bps H1 2022: 6bps
CET1 ratio 14.7% FY22: 15.0%		Loan growth (0.2)% H1 2022: (0.2)%		Relationship deposit growth 2.9% H1 2022: 4.2%

 

LCR 153% FY22: 138%

NSFR 136% FY22: 136%

Dividend per share 3.3p FY22: 10p

 

(1) Hedge ineffectiveness is now presented as an adjustment to underlying earnings as detailed on page 90. The comparative periods have been adjusted accordingly. This restatement does not impact the statutory results of the Group.

 

Business and financial review

Chief Financial Officer's review

 

 

Momentum in strategic and financial delivery

The Group had a good first half of the year, with ongoing strategic delivery and profitable growth in its target segments. Income has benefitted from rising interest rates and the strength of our new digital propositions has supported relationship customer growth. Costs have been higher as inflation and investment in our mortgage platform and customer experience more than offset savings in the period. Credit quality remained resilient in H1, and the Group further increased provision coverage to reflect more conservative economic scenarios and updated credit bureau data, in anticipation of a continued increase in arrears as the credit cycle continues to normalise. While profitability was lower, the Group is well placed to navigate the current economic outlook and deliver further profitable growth, supported by its resilient balance sheet, strong capital position and growing relationship customer base.

Prudent growth in target segments

The Group has continued to execute against its digital strategy and made further improvements to its customer propositions, launching compelling new products and product features. The combination of these factors has supported growth in key target segments in H1, including 2% growth in total active relationship customer accounts (to 3.7m customers at H1 2023). Relationship deposit growth remains a key area of focus and the Group has made further progress, growing balances by 3% in H1 2023, supported by strong digital customer propositions and competitive rates. This supported overall deposit growth of 3% in H1 2023 as we continued to attract inflows across the half. Overall lending remained broadly stable in the period. Given the current weaker credit environment, the Group chose to moderate the pace of growth in Unsecured lending, resulting in a 0.2% reduction in balances across H1, including cards growth of 1.9%, a slower pace compared to last year. In Business, the strength of our developing proposition, supported by the popular fee-free digital BCA, resulted in above-market growth against a subdued backdrop. In Mortgages, market activity levels were lower compared to last year, as the impact of higher rates and inflation have dampened activity, particularly in the house purchase segment with our balances reducing 0.8% during the first half of the financial year.

Resilient financial performance

Underlying profit in H1 was £312m, which was a reduction compared to last year (H1 2022: £371m), as higher operating income was more than offset by a more normalised level of impairments compared to last year's low charge. NIM of 1.91% (H1 2022: 1.83%) was significantly improved year-on-year. The key drivers of this improvement were the higher rate environment and ongoing strategic execution, enabling the Group to benefit from continued supportive conditions in the deposit market and offset mortgage spread pressures. Non-interest income of £78m was 18% higher year-on-year on an overall basis, though broadly stable excluding all fair value movements, driven by normalised customer activity. Overall, this resulted in total income that was 10% higher compared to a year ago. Operating costs of £477m were 5% higher when compared to H1 2022 as gross cost savings were more than offset by inflation, higher digital development spend including costs associated with the ongoing implementation of our digital mortgage platform and short-term investment to support improved customer service. The improvement in income resulted in a 3%pts reduction in our cost: income ratio to 51% compared to H1 2022 and a 16% increase in underlying profit before impairment losses. Credit impairments of £144m were significantly higher year-on-year, mainly reflective of higher modelled expected credit loss (ECL) given updated macroeconomic assumptions and credit bureau data, in anticipation of a continued increase in arrears, resulting in an increased level of provision coverage across the book.

The Group reported a lower statutory profit before tax in the period delivering £236m (H1 2022: £315m) and a statutory RoTE of 6.1% (H1 2022: 9.1%). This reflected the lower underlying profit and adjusting items that were £20m higher in H1 2023, primarily due to negative fair value movements, mainly from hedge ineffectiveness. As a result of the Group's performance and in line with the Group's dividend policy, the Board has announced an interim dividend of 3.3p, representing one-third of the prior year's dividend.

Robust balance sheet with strong capital, liquidity and funding position

The Group maintained a conservative balance sheet position, including robust funding and liquidity, a healthy capital position and increased provision coverage. During the second quarter, the Group fully refreshed its IFRS 9 macroeconomic assumptions from 3^rd party provider Oxford Economics, which contributed to credit provisions totalling £526m (FY22: £457m) equivalent to a coverage ratio of 0.72% (FY22: 0.62%). Funding and liquidity remain strong, with the LCR ratio increasing to 153% (FY22: 138%) and NSFR stable at 136% (FY22: 136%). The LDR reduced to 108% (FY22: 111%) as deposit balances increased 2.6% to £67.0bn, while lending volumes were 0.2% lower at £72.4bn.

The CET1 ratio remains strong at 14.7% (FY22: 15.0%) with the reduction in the period incorporating the full c.(20)bps impact of the £50m extended share buyback programme and a management adjustment for the anticipated impact of implementing mortgage hybrid models c.(30)bps. The Group continues to expect to operate above 14% CET1 in FY23 due to heightened macroeconomic uncertainty, before returning to its target range of 13% - 13.5% in FY24. The Group will target a 30% full year dividend payout ratio, in line with the dividend policy and supplement this with buybacks, subject to ongoing assessment of surplus capital, market conditions and regulatory approval. The Group anticipates further share buybacks this year will take place subject to the outcome of the BoE's 2022 ACS stress test.

Outlook

The Group is well positioned to navigate the current economic outlook with good financial momentum, including a strong margin, prudent growth, and a robust balance sheet. We remain focused on investing to digitise the Bank in the near term, which will drive further cost efficiency and support our ambitions to grow our customer base further. The combination of this strategic and financial momentum will underpin the delivery of profitable growth, despite a weaker credit environment, and will improve returns over the coming periods, while we remain committed to distributing surplus capital to shareholders in line with our capital framework.

Business and financial review

Chief Financial Officer's review

 

Underlying income
						6 months to	Restated 6 months to						Restated 6 months to
						31 Mar 2023	31 Mar 2022						30 Sep 2022
						£m			£m		Change				£m			Change
Underlying net interest income						855			782		9%				810			6%
Underlying non-interest income(1)						78		66		18%						84			(7)%
Total underlying operating income						933			848		10%				894			4%
NIM						1.91%			1.83%		8bps				1.86%			5bps
Average interest earning assets						89,568			85,729		4%				86,817			3%

(1) Hedge ineffectiveness is now presented as an adjustment to underlying non-interest income as detailed on page 90. The comparative periods have been adjusted accordingly. This restatement does not impact the statutory results of the Group.

 

 

 

Overview

 

Operating income of £933m was 10% higher compared with H1 2022 and 4% higher than H2 2022 as the Group continued to benefit from the higher rate environment and ongoing strategic execution. NII improved 9% year-on-year as NIM increased 8bps to 1.91%, including a Q2 NIM of 1.94%. Non-interest income improved 18% compared to H1 2022 or 5% lower when excluding all fair value movements. This underlying reduction was driven by lower merchant services income.

 

 

NII and NIM

 

Asset yields increased 145bps compared to H1 2022 at an aggregate level. Within this, mortgage yields increased 25bps, given the higher rate environment. Average mortgage balances were 1% higher in H1 2022 year-on-year, which together with the higher average yield resulted in higher interest income.

In Unsecured, average balances increased by 10% relative to H1 2022, while yields modestly increased to 673bps. Together, this drove a 12% increase in interest income year-on-year.

In Business, a 253bps increase in the average yield was driven by a combination of the higher rate environment and a reduction in lower-yielding government-backed lending. This, alongside a growth in average balances, resulted in 71% higher interest income year-on-year.

Elsewhere, the average yield on the Group's liquid assets increased 300bps reflecting the higher rate environment.

Liability rates on interest bearing liabilities increased 154bps relative to H1 2022, with increased average rates across current accounts, savings accounts, term deposits and wholesale funding, mainly due to the higher rate environment. The Group has continued to pass through the benefit of recent rate rises to depositors in a balanced way; sector pass through levels have been lower than anticipated given strong liquidity at a sector level.

Current account average balances continued to increase in line with the Group's strategy to grow lower cost relationship deposits. Term deposit average balances increased year-on-year as the Group actively participated in this market, taking opportunities to secure term funding at attractive spreads. Savings account balances reduced in H1 2023 relative to H1 2022 due to the attrition or churn of existing balances into products with higher rates and as the Group prioritised term funding for additional funding. Wholesale funding average balances increased during the period, as the Group continued to optimise overall funding.

 

 

Business and financial review

Chief Financial Officer's review

 

Underlying net interest income

		6 months ended 31 March 2023				6 months ended 31 March 2022
		Average balance	Interest income/ (expense)	Average yield/ (rate)(1)		Average balance	Interest income/ (expense)	Average yield/ (rate)(1)
Average balance sheet		£m	£m	%		£m	£m	%
Interest earning assets:
Mortgages		58,315	719	2.47		57,976	641	2.22
Unsecured lending		6,492	218	6.73		5,902	195	6.62
Business lending(2)		8,359	255	6.12		8,314	149	3.59
Liquid assets		15,651	264	3.38		12,563	24	0.38
Due from other banks		748	5	1.25		970	-	0.05
Swap income/other		-	252	n/a		-	9	n/a
Other interest earning assets		3	-	n/a		4	-	n/a
Total average interest earning assets		89,568	1,713	3.83		85,729	1,018	2.38
Total average non-interest earning assets		2,556				3,218
Total average assets		92,124				88,947
Interest bearing liabilities:
Current accounts		16,123	(84)	(1.04)		15,467	(13)	(0.17)
Savings accounts		27,560	(179)	(1.30)		31,388	(52)	(0.33)
Term deposits		17,129	(206)	(2.41)		13,348	(68)	(1.02)
Wholesale funding		18,395	(387)	(4.22)		15,059	(102)	(1.36)
Other interest earning liabilities		152	(2)	n/a		150	(1)	n/a
Total average interest bearing liabilities		79,359	(858)	(2.17)		75,412	(236)	(0.63)
Total average non-interest bearing liabilities		6,890				7,987
Total average liabilities		86,249				83,399
Total average equity		5,875				5,548
Total average liabilities and average equity		92,124				88,947
Net interest income			855				782	1.83
(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 was £12m higher relative to H1 2022 at £78m and £4m lower year-on-year excluding fair value movements. The key driver for the modest reduction in performance was a reduction in Business fee income, following the strategic decision by the Group to change its payments partner and expand its relationship with Global Payments, resulting in an initial reduction of merchant services income.

As a result of recent changes in interest rates leading to increased volatility, the Group has taken the decision to exclude hedge ineffectiveness from non-interest income. Hedge ineffectiveness will now be reported within 'Adjusting items' (see page 90) and a corresponding adjustment has also been made to prior period comparatives. Hedge ineffectiveness largely represents timing differences that will reverse out over the lives of derivatives that are used in economic hedges but can result in volatility between reporting periods.

 

Business and financial review

Chief Financial Officer's review

 

Underlying costs

							6 months to	6 months to				6 months to
							31 Mar 2023	31 Mar 2022				30 Sep 2022
Operating and administrative expenses							£m		£m	Change			£m	Change
Staff costs							177		184	(4)%			191	(7)%
Property and infrastructure							19		20	(5)%			22	(14)%
Technology and communications							61		57	7%			59	3%
Corporate and professional services							87		54	61%			60	45%
Depreciation, amortisation and impairment							49		67	(27)%			49	-%
Other expenses							84		74	14%			77	9%
Total underlying operating and administrative expenses							477		456	5%			458	4%
Underlying cost: income ratio(1)							51%		54%	(3)%pts			51%	-%pts

(1) Hedge ineffectiveness is now presented as an adjustment to underlying non-interest income as detailed on page 90. The comparative period underlying cost: income ratio has been adjusted accordingly. This restatement does not impact the statutory results of the Group.

 

Operating expenses increased 5% year-on-year to £477m, while the cost: income ratio reduced 3%pts to 51%. During the period, the Group slowed the pace of its restructuring programme as it continued to support customer experience. Despite this slower pace, the programme delivered further cost efficiencies, taking the total annualised gross savings to date to £93m of the c.£175m targeted. Relative to last year, the Group also benefitted from a net pension benefit of £12m, and a lower depreciation charge following past changes to D&A practices and as the Group adopts Agile methodology. These benefits were offset, mainly by higher staff costs (net of the pension benefit), driven by wage inflation and additional resource to support the improvement of customer service levels, partially offset by a lower bonus accrual compared to last year. During the period, the Group also increased digital development spend, including costs associated with the ongoing implementation of our digital mortgage platform.

 

 

Impairments

 

As at 31 March 2023		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		59	58.0	10	1	6.4	1.0
Unsecured:		354	6.5	575	410	22.9	1.5
of which credit cards		319	5.6	602	470	19.8	1.6
of which personal loans and overdrafts		35	0.9	412	56	41.8	1.0
Business		113	8.5	145(2)	34	22.5	4.9
Total		526	73.0	72	40	9.7	1.5
of which Stage 2		349	7.1	494
of which Stage 3		112	1.1	1,209
(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 2022		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		56	58.5	9	(5)	5.3	1.0
Unsecured:		284	6.5	466	322	17.3	1.2
of which credit cards		246	5.5	481	347	13.9	1.3
of which personal loans and overdrafts		38	1.0	388	161	34.9	0.9
Business		117	8.1	159(1)	(112)	18.7	4.6
Total		457	73.1	62	7	7.8	1.4
of which Stage 2		268	5.7	472
of which Stage 3		104	1.0	1,124
(1)	Government-guaranteed element of loan balances excluded for the purposes of calculating the Business and total coverage ratio.

 

 

Business and financial review

Chief Financial Officer's review

 

ECL provisions increased to £526m at H1 2023 (FY22: £457m), resulting in aggregate coverage of 72bps (FY22: 62bps). This was mainly due to a higher modelled ECL, largely in credit cards, in anticipation of a continued increase in arrears reflecting revised macroeconomic assumptions, which showed a deterioration from those applied in September 2022, and updated credit bureau data. Accordingly, the modelled and individually assessed (IA) ECL increased by £83m to £455m in H1 2023 (FY22: £372m), while Management Adjustments (MAs) reduced to £71m (FY22: £85m). The combination of these factors resulted in a £144m impairment charge during the period, equivalent to an annualised cost of risk of 40bps.

The key macroeconomic assumptions used in the Group's IFRS 9 modelling were updated based on scenarios provided by our 3^rd party provider Oxford Economics. The weightings applied to the scenarios were 10% to the Upside scenario, 60% to the Base scenario and 30% to the Downside scenario. The weighted macroeconomic scenario includes a 1.4% contraction in GDP in 2023, peak unemployment of 4.9% in 2024 and a decline in the House Price Index (HPI) across 2023-2025.

To supplement the modelled ECL provision, the Group applied expert credit risk judgement through MAs, designed to account for factors that the models cannot incorporate. Through this process, the Group applied MAs of £71m (FY22: £85m) which are deemed appropriate for the portfolio at the current time. This includes reduced cost of living and economic resilience MAs of £18m (FY22: £57m), as these impacts are now better reflected in the modelled ECL outcome. During the period, the new Loss Given Default (LGD) model in Business lending was fully implemented, resulting in the removal of a negative MA (£(15)m) that was held at FY22, given it is now reflected in the modelled output.

In H1 loans classified as stage 2 increased from 8% of the portfolio at FY22 to 10% at H1 2023. 97% of the Stage 2 lending balances remain <30 days past due (DPD). Stage 3 assets as a % of Group lending remained broadly stable at 1.45% (FY22: 1.41%). The Group's credit provisioning assumes that arrears continue to increase over the remainder of the year.

Across all portfolios, the Group has provision coverage that remains above pre-pandemic levels. In Mortgages, the coverage ratio of 10bps is considered appropriate for the conservative loan book with low LTVs. The portfolio continues to evidence good underlying credit performance, with no significant deterioration in asset quality, despite a marginal increase in late-stage arrears.

Our Unsecured lending book coverage ratio of 575bps includes 602bps of coverage for our credit card portfolio which is focused on more affluent customers, and 412bps of coverage for our smaller personal loans and overdrafts book. In addition to the impact of current macroeconomics, the modelled provision increased due to a modest weakening of credit bureau data, and early-stage arrears compared with prior periods. Overall arrears levels remain modest across the portfolio with 97.5% of balances in stage 1 or stage 2 not past due.

In Business, the coverage ratio of 145bps reflects a 14bps decrease in the period, driven mainly by lower MAs, higher balances and lower specific provisions primarily due to provision utilisation. 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, health and social care.

 

 

Business and financial review

Chief Financial Officer's review

 

Adjusting items and statutory profit

								6 months to
								31 Mar 2023	Restated 31 Mar 2022		Restated 30 Sep 2022
								£m		£m		£m
Underlying profit on ordinary activities before tax								312		371		405
Adjusting items
-  Restructuring charges								(53)		(46)		(36)
-  Acquisition accounting unwinds								(3)		(14)		(21)
-  Legacy conduct costs								(4)		(5)		(3)
-  Hedge ineffectiveness(1)								(16)		17		(4)
-  Other items								-		(8)		(61)
Statutory profit on ordinary activities before tax								236		315		280
Tax (expense)/credit								(56)		(77)		19
Statutory profit for the period								180		238		299
Underlying RoTE(1)								8.3%		11.1%		15.2%
Statutory RoTE								6.1%		9.1%		11.3%
TNAV per share								350.5p		313.2p		383.0p
(1)	Hedge ineffectiveness is now presented as an adjustment to underlying as detailed on page 90. The comparative periods have been adjusted accordingly. This restatement does not impact the statutory results of the Group.

Overview

The Group made a statutory profit before tax of £236m after deducting £76m of adjusting items. The adjusting items charged in H1 2023 mainly reflect the Group's continued investment in its digital growth strategy as well as acquisition unwind costs, legacy conduct charges, hedge ineffectiveness and other items. Overall adjusting items were £20m higher than those incurred in H1 2022, primarily reflecting higher hedge ineffectiveness offsetting lower acquisition accounting unwinds, while restructuring charges were modestly higher.

 

TNAV per share decreased 32.6p in H1 2023 relative to H2 2022, to 350.5p. The key drivers of the decrease were 5.3p of retained earnings net of dividends, 6.0p from share buybacks, offset by (22.5)p from a reduction in the cash flow hedge reserve, (19.5)p from a lower overall actuarial pension surplus and (1.8)p of FVOCI and other movements.

Restructuring charges

The Group incurred £53m of restructuring charges, related to the Group's digital investment programme. During the period, the Group moderated some restructuring activity, reducing the pace of change in order to underpin customer service. Accordingly, charges during the period were broadly stable relative to last year and included c.£27m related to the delivery of IT changes and c.£25m related to changes to the operating model and property footprint. The Group has now incurred £135m of restructuring charges since the start of FY22 and expects to incur the majority of the remaining c.£140m of the c.£275m expected at FY21, in H2 2023.

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. £3m was reflected in H1 2023 and the Group expects a further c.£25m of total acquisition accounting unwind charges by end of FY25.

Legacy conduct

Charges of £4m were incurred, mainly in respect of legal proceedings and claims arising in the ordinary course of the Group's business.

Hedge ineffectiveness

As a result of recent changes in interest rates and increased volatility, the Group has taken the decision to exclude hedge ineffectiveness from non-interest income and will now report it within Adjusting items. Hedge ineffectiveness largely represents timing differences that will reverse out over the lives of derivatives that are used in economic hedges but can result in volatility between reporting periods.

Charges of £16m were incurred in respect of hedge ineffectiveness and rate volatility in the period.

Taxation

There was a £56m tax charge in respect of £236m of statutory profit before tax reflecting an effective tax rate of 24%.

During the full year to September 2022, the most recent period for which annual tax data is available, the Group paid cash tax totalling £175m to HMRC (principally corporation tax including banking surcharge and irrecoverable VAT), with a further £84m (largely payroll taxes and national insurance contributions) collected on HMRC's behalf.

 

Business and financial review

Chief Financial Officer's review

 

Balance sheet

										As at
										31 Mar 2023	30 Sep 2022
										£m			£m	Change
Mortgages										57,687			58,155	(1)%
Unsecured										6,152			6,163	-%
Business(1)										8,596		8,247		4%
Total customer lending										72,435			72,565	-%
Relationship deposits(2)										35,643			34,649	3%
Non-linked savings										12,196			17,048	(28)%
Term deposits										19,191			13,663	40%
Total customer deposits										67,030			65,360	3%
Wholesale funding										16,896		17,012		(1)%
of which TFSME										7,000		7,200		(3)%
LDR										108%			111%	(3)%pts
LCR										153%		138%		15%pts
(1)	Of which, £778m government lending (30 September 2022: £963m)
(2)	Current account and linked savings balances.

Overview

At an aggregate level, Group lending reduced 0.2% to £72.4bn as growth in Business lending was more than offset by a reduction in Mortgages and broadly stable Unsecured lending. Total customer deposits increased 2.6% to £67.0bn, including a 2.9% growth in relationship deposits. This performance reflected the Group executing against its strategy to develop a lower cost, stable funding base.

Mortgage balances reduced 0.8% to £57.7bn as market activity slowed down during the first half of the year, owing to continued rate volatility, seasonality and stressed affordability pressure. Completions spreads remained below back book levels throughout the period, while front book application spreads remained competitive.

Unsecured balances were broadly stable at £6.2bn, as 1.9% growth in credit card balances was offset by a reduction in personal loans. In cards, the Group has benefitted from strong activity levels, innovative new product features and ongoing investment in its overall, digitally-led proposition. The Group moderated the pace of growth during H1 2023, given the weaker credit environment and to drive improved profitability.

Business lending increased by 4.2% in H1 2023 to £8.6bn as a reduction in Government-scheme balances was more than offset by 7.3% growth in BAU balances in a subdued market. BAU performance reflected the strength of our national franchise and sector specialisms in resilient market segments. Government-scheme balances declined 19% to £0.8bn as expected, as borrowers made contractual repayments.

Customer deposits increased by £1.7bn or 2.6% in the first half of the financial year to £67.0bn, including 1.3% growth in the second quarter. The Group continued to execute against its strategy and improved its mix of deposits during the period, as relationship deposits grew by £1.0bn, supported by strong customer propositions and competitive rates. Term deposits increased by £5.5bn as the Group acquired new term deposits at attractive spreads, locking in term funding at pricing below swaps. Non-linked saving balances reduced by £4.9bn during the period, given higher attrition and churn from the back book and as the Group prioritised the good value opportunities available in the term deposit market.

Wholesale funding and liquidity

The Group has a stable funding base with customer deposits representing c.80% of total funding. The Group's customer deposits are weighted towards retail customers (76%), with the balance being from business customers, predominantly small and medium-sized enterprises. 79% of the Group's PCA customers and 65% of BCA customers have balances of less than £5k.

Of the total customer deposit book, 72% is insured via the Financial Services Compensation Scheme. Of balances that are uninsured, a proportion are fixed term and/or would incur a charge if customers wanted to withdraw their money. During the period, customer deposits increased by 2.6% to £67.0bn. With lending balances declining slightly, the Group's LDR reduced 3% points in the period to 108% (FY22: 111%).

The Group has a number of well-established wholesale funding programmes and proven markets access. During the period, the Group successfully issued €500m of MREL senior notes, while at the same time repaying £0.2bn of its TFSME drawings (£7.0bn outstanding as at 31 March 2023). On an overall basis, wholesale funding reduced marginally to £16.9bn as at H1 2023 (FY22: £17.0bn). Of our total debt securities in issue, only c.20% (£1.9bn) has less than 1-year to effective maturity, reflecting term issuance roll-downs (the Group has negligible short-term wholesale funding). Following its recently announced MREL call, the Group has no further capital or MREL call dates or maturities ahead of FY23. The Group has £1.1bn of TFSME maturing in FY24, £2.45bn maturing in FY25, and £2.55bn maturing in FY26, with the remaining £0.9bn subject to term extension beyond FY26.

 

Business and financial review

Chief Financial Officer's review

 

Given the strong deposit performance in H1 2023 and wholesale issuances during the period, the Group expects to issue towards the lower end of the £1.5-2.5bn of secured issuance communicated at FY22, subject to ongoing deposit flows and relative cost. The Group plans to continue to repay TFSME about 1 year ahead of contractual maturity to reduce the refinancing risk further. The stability of the Group's funding sources is highlighted in its NSFR ratio, which remained stable at 136%.

In light of recent market volatility following issues at Silicon Valley Bank as well as other US regional banks and some European banks, the Group prudently held more liquidity during the period, with the LCR increasing 15% points to 153% (FY22 138%), continuing to comfortably exceed both regulatory requirements and the Group's more prudent internal risk appetite metrics. The Group's c.£14bn prime liquid asset portfolio is primarily comprised of cash at the BoE (c.70%), UK Government securities (Gilts) (c.10%) and AAA rated listed securities (e.g. bonds issued by supra-nationals and corporate covered bonds) (c.20%). The liquid asset portfolio is fully hedged from an interest rate, inflation and FX risk perspective and any movements in fair value are recognised in CET1 via the Income Statement or FVOCI reserve.

The Group also has unencumbered pre-positioned collateral at the BoE representing c.£5bn of secondary liquidity drawing capacity via the Bank's Sterling Monetary Framework, which does not form part of the liquid asset portfolio for LCR or internal stressed outflow purposes. Over time the stock of unencumbered pre-positioned collateral will increase as remaining TFSME drawings are repaid. In addition, the Group has a further c.£19bn of unencumbered assets eligible and readily available but not currently pre-positioned at the BoE.

 

 

 

 

 

 

 

Business and financial review

Chief Financial Officer's review

 

Capital										As at
										31 Mar 2023	30 Sep 2022		Change
CET1 ratio (IFRS 9 transitional)										14.7%		15.0%		(0.3)%pts
CET1 ratio (IFRS 9 fully loaded)										14.4%		14.6%		(0.2)%pts
Total capital ratio										21.2%		22.0%		(0.8)%pts
MREL ratio										31.0%		32.1%		(1.1)%pts
UK leverage ratio										5.0%		5.1%		(0.1)%pts
RWAs (£m)										24,703		24,148		2.3%
of which Mortgages (£m)										9,359		9,155		2.2%
of which Unsecured (£m)										4,721		4,817		(2.0)%
of which Business (£m)										6,579		6,196		6.2%
(1)	Unless where stated, data in the table shows the capital position on a Capital Requirements Directive (CRD) IV 'fully loaded' basis with IFRS 9 transitional adjustments applied.
(2)	The capital ratios include unverified profits.

 

Overview

The Group maintained a robust capital position with a CET1 ratio (IFRS 9 transitional basis) of 14.7% and a total capital ratio of 21.2%. The Group's CET1 ratio on an IFRS 9 fully loaded basis was 14.4%. The Group's latest Pillar 2A requirement has a CET1 element of 1.7%. Overall, the Group continues to maintain a significant surplus above its CRD IV minimum CET1 capital requirement (or MDA threshold) of 9.7%.

During the period, the Group was classified as an 'Other' Systemically Important Institution (O-SII) by the PRA. This is not expected to have a material impact on the Group's capital framework laid out in May 2022.

 

CET1 capital

CET1 reduced by c.30bps in the period with the movements set out in the table below. This includes c.£0.4bn additional RWAs through a management adjustment (MA) for the anticipated impact of implementing mortgage hybrid models.

 

CET1 Capital movements		6 months to 31 Mar 2023
		%/bps
Opening CET1 ratio		15.0%
Capital generated (bps)		89
RWA growth (bps)		(9)
AT1 distributions (bps)		(8)
Underlying capital generated (bps)		72
Restructuring charges (bps)		(16)
Acquisition accounting unwind (bps)		(1)
Conduct (bps)		(1)
Hedge ineffectiveness (bps)		(5)
Hybrid mortgage impact (bps)		(28)
Foreseeable ordinary dividends (bps)		(18)
Share buyback (bps)		(20)
Other (bps)		(19)
Net capital absorbed (bps)		(36)
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 9.1% (FY22: 9.2%) of Leverage Exposures, or 31.0% when expressed as a percentage of RWAs (FY22: 32.1%). This provides prudent headroom of £1.3bn or 1.6% above the binding loss-absorbing capacity (LAC) requirement of 7.5% of Leverage Exposures, or 5.4% above the binding LAC requirement of 25.6% when expressed as a percentage of RWAs. Capital and MREL issuance during the remainder of FY23 is still expected to be broadly limited to refinancing and maintaining the surplus to regulatory requirements.

 

 

 

 

 

 

Business and financial review

Chief Financial Officer's review

 

Outlook and guidance

 

FY23 financial guidance

NIM NIM expected to be c.190bps, with stable performance in H2 compared to H1

Cost: income ratio Underlying cost: income ratio to be in the range 51-52%

Cost of risk c.35-40bps

Capital return 30% dividend payout; buybacks subject to ongoing assessment of surplus capital, market conditions and regulatory approval

 

Medium-term outlook:

Assuming no significant further deterioration in 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 the good momentum in NIM in H1, the Group expects NIM for FY23 to be around 190bps, with stable performance in H2 compared to H1.

The Group continues to invest in its digital strategy, which will drive improved efficiency and cost reduction over time. In line with this, the Group expects the majority of the remaining c.£140m of restructuring costs to be incurred in FY23, which will support a less than 50% underlying cost: income ratio in FY24. In FY23, the Group expects the underlying cost: income ratio to be in the range 51-52%, reflecting higher costs from our investment in mortgage digitisation and temporary costs to support service.

Following the update to credit provisioning levels in the first half of the year, the cost of risk is now expected to be in the range of c.35-40bps for FY23, assuming no further changes in the macroeconomic outlook.

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

At FY22, the Group announced it expects to return to its CET1 target range of 13-13.5% in FY24. During FY23, the Group continues to expect to operate above 14%, given the level of macroeconomic uncertainty. In line with the Company's capital framework and dividend policy, the Group expects a 30% full year dividend payout level, supplemented with buybacks subject to ongoing assessment of surplus capital, market conditions and regulatory approval. We expect further buybacks subject to the outcome of the BoE's Annual Cyclical Scenario (ACS) stress test.

In the medium term, the Group will continue to target diversification on both sides of the balance sheet, delivering growth in Unsecured and Business lending, while maintaining our Mortgage market share. We continue to target strong growth in new PCA and BCA customer numbers, improving the overall cost of funds.

Assuming no significant further deterioration in the economic outlook, Virgin Money has a clear path to delivering sustainable double digit statutory returns on tangible equity in FY24.

 

 

Clifford Abrahams, Chief Financial Officer - 3 May 2023

 

Business and financial review

Financial review - statutory basis

Summary income statement

 

						6 months to	6 months to						6 months to
						31 Mar 2023	31 Mar 2022				Change		30 Sep 2022				Change
						£m			£m		%				£m			%
Net interest income						852			777		10				799			7
Non-interest income						62		67		(7)						73			(15)
Total operating income						914			844		8				872			5
Operating and administrative expenses						(534)			(508)		5				(561)			(5)
Operating profit before impairment losses						380			336		13				311			22
Impairment losses on credit exposures						(144)			(21)		586				(31)			365
Statutory profit on ordinary activities before tax						236			315		(25)				280			(16)
Tax (expense)/credit						(56)			(77)		(27)				19			n/a
Statutory profit after tax						180			238		(24)				299			(40)

 

The Group has recognised a statutory profit before tax of £236m (H1 2022: profit before tax of £315m). The reduction in statutory profit is largely reflective of an increase in impairment losses.

 

Performance metrics⁽¹⁾

 

					6 months to	6 months to		12 months to
					31 Mar 2023	31 Mar 2022	Change	30 Sep 2022(2)	Change
Profitability:
Statutory RoTE					6.1%	9.1%	(3.0)%pts	10.3%	(4.2)%pts
Statutory cost: income ratio					58%	60%	(2)%pts	62%	(4)%pts
Statutory EPS					11.0p	13.7p	(2.7)p	32.4p	(21.4)p
(1)	For definitions of the performance metrics, refer to 'Measuring the Group's performance' on pages 344 to 352 of the Group's 2022 Annual Report and Accounts.
(2)	Profitability measures are provided with a full year to 30 September 2022 comparative in line with the statutory income statement presentation in the financial statements and as previously reported in the Group's 2022 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 as presented to the CEO, Executive Leadership Team and Board and excludes certain items that are part of the statutory results. The table below reconciles the statutory results to the underlying results, and full details on the adjusted items to the underlying results are included on page 90.

 

	Statutory results	Restructuring charges	Acquisition accounting unwinds	Legacy conduct	Hedge ineffectiveness(1)	Other	Underlying basis
6 months to 31 Mar 2023	£m	£m	£m	£m	£m	£m	£m
Net interest income	852	-	3	-	-	-	855
Non-interest income	62	-	-	-	16	-	78
Total operating income	914	-	3	-	16	-	933
Total operating and administrative expenses before impairment losses	(534)	53	-	4	-	-	(477)
Operating profit before impairment losses	380	53	3	4	16	-	456
Impairment losses on credit exposures	(144)	-	-	-	-	-	(144)
Profit on ordinary activities before tax	236	53	3	4	16	-	312
Financial performance measures
RoTE	6.1%	1.5%	0.1%	0.1%	0.5%	-%	8.3%
Cost: income ratio	58.5%	(5.1)%	(0.3)%	(0.4)%	(1.6)%	-%	51.1%
Basic EPS	11.0p	2.8p	0.1p	0.2p	0.8p	-p	14.9p

 

	Statutory results	Restructuring charges	Acquisition accounting unwinds	Legacy conduct	Hedge ineffectiveness(1)	Other	Restated underlying basis
6 months to 30 Sep 2022	£m	£m	£m	£m	£m	£m	£m
Net interest income	799	-	11	-	-	-	810
Non-interest income	73	-	8	-	4	(1)	84
Total operating income	872	-	19	-	4	(1)	894
Total operating and administrative expenses before impairment losses	(561)	36	2	3	-	62	(458)
Operating profit before impairment losses	311	36	21	3	4	61	436
Impairment losses on credit exposures	(31)	-	-	-	-	-	(31)
Profit on ordinary activities before tax	280	36	21	3	4	61	405
Financial performance measures
RoTE	11.3%	1.1%	0.7%	0.1%	0.1%	1.9%	15.2%
Cost: income ratio	64.3%	(3.8)%	(2.2)%	(0.3)%	(0.4)%	(6.4)%	51.2%
Basic EPS	18.7p	1.8p	1.1p	0.2p	0.2p	3.1p	25.1p

 

	Statutory results	Restructuring charges	Acquisition accounting unwinds	Legacy conduct	Hedge ineffectiveness(1)			Other		Restated underlying basis
6 months to 31 Mar 2022	£m	£m	£m	£m	£m			£m		£m
Net interest income	777	-	5	-	-			-		782
Non-interest income	67	-	8	-	(17)			8		66
Total operating income	844	-	13	-	(17)			8		848
Total operating and administrative expenses before impairment losses	(508)	46	1	5	-			-		(456)
Operating profit before impairment losses	336	46	14	5	(17)			8		392
Impairment losses on credit exposures	(21)	-	-	-	-			-		(21)
Profit on ordinary activities before tax	315	46	14	5	(17)			8		371
Financial performance measures
RoTE	9.1%	1.6%	0.5%	0.2%	(0.6)%			0.3%		11.1%
Cost: income ratio	60.2%	(5.2)%	(1.6)%	(0.6)%	1.9%			(0.9)%		53.8%
Basic EPS	13.7p	2.5p	0.7p	0.3p	(0.9)p			0.4p		16.7p

 

(1)	Hedge ineffectiveness is now presented as an adjustment to underlying earnings as detailed on page 90. The comparative periods have been adjusted accordingly. This restatement does not impact the statutory results of the Group.

 

 

 

 

 

 

Risk management

Risk Report

 

 

 

Risk overview	24
Credit risk	26
Financial risk	47

 

 

 

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 fundamental to enabling our customers and stakeholders to be 'happier about money'.

Changes to the risks that the Group is exposed to and how those risks are managed are disclosed in this report. Where there has been no update to the way the Group manages and assesses risk, from that disclosed at year end, this information has not been repeated. These risk disclosures support, and should be read in conjunction with, the Risk report in the Annual Report and Accounts 2022.

 

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 2022 Annual Report and Accounts, with the following exceptions: "Operational and resilience risk" and "Financial crime risk" have been renamed "Operational risk" and "Economic crime risk" respectively, to more clearly define the risk types. "People risk" and "Technology and cyber risk" are now classified under the wider "Operational risk" principal risk to align with our Operational Risk Management Framework.

 

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 not managed correctly.
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 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 risk	Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk but excludes strategic and reputational risk.
Economic crime 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.
Climate risk	The risk of exposure to physical and transition risks arising from climate change.

 

 

Risk management

Risk overview

 

Emerging and evolving risks

Emerging and evolving risks are current or future risks arising from internal or external events, with a material unknown or unpredictable component, and the potential to significantly impact the future performance of the Group or result in customer harm. Emerging and evolving risks may encompass attributes of, and/or correlate to, multiple principal risks. The Group's emerging and evolving 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 and evolving risk classifications reported in the Group's 2022 Annual Report and Accounts have been retained, with the exception of Potential for Scottish independence which is now expanded to UK political risks in recognition of the wider UK political risk themes. Risk descriptions have been refreshed since the year-end disclosure where appropriate, with important developments and areas most relevant to the Group's strategy shown. 

 

Risks	Trend	Description	Risk trend since 2022:	▲ Increase	►Unchanged
Externally driven
Economic risk	▲	Inflationary pressures and base rate rises in the UK combined with global responses to low economic growth, present risks to the Group's strategic plan and ability to grow. In aggregate, these risks could impact customer resilience and consequently debt affordability, and drive increases in the Group's credit provisions, as well as creating higher competitive pressure. Additionally, difficulties experienced by international banks have created volatility, which has impacted funding markets, increased the likelihood of regulatory interventions and risks eroding trust in the banking sector.
UK political risks	►	UK political risks, such as those linked to the possibility of a Scottish independence referendum and the outcome of an expected 2024 general election, could have financial, operational, and regulatory impacts for the Group. A UK general election is due no later than 2024 and this creates uncertainty about the future direction of policy.
Geopolitical tensions	►	Geopolitical tensions, including the war in Ukraine, are creating volatility within domestic and global markets, leading to impacts on global trade and consumer confidence.
Regulatory change	►	The Group remains subject to high levels of oversight as the regulatory landscape continues to evolve, with the requirement to respond to ongoing prudential and conduct driven initiatives, the outcomes of which are difficult to predict. Financial crime and anti-money laundering failures in the banking sector continue to be a particular area of regulatory focus, and the Group is subject to high levels of scrutiny and the risk of fines for non-compliance.
Technological change	▲	The rapid pace of technological change, coupled with changing customer requirements, creates increasing demands on systems resilience and our people. This could be heightened by the Group's accelerated digital strategy, as new service propositions and products are launched.
ESG risk	►	While climate risk is treated as a principal risk, this emerging 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 continued 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.
Internally driven
Change risk	▲	The Group manages a range of complex change programmes which are required to support the delivery of strategic priorities and regulatory obligations and can be subject to heightened execution risk given time and resource constraints. Failure to deliver key change projects could have wide-ranging impacts.
Third-party risk	▲	The Group's accelerated digitisation strategy relies on a significant number of third-party services required to maintain day-to-day operations without interruption, which could create vulnerabilities if not managed and affect the Group's ability to support our customers and meet regulatory expectations.
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. Data is integral to the Group's operations and delivery of strategy, and significant risks could arise if data is misused, incomplete, absent or not protected.
Changing skills and talent attraction	►	Skill shortages continue to affect the Group's ability to attract, develop and retain talent in certain sectors, with the backdrop of a highly competitive labour market and internal cost pressures adding to challenges. The Group's success is dependent on attracting and retaining skilled and highly performing personnel.

 

 

Risk management

Credit risk

 

Section	Page	Tables	Page
Credit risk overview	27
Group credit risk exposures	27	Maximum exposure to credit risk on financial assets, contingent liabilities and credit-related commitments	28
Key credit metrics	28	Key credit metrics	28
		Gross loans and advances ECL and coverage	29
		Stage 2 balances	30
		Credit risk exposure, by internal probability of default (PD) rating, by IFRS 9 stage allocation	31
		Movement in gross balances and impairment loss allowance	32
Mortgage credit performance	33	Breakdown of Mortgage portfolio	33
Forbearance	33
Collateral	34	Average LTV of Mortgage portfolio by staging	34
IFRS 9 staging	35	IFRS 9 staging	35
Unsecured credit performance	36	Breakdown of Unsecured credit portfolio	36
Forbearance	36
IFRS 9 staging	37	IFRS 9 staging	37
Business credit performance	38	Breakdown of Business credit portfolio	38
Forbearance	39
IFRS 9 staging	40	IFRS 9 staging	40
Macroeconomic assumptions, scenarios, and weightings	41
Macroeconomic assumptions	41	Scenarios	41
		Five-year simple averages on unemployment, GDP and HPI	43
The use of estimates, judgements and sensitivity analysis	43
The use of estimates	43	Economic scenarios	43
		ECL impact of HPI changes	44
		ECL impact of unemployment rate changes	44
The use of judgements	44	Impact of changes to significant increase in credit risk (SICR) thresholds on staging	44
		Impact of management adjustments (MAs) on the Group's ECL allowance and coverage ratio	45
		Macroeconomic assumptions	46