Interim Financial Report

RNS Number : 0365M

Virgin Money UK PLC

06 May 2020

 

VIRGIN MONEY UK PLC

INTERIM FINANCIAL REPORT

SIX MONTHS TO 31 MARCH 2020

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

BASIS OF PRESENTATION Virgin Money UK PLC ('Virgin Money' or 'the Company'), together with its subsidiary undertakings (which together comprise the 'Group'), operate under the Clydesdale Bank, Yorkshire Bank, B and Virgin Money brands. It offers a range of banking services for both retail and business customers through retail branches, lounges, business banking centres, direct and online channels, and brokers. This release covers the results of the Group for the six months ended 31 March 2020. Statutory basis: Statutory information is set out on page 18 and within the interim condensed consolidated financial statements. Pro forma comparative results: On 15 October 2018, the Company acquired all the voting rights in Virgin Money Holdings (UK) PLC by means of a scheme of arrangement under Part 26 of the UK Companies Act 2006, with the transaction being accounted for as an acquisition of Virgin Money Holdings (UK) PLC. We believe that it is helpful to provide additional information which is more readily comparable with the current year results of the combined businesses. Therefore we have prepared pro forma comparative results for the Group as if Virgin Money UK PLC and Virgin Money Holdings (UK) PLC had always been a combined group, in order to assist in explaining trends in financial performance. A reconciliation between the results on a comparative pro forma basis and a statutory basis is included on page 17. The pro forma comparative results are also presented on an underlying basis as there were a number of factors which had a significant effect on the comparability of the Group's financial position and results. Any reference to pro forma results relates to the prior period only as the pro forma basis is not applicable in the current period due to the combined group being in operation for the entire six months to 31 March 2020. Underlying basis: The results are adjusted to remove certain items that do not promote an understanding of historical or future trends of earnings or cash flows, and therefore allows a more meaningful comparison of the Group's underlying performance. A reconciliation from the underlying results to the statutory basis is shown on page 17 and management's rationale for the adjustments is shown on page 80. Alternative performance measures: the financial key performance indicators (KPIs) used by management in monitoring the Group's performance and reflected throughout this report are determined on a combination of bases (including statutory, regulatory and alternative performance measures), as detailed at 'Measuring financial performance - glossary' on pages 278 to 279 of the Group Annual Report and Accounts for the year ended 30 September 2019.  Certain figures contained in this document, including financial information, may have been subject to rounding adjustments and foreign exchange conversions. Accordingly, in certain instances, the sum or percentage change of the numbers contained in this document may not conform exactly to the total figure given.

FORWARD-LOOKING STATEMENTS

The information in this document may include forward-looking statements, which are based on assumptions, expectations, valuations, targets, estimates, forecasts and projections about future events. These can be identified by the use of words such as 'expects', 'aims', 'targets', 'seeks', 'anticipates', 'plans', 'intends', 'prospects', 'outlooks', 'projects', 'forecasts', 'believes', 'estimates', 'potential', 'possible', and similar words or phrases. These forward-looking statements, as well as those included in any other material discussed at any presentation, are subject to risks, uncertainties and assumptions about the Group and its securities, investments and the environment in which it operates, including, among other things, the development of its business and strategy, any acquisitions, combinations, disposals or other corporate activity undertaken by the Group (including but not limited to the integration of the business of Virgin Money Holdings (UK) PLC) and its subsidiaries into the Group, trends in its operating industry, changes to customer behaviours and covenant, macro-economic and/or geopolitical factors, the repercussions of the outbreak of coronavirus (including but not limited to the COVID-19 outbreak), changes to its board and/or employee composition, exposures to terrorist activity, IT system failures, cyber ‐ crime, fraud and pension scheme liabilities, changes to law and/or the policies and practices of the Bank of England (BoE), the Financial Conduct Authority (FCA) and/or other regulatory and governmental bodies, inflation, deflation, interest rates, exchange rates, changes in the liquidity, capital, funding and/or asset position and/or credit ratings of the Group and future capital expenditures and acquisitions.

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

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

Interim financial report

For the six months ended 31 March 2020

Contents

Virgin Money UK PLC Interim Results 2020   1

Business and financial review   3

Risk management 19

Statement of Directors' responsibilities   48

Independent review report to Virgin Money UK PLC   49

Financial statements   50

Interim condensed consolidated income statement 50

Interim condensed consolidated statement of comprehensive income   51

Interim condensed consolidated balance sheet 52

Interim condensed consolidated statement of changes in equity   53

Interim condensed consolidated statement of cash flows   54

Notes to the interim condensed consolidated financial statements   55

Additional information   80

Virgin Money UK PLC Interim Results 2020

David Duffy, Chief Executive Officer:

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

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

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

H1 financial highlights

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Supporting our customers, colleagues & communities

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

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

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

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

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

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

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

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

Well positioned for an uncertain outlook

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

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

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

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

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

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

Contact details

For further information, please contact:

Investors and Analysts
Andrew Downey Head of Investor Relations	[phone] [e-mail]
Richard Smith Senior Manager, Investor Relations	[phone] [e-mail]
Martin Pollard Investor Relations Manager	[phone] [e-mail]
Media (UK)
Matt Magee	[phone]
Head of Media Relations	[e-mail]
Christina Kelly	[phone]
Senior Media Relations Manager	[e-mail]
Simon Hall	[phone]
Senior Media Relations Manager	[e-mail]
Press Office	[phone]
	[e-mail]
Powerscourt
Victoria Palmer-Moore	[phone]
Andy Smith	[phone]
Media (Australia)
Citadel Magnus
James Strong Peter Brookes	[phone] [phone]

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

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

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

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

 

Business and financial review

Financial Performance - underlying basis

Summary income statement - underlying basis

							Pro forma
						6 months to	6 months to					6 months to
						31 Mar 2020	31 Mar 2019			Change		30 Sep 2019				Change
						£m			£m	%				£m		%
Underlying net interest income						702			728	(4)				705		-
Underlying non-interest income						115		115		-					91	26
Total underlying operating income						817			843	(3)				796		3
Underlying operating and administrative expenses						(465)			(480)	(3)				(467)		-
Underlying operating profit before impairment losses						352			363	(3)				329		7
Impairment losses on credit exposures (pre COVID-19)						(86)			(77)	12				(76)		13
Impairment charge for COVID-19						(146)			-					-
Total impairment losses on credit exposures						(232)			(77)	201				(76)		205
Underlying profit on ordinary activities before tax						120			286	(58)				253		(53)
-  Integration and transformation costs						(61)			(45)	36				(111)		(45)
-  Acquisition accounting unwinds						(57)			(67)	(15)				(20)		185
-  Legacy conduct costs						-			(33)	(100)				(400)		(100)
-  Other items						(9)			(132)	(93)				4		(325)
Statutory/pro forma (loss)/profit on ordinary activities before tax						(7)			9	n/a				(274)		(97)
Tax credit						29			-					58		(50)
Statutory/pro forma profit/(loss) after tax						22			9	144				(216)		n/a

Key performance indicators⁽¹⁾

					Pro forma
				6 months to	6 months to		6 months to
				31 Mar 2020	31 Mar 2019	Change	30 Sep 2019	Change
Profitability:
Net interest margin				1.62%	1.71%	(9)bps	1.61%	1bps
Underlying return on tangible equity (RoTE)				4.6%	10.4%	(5.8)%pts	11.2%	(6.6)%pts
Underlying cost to income ratio (CIR)				57%	57%	-	59%	(2)%pts
Underlying return on assets				0.25%	0.49%	(24)bps	0.54%	(29)bps
Underlying earnings per share (EPS)				5.7p	13.4p	(7.7)p	14.7p	(9.0)p
(1)  For a definition of each of the KPIs, refer to 'Measuring financial performance - glossary' on pages 278 to 279 of the Group Annual Report and Accounts for the year ended 30 September 2019. The KPIs include statutory, regulatory and alternative performance measures. Where applicable certain KPIs are calculated on an annualised basis for the periods to 31 March.

 

Business and financial review

Financial Performance - underlying basis

Key performance indicators (continued)

As at:

31 Mar 2020

31 Mar 2019

Change

30 Sep 2019

Change

Asset quality

Cost of risk pre COVID-19(1)

0.23%

0.21%

2bps

0.21%

2bps

Cost of risk post COVID-19(1)

0.63%

n/a

n/a

n/a

n/a

Total provision to customer loans pre COVID-19

0.55%

0.52%

3bps

0.53%

2bps

Total provision to customer loans post COVID-19

0.75%

n/a

n/a

n/a

n/a

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

57.1%

58.2%

(1.1)%pts

57.2%

(0.1)%pts

Regulatory Capital:

Common equity tier 1 (CET1) ratio

13.0%

14.5%

(1.5)%pts

13.3%

(0.3)%pts

Tier 1 ratio

16.6%

18.6%

(2)%pts

17.1%

(0.5)%pts

Total capital ratio

19.5%

21.9%

(2.4)%pts

20.1%

(0.6)%pts

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

25.6%

25.2%

0.4%pts

26.6%

(1.0)%pts

Capital Requirement Directive IV (CRD IV) leverage ratio

4.4%

4.7%

(0.3)%pts

4.3%

0.1%pts

UK leverage ratio

4.9%

5.3%

(0.4)%pts

4.9%

-%pts

Tangible net asset value (TNAV) per share

252.5p

260.1p

(7.6)p

249.2p

3.3p

Funding and Liquidity:

Loan to deposit ratio (LDR)

113%

118%

(5)%pts

114%

(1)%pts

Liquidity coverage ratio (LCR)

139%

158%

(19)%pts

152%

(13)%pts

Net stable funding ratio (NSFR)

129%

125%

4%pts

128%

1%pts

(1)

Cost of risk is calculated on an annualised basis.

(2)

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

Summary balance sheet

										As at
										31 Mar 2020	30 Sep 2019			Change
										£m			£m	%
Customer loans										73,183			72,979	0.3
of which Mortgages										59,521			60,079	(0.9)
of which Business										8,327			7,876	5.7
of which Personal										5,335			5,024	6.2
Other financial assets										14,868			16,391	(9.3)
Other non-financial assets										2,003		1,629		23.0
Total assets										90,054			90,999	(1.0)
Customer deposits										64,652			63,787	1.4
of which relationship deposits(1)										22,268			21,347	4.3
of which non-linked savings										20,270			20,197	0.4
of which term deposits										22,114			22,243	(0.6)
Wholesale funding										16,835			18,506	(9.0)
Other liabilities										3,493			3,685	(5.2)
Total liabilities										84,980			85,978	(1.2)
Ordinary shareholders' equity										4,159			4,106	1.3
Additional Tier 1 (AT1) equity										915			915	-
Equity										5,074			5,021	1.1
Total liabilities and equity										90,054			90,999	(1.0)
Risk Weighted Assets (RWAs)										25,173			24,046	4.7
(1)	Current account and linked savings balances.

Business and financial review

Chief Executive Officer's statement

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

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

Resilient H1 operating performance

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

Supporting our Customers

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

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

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

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

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

Business and financial review

Chief Executive Officer's statement

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

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

Supporting our Colleagues

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

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

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

Supporting our Communities

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

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

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

Protecting our Bank

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

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

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

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

Business and financial review

Chief Executive Officer's statement

Board succession

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

Outlook

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

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

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

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

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

David Duffy, Chief Executive Officer - 5 May 2020

 

Business and financial review

Chief Financial Officer's review

Resilient H1 operational performance

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

Balance sheet strength

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

Key portfolio metrics

		Mortgages	Business	Personal
Customer lending balances		£59.5bn	£8.3bn	£5.3bn
Proportion of customer lending		82%	11%	7%
Collateral levels		57% LTV	c.65% full or partial	n/a
Arrears (90 DPD)		0.4%	0.5%	Cards(1): 1.2%  Loans: 0.7%
Gross cost of risk (pre-COVID-19)		2bps	45bps	300bps
Balance sheet credit provision (post-COVID-19)		£50m	£261m	£231m
Coverage ratio (post-COVID-19)		9bps	323bps	440bps
IRB status		Advanced-IRB	Foundation-IRB	Standardised
Average risk weight density		14%	73%	75%
(1)	Credit cards arrears methodology is 2 cycles past due

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

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

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

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

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

Business and financial review

Chief Financial Officer's review

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

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

COVID-19 impairment provision

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

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

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

Key capital, funding and liquidity metrics

CET1 ratio %	CRD IV Minimum CET1 requirement %	CET1 management buffer over reg min	Total capital ratio %	MREL ratio %	UK leverage ratio %	LCR %	LDR %	Debt securities <3 months
13.0%	9.9%	c.£800m	19.5%	25.6%	4.9%	139%	113%	£0.4bn or 4%

Resilient capital base and prudent funding & liquidity position

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

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

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

Business and financial review

Chief Financial Officer's review

Review of current period results

Underlying income							Pro forma
						6 months to	6 months to						6 months to
						31 Mar 2020	31 Mar 2019						30 Sep 2019
						£m			£m		Change				£m			Change
Underlying net interest income						702			728		(4)%				705			-
Non-interest income						115		115		-						91			26%
Total underlying operating income						817			843		(3)%				796			3%
Net interest margin (NIM)						1.62%			1.71%		(9)bps				1.61%			1bps
Average interest-earning assets						86,847			85,628		1%				87,092			-

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

Net interest income

						Pro forma
		6 months ended 31 March 2020				6 months ended 31 March 2019
		Average balance	Interest income/ (expense)	Average yield/ (rate)(1)		Average balance	Interest income/ (expense)	Average yield/ (rate)(1)
Average balance sheet		£m	£m	%		£m	£m	%
Interest-earning assets:
Mortgages		59,823	742	2.48		59,991	783	2.62
Business lending(2)		7,963	162	4.08		7,500	156	4.17
Personal lending		5,344	219	8.19		4,506	172	7.65
Liquid assets		11,982	48	0.80		11,984	49	0.82
Due from other banks		1,730	4	0.44		1,647	6	0.74
Swap income/other		-	(20)	n/a		-	(6)	n/a
Other interest earning assets		5	-	n/a		-	-	-
Total average interest-earning assets		86,847	1,155	2.66		85,628	1,160	2.72
Total average non-interest-earning assets		3,416				3,243
Total average assets		90,263				88,871
Interest-bearing liabilities:
Current accounts		11,748	(9)	(0.16)		11,581	(9)	(0.16)
Savings accounts		27,221	(128)	(0.94)		23,352	(99)	(0.85)
Term deposits		22,151	(178)	(1.61)		23,213	(185)	(1.60)
Wholesale funding		17,172	(136)	(1.59)		19,100	(139)	(1.46)
Other interest earning liabilities		179	(2)	n/a		-	-	-
Total average interest-bearing liabilities		78,471	(453)	(1.16)		77,246	(432)	(1.12)
Total average non-interest-bearing liabilities		6,986				6,522
Total average liabilities		85,457				83,768
Total average equity		4,806				5,103
Total average liabilities and average equity		90,263				88,871
Net interest income			702	1.62			728	1.71
(1)	Average yield is calculated by annualising the interest income/expense for the period.
(2)	Includes loans designated at fair value through profit or loss.

Business and financial review

Chief Financial Officer's review

Net interest income (continued)

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

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

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

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

Non-interest income

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

Costs

Pro forma

6 months to

6 months to

6 months to

31 Mar 2020

31 Mar 2019

30 Sep 2019

Operating and administrative expenses

£m

£m

Change

£m

Change

Total underlying operating and administrative expenses

465

480

(3)%

467

-

Underlying CIR

57%

57%

-

59%

(2)%pts

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

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

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

 

Business and financial review

Chief Financial Officer's review

Impairments post COVID-19 basis

							Pro forma
		6 months ended 31 March 2020					6 months ended 31 March 2019
		Mortgages	Personal	Business	Total		Mortgages	Personal	Business	Total
Impairment
Pre-COVID-19 gross cost of risk (bps)(1)		2	300	45	28		1	317	55	26
Impairment charge for COVID-19		4	120	253	40		-	-	-	-
Post-COVID-19 gross cost of risk (bps)(1)		6	420	298	68		1	317	55	26
Specific provision releases and recoveries (bps)					(5)					(5)
Net cost of risk post-COVID-19 (bps)(1)					63					21
(1)	Cost of risk is calculated on an annualised basis.

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

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

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

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

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

Exceptional items and statutory profit

							6 months to
							31 Mar 2020	Pro forma 31 Mar 2019		30 Sep 2019
							£m		£m		£m
Underlying profit on ordinary activities before tax							120		286		253
Exceptional items							(127)		(277)		(527)
-  Integration and transformation costs							(61)		(45)		(111)
-  Acquisition accounting unwinds							(57)		(67)		(20)
-  Legacy conduct costs							-		(33)		(400)
-  Other items							(9)		(132)		4
(Loss)/profit on ordinary activities before tax							(7)		9		(274)
Add Virgin Money Holdings (UK) PLC pre-acquisition loss							-		33		-
Statutory (loss)/profit on ordinary activities before tax							(7)		42		(274)
Tax credit/(expense)							29		(5)		58
Statutory profit/(loss) after tax							22		37		(216)

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

Business and financial review

Chief Financial Officer's review

Integration and transformation costs

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

Acquisition accounting unwinds

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

Legacy conduct

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

Other items

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

Taxation

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

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

Returns and TNAV

Pro forma

6 months to

6 months to

6 months to

31 Mar 2020

31 Mar 2019

Change

30 Sep 2019

Change

Underlying RoTE

4.6%

10.4%

(5.8)%pts

11.2%

(6.6)%pts

TNAV per share

252.5p

260.1p

(7.6)p

249.2p

3.3p

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

 

Business and financial review

Chief Financial Officer's review

Balance sheet

										As at
										31 Mar 2020	30 Sep 2019
										£m			£m	Change
Mortgages										59,521			60,079	(0.9)%
Business										8,327			7,876	5.7%
Personal										5,335		5,024		6.2%
Total customer lending										73,183			72,979	0.3%
Relationship deposits(1)										22,268			21,347	4.3%
Non-linked savings										20,270			20,197	0.4%
Term deposits										22,114			22,243	(0.6)%
Total customer deposits										64,652			63,787	1.4%
Wholesale funding										16,835		18,506		(9.0)%
of which Term Funding Scheme (TFS)										7,142		7,342		(2.7)%
Loan to Deposit Ratio (LDR)										113%			114%	(1)%pts
Liquidity Coverage Ratio (LCR)										139%		152%		(13)%pts
(1)	Current account and linked savings balances.

Continued customer balance growth

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

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

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

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

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

Wholesale funding and liquidity

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

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

Business and financial review

Chief Financial Officer's review

Capital and RWAs									As at
									31 Mar 2020	30 Sep 2019		Change
CET1 ratio									13.0%		13.3%		(0.3)%pts
Total capital ratio									19.5%		20.1%		(0.6)%pts
MREL ratio									25.6%		26.6%		(1.0)%pts
UK leverage ratio									4.9%		4.9%		-%pts
RWAs									25,173		24,046		4.7%
of which Mortgages									9,104		8,846		2.9%
of which Business									7,580		7,124		6.4%
of which Personal									4,238		4,042		4.8%

CET1 Capital movements		6 months to 31 Mar 2020
		%/bps
Opening CET1 ratio as at 1 October 2019		13.3%
Generated(1) (bps)		97
COVID-19 impairment charge (bps)		(51)
COVID-19 regulatory adjustments(2) (bps)		51
Underlying RWA growth (bps)		(31)
Mortgage model RWA changes (bps)		(28)
AT1 distributions (bps)		(14)
Underlying capital generated (bps)		24
Integration and transformation costs (bps)		(21)
Acquisition accounting impacts		(16)
Other (bps)		(22)
Net capital absorbed (bps)		(35)
Closing CET1 ratio		13.0%

(1)	Generated includes 4bps of IFRS 9 transitional relief relating to pre-COVID-19 impairment charges.
(2)	COVID-19 regulatory adjustments include IFRS 9 transitional relief and movements in excess expected losses.

CET1 capital

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

Risk weight assets

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

MREL

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

 

Business and financial review

Chief Financial Officer's review

Outlook and guidance

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

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

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

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

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

Business and financial review

Reconciliation of statutory to underlying results

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

	Statutory results	Integration and transformation costs	Acquisition accounting unwinds	Legacy conduct	Other	Underlying basis
6 months to 31 Mar 2020	£m	£m	£m	£m	£m	£m
Net interest income	671	-	31	-	-	702
Non-interest income	96	-	15	-	4	115
Total operating income	767	-	46	-	4	817
Total operating and administrative expenses before impairment losses	(537)	61	6	-	5	(465)
Operating profit before impairment losses	230	61	52	-	9	352
Impairment losses on credit exposures	(237)	-	5	-	-	(232)
(Loss)/profit on ordinary activities before tax	(7)	61	57	-	9	120
Financial performance measures
RoTE	(1.0)%	2.7%	2.5%	-%	0.4%	4.6%
CIR	70.0%	(6.3)%	(5.8)%	-%	(0.9%)	57.0%
Return on assets	0.02%	0.11%	0.10%	-%	0.02%	0.25%
Basic EPS	(1.2)p	3.3p	3.1p	-p	0.5p	5.7p

	Statutory results	Integration and transformation costs	Acquisition accounting unwinds	Legacy conduct	Other	Underlying basis
6 months to 30 Sep 2019	£m	£m	£m	£m	£m	£m
Net interest income	694	-	11	-	-	705
Non-interest income	129	-	-	-	(38)	91
Total operating income	823	-	11	-	(38)	796
Total operating and administrative expenses before impairment losses	(1,018)	111	6	400	34	(467)
Operating (loss)/profit before impairment losses	(195)	111	17	400	(4)	329
Impairment losses on credit exposures	(79)	-	3	-	-	(76)
(Loss)/profit on ordinary activities before tax	(274)	111	20	400	(4)	253

	Statutory results	Include Virgin Money pre-acquisition results	Pro forma results	Integration and transformation costs	Acquisition accounting unwinds	Legacy conduct	Other	Underlying basis
6 months to 31 Mar 2019	£m	£m	£m	£m	£m	£m	£m	£m
Net interest income	820	22	842	-	(34)	-	(80)	728
Non-interest income	106	9	115	-	-	-	-	115
Total operating income	926	31	957	-	(34)	-	(80)	843
Total operating and administrative expenses before impairment losses	(711)	(60)	(771)	45	1	33	212	(480)
Operating profit/(loss) before impairment losses	215	(29)	186	45	(33)	33	132	363
Impairment losses on credit exposures	(173)	(4)	(177)	-	100	-	-	(77)
Profit/(loss) on ordinary activities before tax	42	(33)	9	45	67	33	132	286
Financial performance measures
RoTE	0.1%	(1.5)%	(1.4)%	1.9%	2.9%	1.4%	5.6%	10.4%
CIR	77%	4%	81%	(6)%	4%	(4)%	(18)%	57%
Return on assets	0.06%	(0.06)%	-%	0.08%	0.12%	0.06%	0.23%	0.49%
Basic EPS	0.2p	(2.0)p	(1.8)p	2.5p	3.7p	1.8p	7.2p	13.4p

 

Business and financial review

Financial review - statutory basis

Summary income statement- statutory basis

						6 months to	6 months to						6 months to
						31 Mar 2020	31 Mar 2019				Change		30 Sep 2019				Change
						£m			£m		%				£m			%
Net interest income						671			820		(18)				694			(3)
Non-interest income						96		106		(9)						129			(26)
Total operating income						767			926		(17)				823			(7)
Operating and administrative expenses						(537)			(711)		(24)				(1,018)			(47)
Operating profit/(loss) before impairment losses						230			215		7				(195)
Impairment losses on credit exposures						(237)			(173)		37				(79)			200
Statutory (loss)/profit on ordinary activities before tax						(7)			42						(274)			(97)
Tax credit/(expense)						29			(5)						58			(50)
Statutory profit/(loss) after tax						22			37		(41)				(216)

Key performance indicators⁽¹⁾

					6 months to	6 months to		12 months to
					31 Mar 2020	31 Mar 2019	Change	30 Sep 2019(2)	Change
Profitability:
Statutory RoTE					(1.0)%	0.1%	(1.1)%pts	(6.8)%	5.8%pts
Statutory CIR					70%	77%	(7)%pts	99%	(29)%pts
Statutory return on assets					0.02%	0.06%	(4)bps	(0.23)%	25bps
Statutory EPS					(1.2)p	0.2p	(1.4)p	(17.9)p	16.7p
(1)	For a definition of each of the KPIs, refer to 'Measuring financial performance - glossary' on pages 278 to 279 of the Group Annual Report and Accounts for the year ended 30 September 2019. The KPIs include statutory, regulatory and alternative performance measures. Where applicable certain KPIs are calculated on an annualised basis for the periods to 31 March.
(2)	Profitability KPIs are provided with a full year to 30 September 2019 comparative in line with the statutory income statement presentation in the financial statements and as previously reported in the 2019 Group Annual Report and Accounts.

 

Risk management

Risk overview

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

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

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

COVID-19

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

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

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

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

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

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

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

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

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

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

Principal risks and definitions

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

Credit risk

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

Financial risk

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

Regulatory and compliance risk

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

Conduct risk

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

Operational risk

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

Risk management

Risk overview

Financial crime risk

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

Technology risk

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

Strategic and enterprise risk

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

People risk

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

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

COVID-19impacts on principal risks

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

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

Risk	Key Mitigating actions
Credit Risk: Although the impact on the Group's retail and business credit portfolios is yet to fully manifest, it is clear that credit risk is heightened, with implications for the Group's customers, resulting in increased levels of capital repayment holidays, forbearance and other forms of customer support. Levels of default, provisions and impairments are also expected to increase over time.	The Group has amended credit frameworks and policies, providing temporarysupporttoexistingcustomersthroughcapitalrepaymentholidays, interest free overdrafts (for retail customers), extensions of credit, including through the CBILS and the CLBILS, and introduced a variety of additional supporting measures across allportfolios. The Group has implemented additional credit monitoring and updated the Risk Appetite Statement.
Operational Risk, Technology Risk and Financial Crime: Increased remote working, the implementation of new processes and the pressure on customer support areas all have the potential to increase the Group's operational risk profile. This could lead to increased errors or delays and subsequent loss. Enabling working from home can increase risk of internal fraud, which may arise as a result of unauthorised access to critical systems and data. There is an increased risk in cyber-attacks, due to phishing emails which use a COVID-19 theme, and breaches could have legal, regulatory or privacy implications. There is an increased risk of fraud, as fraudsters take advantage of the vulnerabilities created by the current situation.	There is additional fraud monitoring, continuous risk assessment of temporary process changes, customers have been directed to digital banking and there continues to be enhanced focus on supplier service level agreements and contingency plans. A significant amount of work has been undertaken to enable and improve home working conditions, and network capacity for telephony has been increased to meet demand. System monitoring, incident management and escalation processes are in place with oversight from the Risk function. The Group has undertaken risk assessments for remote working, tracked policy exceptions, implemented additional controls such as an increased levels of monitoring, and mobilised awareness initiatives.

 

Risk management

Risk overview

COVID-19impacts on principal risks (continued)

People Risk: There is an impact on colleague health from risk of illness and increased absence, in addition to longer-term well-being risks, such as mental health impacts, which may arise from societal factors. These factors could also increase pressure and reduce skills availability in key areas.	TheGroupisfollowinggovernmentadvicewithcolleaguesworkingfromhome wherepossible,andsocialdistancingandadditionalcleaningmeasuresarein place to support key workers based in offices and branches. Vulnerable colleagues are not onsite. The Group is ensuring that colleagues are protected through adhering to the government's physical and health measures, while recognising there is uncertainty surrounding timing of their removal or relaxation. Additional well-being programmes have been implemented to support colleagues.
Conduct Risk: There is the potential for harm to customers impacted by COVID-19 through failure to recognise customer circumstances, financial difficulties or vulnerability and to apply appropriate actions.	TheGroupisprioritisingitscustomersandwillmaintainopenandtransparent communication with regulators. The Group is undertaking file reviews, call listening, managing contact centre availability and workflow management impacted due to increased volumes and reducedstaff.
Financial Risk: Capital may be required to absorb the impact of heightened levels of credit risk and the expected increase of impairment levels over time. Wholesale funding markets may be fragile during high levels of uncertainty. Customers' use of deposits may change, particularly amongst businesses, and the taking of loan repayment holidays will alter cash flows for the management of liquidity.	Capital,fundingandliquidityareallsubjecttoextensivestresstestingwiththe resultsinformingthelevelsofcapitalandliquiditythatarerequiredtobeheld in the event of adverseconditions.

Emerging risks

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

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

Geo-political and macro-economic environment

The Group is exposed to a variety of risks resulting from a downturn in the UK economic environment. These risks are expected to crystallise in the near- term due to the impact of the COVID-19 pandemic. The precise duration and depth of the downturn is uncertain, but risks to credit and margin performance are expected and significant disruption to both business supply and demand has already been seen. The efficacy of monetary and fiscal policy, and the speed and ability with which the UK can return to normal operating conditions, will determine the overall economic impact for the UK and the Group. Uncertainty remains regarding the future relationship between the UK and EU and whether the scheduled trade deal negotiations can be completed ahead of the transition period end date of 31 December 2020.

 

Risk management

Risk overview

Emerging risks (continued)

Regulatory change	There is wide-ranging and material short-term disruption to firms and regulators as a result of COVID-19 that impacts customers, businesses and firms, requiring large-scale prioritisation decisions in a fast-moving and highly uncertain environment. The longevity of temporary changes (e.g. cancellation of the 2020 Annual Cyclical Scenario), or the possible requirement for lasting changes, is currently unknown and may impact firms in the medium term. Beyond COVID-19, there is continued evolution of the regulatory landscape, and the requirement to respond to on-going prudential and conduct driven initiatives.
Competition	The Group continues to operate in a highly competitive environment, with growth across a number of digital-only providers, and emerging signs of participation from large technology companies. Forced changes in customer behaviour, as a result of COVID-19, could make it easier, and faster, for these digital companies to enter the UK financial services market. As the market continues to react to COVID-19, and the impacts become clearer, it will be necessary to remain agile, focused and responsive to ensure we are addressing new risks in a safe and efficient manner. This increased competition within the financial services industry could also drive consolidation within the market, as banks review ways of increasing their UK footprint.
Climate change	The Group continues to consider its exposure to the physical, transitional and reputational risks arising from climate change, and the transition to a low carbon economy, which have the potential to impact the Group's customers, strategic priorities and operational activities.

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

 

Risk management

Credit risk

Credit risk is the risk that a borrower or counterparty fails to pay the interest or capital due on a loan or other financial instrument. Credit risk manifests itself in the financial instruments and/or products that the Group offers, and those in which the Group invests (including, among others, loans, guarantees, credit-related commitments, letters of credit, acceptances, inter-bank transactions, foreign exchange transactions, swaps and bonds). Credit risk can be found both on-balance sheet and off-balance sheet.

COVID-19 Assessment

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

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

IFRS 9 Methodology

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

Key credit metrics

	As at
	31 Mar 2020 (unaudited) £m	30 Sept 2019 (audited) £m		31 Mar 2019 (unaudited) £m
Impairment provisions held on credit exposures(1) (pre COVID-19)
Mortgage lending	40	40		35
Personal lending	199	175		152
Business lending	157	147		163
	396	362		350

	As at
	31 Mar 2020 (unaudited) £m	30 Sept 2019 (audited) £m		31 Mar 2019 (unaudited) £m
Impairment provisions held on credit exposures(1) (post COVID-19)
Mortgage lending	50	40		35
Personal lending	231	175		152
Business lending	261	147		163
	542	362		350

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

 

Risk management

Credit risk

			6 months to 31 Mar 2020 (unaudited) £m			Pro-forma(3) 12 months to 30 Sept 2019 (unaudited) £m			Pro-forma 6 months to 31 Mar 2019 (unaudited) £m
Underlying impairment charge on credit exposures(1)
Mortgage lending (pre COVID-19)			2			4			1
Mortgage lending impairment charge for COVID-19			10			n/a			n/a
Personal lending (pre COVID-19)			68			124			58
Personal lending impairment charge for COVID-19			32			n/a			n/a
Business lending (pre COVID-19)			16			25			18
Business lending impairment charge for COVID-19			104			n/a			n/a
			232			153			77
Asset quality measures:
Underlying cost of risk pre COVID-19(2)				0.23%			0.21%			0.21%
Underlying cost of risk post COVID-19				0.63%			n/a			n/a
Stage 3 assets to customer loans				1.13%			1.09%			1.08%
Total provision to customer loans pre COVID-19				0.55%			0.50%			0.49%
Total provision to customer loans post COVID-19				0.75%			n/a			n/a
Stage 3 provision to Stage 3 loans				18.38%			14.32%			15.00%
(1)	The underlying impairment charge in the 2019 periods exclude the impact of the acquisition of Virgin Money Holdings (UK) PLC on 15th October 2018.
(2)	Inclusive of gains/losses on assets held at fair value and elements of fraud loss.
(3)	The comparative has been restated in line with the current period presentation

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

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

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

As at 31 March 2020 (unaudited)
		Stage 2	Stage 2	Stage 2		Stage 3
	Stage 1	<30 DPD	>30 DPD	Total	Stage 3	POCI	Total
	£m	£m	£m	£m	£m	£m	£m
Mortgages	56,906	2,180	188	2,368	398	92	59,764
Personal of which:	4,929	425	35	460	66	5	5,460
- credit cards	3,875	384	28	412	50	5	4,342
- personal overdrafts	42	-	1	1	3	-	46
- other retail lending	1,012	41	6	47	13	-	1,072
Business	5,570	2,456	3	2,459	273	-	8,302
Closing balance	67,405	5,061	226	5,287	737	97	73,526

As at 30 September 2019 (audited)
		Stage 2	Stage 2	Stage 2		Stage 3
	Stage 1	<30 DPD	>30 DPD	Total	Stage 3	POCI	Total
	£m	£m	£m	£m	£m	£m	£m
Mortgages	58,120	1,637	168	1,805	363	103	60,391
Personal of which:	4,787	392	32	424	61	8	5,280
- credit cards	3,806	353	25	378	46	8	4,238
- personal overdrafts	53	-	1	1	4	-	58
- other retail lending	928	39	6	45	11	-	984
Business	5,018	2,280	5	2,285	272	-	7,575
Closing balance	67,925	4,309	205	4,514	696	111	73,246

Risk management

Credit risk

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

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

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

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

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

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

 

Risk management

Credit risk

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

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

As at 31 March 2020

		Gross carrying amount
		Stage 2	Stage 3
	Stage 1	(not credit	(credit	Stage 3
	12 month	impaired)	impaired)	(POCI)
	ECLs	Lifetime ECLs	Lifetime ECLs	Lifetime ECLs	Total
	£m	£m	£m	£m	£m
Mortgages
<0.15	36,087	369	-	-	36,456
0.15 to <0.25	6,135	178	-	-	6,313
0.25 to <0.50	9,040	395	-	-	9,435
0.50 to <0.75	2,683	170	-	-	2,853
0.75 to <2.50	2,561	629	-	-	3,190
2.50 to <10.00	339	266	-	-	605
10.00 to <100.00	61	361	-	-	422
100.00 (Default)	-	-	398	92	490
Total	56,906	2,368	398	92	59,764

Personal
<0.15	81	-	-	-	81
0.15 to <0.25	70	-	-	-	70
0.25 to <0.50	1,248	5	-	-	1,253
0.50 to <0.75	1,001	7	-	-	1,008
0.75 to <2.50	1,910	35	-	-	1,945
2.50 to <10.00	584	250	-	-	834
10.00 to <100.00	35	163	-	-	198
100.00 (Default)	-	-	66	5	71
Total	4,929	460	66	5	5,460

Business
<0.15	658	5	-	-	663
0.15 to <0.25	308	10	-	-	318
0.25 to <0.50	788	56	-	-	844
0.50 to <0.75	365	118	-	-	483
0.75 to <2.50	2,373	971	-	-	3,344
2.50 to <10.00	1,078	1,159	-	-	2,237
10.00 to <100.00	-	140	-	-	140
100.00 (Default)	-	-	273	-	273
Total	5,570	2,459	273	-	8,302

 

Risk management

Credit risk

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

As at 30 September 2019

		Gross carrying amount
		Stage 2	Stage 3
	Stage 1	(not credit	(credit	Stage 3
	12 month	impaired)	impaired)	(POCI)
	ECLs	Lifetime ECLs	Lifetime ECLs	Lifetime ECLs	Total
	£m	£m	£m	£m	£m
Mortgages
<0.15	38,816	389	-	-	39,205
0.15 to <0.25	5,836	103	-	-	5,939
0.25 to <0.50	7,983	245	-	-	8,228
0.50 to <0.75	2,422	96	-	-	2,518
0.75 to <2.50	2,648	455	-	-	3,103
2.50 to <10.00	376	274	-	-	650
10.00 to <100.00	39	243	-	-	282
100.00 (Default)	-	-	363	103	466
Total	58,120	1,805	363	103	60,391

Personal
<0.15	93	-	-	-	93
0.15 to <0.25	68	-	-	-	68
0.25 to <0.50	1,326	6	-	-	1,332
0.50 to <0.75	967	8	-	-	975
0.75 to <2.50	1,743	36	-	-	1,779
2.50 to <10.00	553	231	-	-	784
10.00 to <100.00	37	143	-	-	180
100.00 (Default)	-	-	61	8	69
Total	4,787	424	61	8	5,280

Business
<0.15	530	5	-	-	535
0.15 to <0.25	440	17	-	-	457
0.25 to <0.50	718	52	-	-	770
0.50 to <0.75	537	101	-	-	638
0.75 to <2.50	2,199	1,019	-	-	3,218
2.50 to <10.00	592	919	-	-	1,511
10.00 to <100.00	2	172	-	-	174
100.00 (Default)	-	-	272	-	272
Total	5,018	2,285	272	-	7,575

Risk management

Credit risk

The following tables disclose the impairment allowance by portfolio:

As at 31 March 2020 (unaudited)
		Stage 2	Stage 2	Stage 2		Stage 3
	Stage 1	<30 DPD	>30 DPD	Total	Stage 3	POCI	Total
	£m	£m	£m	£m	£m	£m	£m
Mortgages	7	8	7	15	29	(1)	50
Personal of which:	79	92	20	112	42	(2)	231
- credit cards	65	85	15	100	30	(2)	193
- personal overdrafts	2	-	1	1	3	-	6
- other retail lending	12	7	4	11	9	-	32
Business	44	140	-	140	77	-	261
Closing balance	130	240	27	267	148	(3)	542

As at 30 September 2019 (audited)
		Stage 2	Stage 2	Stage 2		Stage 3
	Stage 1	<30 DPD	>30 DPD	Total	Stage 3	POCI	Total
	£m	£m	£m	£m	£m	£m	£m
Mortgages	6	5	4	9	26	(1)	40
Personal of which:	53	71	16	87	37	(2)	175
- credit cards	42	65	12	77	28	(2)	145
- personal overdrafts	2	-	1	1	3	-	6
- other retail lending	9	6	3	9	6	-	24
Business	20	72	-	72	55	-	147
Closing balance	79	148	20	168	118	(3)	362

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

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

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

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

 

Risk management

Credit risk

Coverage ratios

As at 31 March 2020 (unaudited)
		Stage 2	Stage 2	Stage 2		Stage 3
	Stage 1	<30 DPD	>30 DPD	Total	Stage 3	POCI	Total
	%	%	%	%	%	%	%
Mortgages	0.01	0.39	3.88	0.67	7.23	(0.58)	0.09
Personal of which:	1.65	22.44	59.68	25.27	66.67	(36.72)	4.40
- credit cards	1.69	22.83	54.95	25.03	63.13	(36.72)	4.56
- personal overdrafts	5.51	13.69	66.06	57.77	86.07	-	12.20
- other retail lending	1.32	18.59	82.36	26.83	76.05	-	3.32
Business	0.80	5.86	6.37	5.86	29.14	-	3.23
Closing balance	0.19	4.84	12.35	5.16	20.43	(2.43)	0.75

As at 30 September 2019 (audited)
		Stage 2	Stage 2	Stage 2		Stage 3
	Stage 1	<30 DPD	>30 DPD	Total	Stage 3	POCI	Total
	%	%	%	%	%	%	%
Mortgages	0.01	0.29	2.26	0.47	7.13	(0.80)	0.07
Personal of which:	1.15	18.22	51.18	20.64	62.14	(22.61)	3.39
- credit cards	1.11	18.49	46.91	20.35	60.39	(22.61)	3.42
- personal overdrafts	5.00	14.17	66.02	56.00	91.21	-	11.41
- other retail lending	1.09	15.56	68.29	22.35	60.64	-	2.75
Business	0.40	3.13	2.27	3.13	19.99	-	1.93
Closing balance	0.12	3.41	9.68	3.69	16.89	(2.30)	0.50

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

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

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

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

 

Risk management

Credit risk

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

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

	Non credit impaired				Credit impaired					Total	Total
	Stage 1		Stage 2		Stage 3		Stage 3 POCI
	Gross Loans	ECL	Gross Loans	ECL	Gross Loans	ECL	Gross Loans	ECL		Gross Loans	ECL
	£m	£m	£m	£m	£m	£m	£m	£m		£m	£m
Opening balance at 1 October 2019	67,925	79	4,514	168	696	118	111	(3)		73,246	362
Transfers Across Stages	(1,511)	(3)	790	29	141	54	-	-		(580)	80
Assets Originated or Purchased	9,790	42	529	37	68	3	-	-		10,387	82
Repayments and Other movements	(8,799)	12	(546)	33	(100)	29	(13)	1		(9,458)	75
Write-offs	-	-	-	-	(68)	(68)	(1)	(1)		(69)	(69)
Cash Recoveries	-	-	-	-	-	12	-	-		-	12
Closing balance at 31 March 2020	67,405	130	5,287	267	737	148	97	(3)		73,526	542

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

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

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

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

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

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

Risk management

 

Credit risk

Mortgage lending by average LTV

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

		31 Mar 2020	30 Sep 2019
		(unaudited)	(audited)
LTV(1)		%	%
Less than 50%		34	35
50% to 75%		49	48
76% to 80%		6	6
81% to 85%		5	5
86% to 90%		4	4
91% to 95%		2	2
96% to 100%		-	-
Greater than 100%		-	-
		100	100
(1)	LTV of the mortgage portfolio is defined as mortgage portfolio weighted by balance.  The heritage Clydesdale and Yorkshire Bank portfolios are indexed using the MIAC Acadametrics indices at a given date, while the heritage Virgin Money portfolio is indexed using the Markit indices.  The Group view is a combined summary of the two portfolios.

Risk management

Credit risk

Forbearance

In dealing with the exceptional challenges posed by COVID-19 and to ensure the appropriate provision of support for our customers, a number of concessions have been, and will continue to be, granted in response to the short-term financial consequences for our customers. In line with regulatory guidance, these interim measures are not considered to be forbearance, as determined by the Group's Forbearance Policy, and have not been reflected in the Group's forbearance disclosures.

Where underlying longer term, financial difficulties are evident the Group's normal forbearance assessment applies.

Mortgage and Personal forbearance

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

As at 31 March 2020
(unaudited)							Impairment allowance on
	Total loans and advances					loans and advances subject to
	subject to forbearance measures					forbearance measures
	Number of loans		Gross carrying amount		% of total portfolio	Impairment allowance			Coverage
			£m			£m				%
Formal arrangements	1,333		159		0.26		6.7				4.20
Temporary arrangements	856		111		0.19		4.2				3.81
Payment arrangement	1,353		134		0.22		3.1				2.34
Payment holiday	1,340		148		0.25		1.4				0.97
Interest only conversion	353		53		0.09		0.2				0.43
Term extension	165		14		0.02		0.1				0.59
Other	33		3		0.01		-				0.62
Legal	135		12		0.02		1.0				8.20
Total mortgage forbearance	5,568		634		1.06		16.7				2.65
Personal forbearance - credit cards	6,609		30		0.61		14.0						46.73
Total	12,177		664		1.03		30.7						4.59
As at 30 September 2019
(audited)							Impairment allowance on
	Total loans and advances					loans and advances subject to
	subject to forbearance measures					forbearance measures
	Number of loans		Gross carrying amount		% of total portfolio	Impairment allowance						Coverage
			£m			£m						%
Formal arrangements	1,352		157		0.26	4.4					2.83
Temporary arrangements	913		119		0.20	3.1					2.62
Payment arrangement	1,118		113		0.19	1.6					1.41
Payment holiday	981		114		0.19	0.7					0.58
Interest only conversion	358		54		0.09	0.3					0.57
Term extension	174		16		0.03	0.1					0.64
Other	35		3		0.00	-					0.50
Legal	130		13		0.02	0.3					2.46
Total mortgage forbearance	5,061		589		0.98	10.5					1.79
Personal forbearance - credit cards	5,522		24		0.53	9.5					41.30
Total	10,583		613		0.95	20.0					3.31

Relative to Mortgages, when all other avenues of resolution including forbearance have been explored, the Group will take steps to repossess and sell underlying collateral. In the period to 31 March 2020, there were 34 repossessions of which 8 were voluntary (12 months to 30 September 2019: 66 including 14 voluntary).

Risk management

Credit risk

Forbearance - other personal lending

Excluding credit cards, the Group currently exercises limited forbearance strategies in relation to other types of personal lending; namely current accounts and personal loans. The Group has assessed the total loan balances subject to forbearance on other types of personal lending to be £10.9m as at 31 March 2020 (30 September 2019: £11.5m), representing 1.08% of the personal lending portfolio (30 September 2019: 1.10%).

Impairment provisions on forborne balances totalled £4.2m as at 31 March 2020 (30 September 2019: £3.6m) providing overall coverage of 38.3% (30 September 2019: 31.58%).

Business forbearance 

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.

As at 31 March 2020
(unaudited)								Impairment allowance on
	Total loans and advances							loans subject to
	subject to forbearance measures							forbearance measures
	Number of customers		Gross carrying amount		% of total portfolio		Impairment allowance			Coverage
			£m				£m			%
Term extension	199		189		2.23		22.9			12.15
Deferral of contracted capital repayments	86		98		1.16		19.3			19.75
Reduction in contracted interest rate	2		1		0.01		0.1			5.32
Alternative forms of payment	2		6		0.08		0.4			5.97
Debt forgiveness	2		4		0.05		0.3			6.89
Refinancing	17		9		0.10		2.1			23.45
Covenant breach/reset/waiver	55		201		2.37		36.2			18.02
Total business forbearance	363		508		6.00		81.3			16.00

As at 30 September 2019
(audited)							Impairment allowance on
	Total loans and advances							loans and advances subject to
	subject to forbearance measures							forbearance measures
	Number of customers		Gross carrying amount		% of total portfolio		Impairment allowance			Coverage
			£m				£m			%
Term extension	187		153		1.93		14.9			9.70
Deferral of contracted capital repayments	98		134		1.68		15.0			11.16
Reduction in contracted interest rate	3		1		0.02		-			3.37
Alternative forms of payment	2		7		0.08		0.4			5.37
Debt forgiveness	2		4		0.05		-			1.06
Refinancing	16		10		0.12		1.5			15.03
Covenant breach/reset/waiver	60		200		2.50		23.6			11.82
Total business forbearance	368		509		6.38		55.4			10.87

Included in other financial assets at fair value is a portfolio of loans which are included in the above table. The gross value of fair value loans subject to forbearance as at 31 March 2020 is £6m (30 September 2019: £8m), representing 0.07% of the total business portfolio (30 September 2019: 0.11%). The credit risk adjustment on these amounts totalled £0.2m (30 September 2019: £0.6m), a coverage of 4.26% (30 September 2019: 6.94%).

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, model risk, pension risk and financial risks arising from climate change.

Capital risk

Capital is held by the Group to protect its depositors, to cover inherent risks in a normal and stressed operating environment and to support the Group's strategy of pioneering growth. Capital risk is the risk that the Group has insufficient quantity or quality of capital to support its operations.

Included in this section are certain Pillar 3 disclosures which the Group has assessed as requiring semi-annual disclosure.

Regulatory capital developments

The Group measures the amount of capital it is required to hold by applying CRD IV as implemented in the UK by the Prudential Regulation Authority (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. These ratios apply at the consolidated Group level.

		As at 31 March 2020
Minimum requirements (unaudited)		CET1	Total capital
Pillar 1(1)		4.5%	8.0%
Pillar 2A		2.9%	5.2%
Total capital requirement		7.4%	13.2%
Capital conservation buffer		2.5%	2.5%
UK countercyclical capital buffer(2)		0.0%	0.0%
Total (excluding PRA buffer)(3)		9.9%	15.7%
(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 UK countercyclical capital buffer (CCyB) is set by the Financial Policy Committee (FPC). On 11 March 2020, as part of a package of measures to support the economy from the impacts of the COVID-19 virus, the FPC announced an immediate reduction of the CCyB from 1.00% to 0.00%.
(3)	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. − a buffer relating to the results of the Bank of England's stress tests.

The Group continues to maintain a significant buffer to its CRD IV minimum CET1 requirement of 9.9%, being a buffer equivalent to £0.8 billion.

The Group's total capital Pillar 2A requirement has reduced from 5.3% at September 2019 to 5.2% at March 2020.  This is because some elements of the Pillar 2A requirement are fixed and therefore represent a lower percentage of RWAs following the RWA growth seen since September 2019.

The UK countercyclical capital buffer (UK CCyB) may be set between 0% and 2.5%. At its December 2019 meeting, the FPC raised the level of the UK CCyB rate that it expects to set in a standard risk environment from in the region of 1% to in the region of 2% and accordingly raised the UK CCyB rate from 1% to 2% which would have taken effect in December 2020.

The FPC also noted that the PRA would consult in 2020 on a proposal to reduce variable Pillar 2A requirements for the largest UK banks by 50% of the relevant firm-specific increase in the UK CCyB rate.

The FPC stated that its intention was to leave the overall loss-absorbing capacity in the banking system broadly unaffected but that the changes will shift the balance of that capacity to higher-quality Tier 1 capital. The PRA's consultation has since been launched and was in line with these proposals.

However, on 11 March 2020, as part of a package of measures to support the economy from the impact of the COVID-19 virus, the FPC announced a reduction in the UK CCyB to 0% with immediate effect. The FPC expects to maintain the 0% rate for at least 12 months, so that any subsequent increase would not take effect until March 2022 at the earliest.

The Bank of England has not yet advised the Group's final MREL requirements. From 1 January 2020 until 31 December 2021, the Group is required to hold 18% of RWA in the form of MREL. From 1 January 2022, the Group continues to expect that it will be subject to an end state MREL of two times Pillar 1 and Pillar 2A capital. 

Following the Bank of England's announcement on 20 March 2020, in relation to supervisory and prudential policy measures to address the challenges of COVID-19, the requirements to comply with updates to definition of default, as well as mortgage Hybrid PD and LGD are now required to be approved and implemented by 1 January 2022, a year later than the original timeline. 
 

Risk management

Financial risk

Regulatory capital developments (continued)

Distributable reserves are determined as required by the Companies Act 2006 by reference to a company's individual financial statements. At 31 March 2020, the Company had accumulated distributable reserves of £1,018m (30 September 2019: £1,015m).

Capital position

The Group's capital position as at 31 March 2020 is summarised below.

Regulatory capital (unaudited)(1)
		31 Mar 2020		30 Sep 2019
		£m		£m
Statutory total equity		5,074		5,021
CET1 capital: Regulatory Adjustments(2)
AT1 capital instruments		(915)		(915)
Defined benefit pension fund assets		(402)		(257)
Prudent valuation adjustment		(5)		(5)
Intangible assets		(501)		(501)
Goodwill		(11)		(11)
Deferred tax asset relying on future profitability		(156)		(146)
Cash flow hedge reserve		51		26
Excess expected losses		-		(88)
AT1 coupon accrual		(21)		(20)
IFRS 9 transitional adjustments		147		100
Total CET1 capital		3,261		3,204
AT1 capital
AT1 capital instruments		915		915
Total AT1 capital		915		915
Total Tier 1 capital		4,176		4,119
Tier 2 capital
Subordinated debt		722		721
IRB excess provisions over expected losses		5		-
Total Tier 2 capital		727		721
Total regulatory capital		4,903		4,840
(1)	The table shows the capital position on a CRD IV 'fully loaded' basis and transitional IFRS 9 basis.
(2)	A number of regulatory adjustments to CET1 capital are required under CRD IV regulatory capital rules.

Risk management

Financial risk

Capital position (continued)

Regulatory capital flow of funds (unaudited)(1)	31 Mar 2020		30 Sep 2019
	£m		£m
CET1 capital(2)
CET1 capital at 1 October	3,204		2,113
Share capital and share premium	1		3
Retained earnings and other reserves (including special purpose entities)	51		(210)
Acquisition of Virgin Money Holdings (UK) plc	-		1,567
Prudent valuation adjustment	-		(2)
Intangible assets	-		(89)
Goodwill arising on acquisition of Virgin Money Holdings (UK) plc	-		(11)
Deferred tax asset relying on future profitability	(10)		(47)
Defined benefit pension fund assets	(145)		(119)
Cash flow hedge reserve	25		(13)
IRB shortfall of credit risk adjustments to expected losses	88		(88)
IFRS 9 transitional relief	47		100
Total CET1 capital	3,261		3,204
AT1 capital
AT1 capital at 1 October	915		450
AT1 capital issued and transferred from Virgin Money Holdings (UK) plc	-		465
Total AT1 capital	915		915
Total Tier 1 capital	4,176		4,119
Tier 2 capital
Tier 2 capital at 1 October	721		626
IRB excess provisions over expected losses	5		-
Credit risk adjustments(3)	-		(152)
Other movements	1		-
Capital instruments issued: subordinated debt	-		247
Total Tier 2 capital	727		721
Total capital	4,903		4,840

(1)	The table shows the capital position on a CRD IV 'fully loaded' basis and transitional IFRS 9 basis.
(2)	CET1 capital is comprised of shares issued and related share premium, retained earnings and other reserves less specified regulatory adjustments.
(3)	The transition to IFRS 9 reporting has removed the requirement for Tier 2 credit risk adjustments.

The Group's CET1 capital increased by £57m in the first six months of the year, primarily due to movement in the IRB shortfall of credit risk adjustments to expected losses. This was driven by an increase in impairment provisions as a result of the COVID-19 related overlay, alongside an increase in retained earnings. These increases are offset by a charge to the Group's defined benefit pension scheme which was closed to future accrual for most members on 1 August 2017.

AT1 and Tier 2 capital remained stable during the first six months of the year.

	31 Mar 2020		30 Sep 2019
Minimum Pillar 1 capital requirements (unaudited)	£m		£m
Credit risk	1,771		1,685
Operational risk	209		209
Counterparty credit risk	18		15
Credit valuation adjustment	16		15
Total Pillar 1 regulatory capital requirements	2,014		1,924

 

Risk management

Financial risk

Capital (continued)

IFRS 9 transitional arrangements(1) (unaudited)		31 March 2020 (£m)
Available capital (amounts)		IFRS 9 Transitional basis	IFRS 9 Fully loaded basis
CET1 capital		3,261	3,114
Tier 1 capital		4,176	4,029
Total capital		4,903	4,756
RWA (amounts)
Total RWA		25,173	25,074
Capital ratios
CET1 (as a percentage of risk exposure amount)		13.0%	12.4%
Tier 1 (as a percentage of risk exposure amount)		16.6%	16.1%
Total capital (as a percentage of risk exposure amount)		19.5%	19.0%
Leverage ratio
Leverage ratio total exposure measure		94,452	94,305
Leverage ratio		4.4%	4.3%
(1)	The table shows a comparison of capital resources, requirements and ratios with and without the application of transitional arrangements for IFRS 9.

Transitional arrangements in Capital Requirements Regulation (CRR) mean the regulatory capital impact of ECL is being phased in over time. The Group currently receives 85% relief on new provisions due to IFRS 9.

RWA movements (unaudited)
		6 months to 31 March 2020					6 months to 30 September 2019(1)
RWA flow statement		IRB RWA £m	STD RWA £m	Other RWA £m	Total £m	Capital Required £m	IRB RWA £m	STD RWA £m		Other RWA £m	Total £m		Capital required £m
RWA at 1 October		15,104	5,953	2,989	24,046	1,924	15,318	5,558		2,988	23,864		1,908
Asset size		213	308	48	569	46	129	386		1	516		42
Asset quality		135	94	-	229	18	156	(17)		-	139		11
Model updates(2)		(148)	-	-	(148)	(12)	(511)	-		-	(511)		(40)
Methodology and policy		417	-	-	417	33	11	-		-	11		1
Other		-	60	-	60	5	1	26		-	27		2
RWA at 31 March		15,721	6,415	3,037	25,173	2,014	15,104	5,953		2,989	24,046		1,924
(1)	The comparative has been restated in line with current year presentation following a change in flow logic.
(2)	Model updates include the mortgage quarterly PD calibrations.

Methodology and policy movements have been driven primarily by the inclusion of a new mortgage LGD model, approved by the regulator and deployed into the heritage Virgin Money rating system in March 2020. This resulted in an uplift of £511m in RWA, reflecting increased risk sensitivity and improved downturn estimation. The other material change is the inclusion of additional eligible collateral types within the business portfolio following approval by the PRA, resulting in a reduction of RWA of £94m.
 

Risk management

Financial risk

Capital (continued)

Pillar 1 RWA and capital requirements by business line (unaudited)
	At 31 March 2020						At 30 September 2019
	Capital required		RWA		Exposure		Capital required		RWA		Exposure
Capital requirements for calculating RWA	£m		£m		£m		£m		£m		£m
Corporates	529		6,617		8,971		501		6,258		8,587
Retail	728		9,104		63,747		708		8,846		64,067
Total IRB approach	1,257		15,721		72,718		1,209		15,104		72,654
Central governments or central banks	-		-		10,262		1		9		11,663
Regional governments or local authorities	1		13		202		1		13		175
Public sector entities	-		5		344		-		5		335
Multilateral development banks	-		-		1,146		-		-		1,034
Financial institutions	14		174		830		16		195		948
Corporates	27		334		358		28		347		376
Retail	334		4,177		5,570		319		3,993		5,324
Secured by mortgages on immovable property	47		582		970		40		498		875
Exposures in default	6		80		71		5		59		55
Collective investments undertakings	-		-		-		-		1		1
Equity exposures	1		10		9		1		11		9
Items associated with particularly high risk	3		32		21		1		11		7
Covered bonds	13		157		1,566		11		141		1,415
Other items	68		851		1,000		53		670		754
Total standardised approach	514		6,415		22,349		476		5,953		22,971
Total credit risk	1,771		22,136		95,067		1,685		21,057		95,625
Operational risk	209		2,606				209		2,606
Counterparty credit risk	18		229				15		191
Credit valuation adjustment	16		202				15		192
Total Pillar 1 regulatory capital requirements	2,014		25,173				1,924		24,046

The exposure amounts disclosed above are post-credit conversion factors and pre-credit mitigation.

Additional breakdown analysis of the IRB portfolios can be seen within the 'EU CR6 -IRB Approach - Credit risk by exposure class and PD range' tables on pages 39 to 42.

 

Risk management

Financial risk

Capital (continued)

		31 Mar 2020		30 Sep 2019
Capital position and CET1 (unaudited)		£m		£m
RWA(1)
Retail mortgages		9,104		8,846
Business lending		7,580		7,124
Other retail lending		4,238		4,042
Other lending		272		481
Other(2)		942		564
Credit risk		22,136		21,057
Credit valuation adjustment		202		192
Operational risk		2,606		2,606
Counterparty credit risk		229		191
Total RWA		25,173		24,046
Capital ratios
CET1 ratio		13.0%		13.3%
Tier 1 ratio		16.6%		17.1%
Total capital ratio		19.5%		20.1%
(1)	RWA are calculated under the AIRB approach for the mortgage portfolio and the foundation internal ratings-based (FIRB) approach for the business portfolio, with all other portfolios being calculated under the standardised approach, via either sequential IRB implementation or Permanent Partial Use (PPU).
(2)	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.

EU CR6 - IRB approach - Credit risk by exposure class and PD range.

Heritage Clydesdale Bank PLC and heritage Virgin Money PLC have separate IRB models for Retail Mortgages, with different modelling methodologies and risk profiles. Combining these into a single table does not provide a valid representation of risk, therefore the position of each portfolio as at 31 March 2020 (unaudited) is presented separately below.

The exposure amounts shown are disclosed after, where applicable, on- or off-balance sheet netting.

Clydesdale Bank PLC Retail Mortgages⁽¹⁾

(AIRB) Retail Secured by Immovable Property non-SME

PD scale		Original on-balance sheet gross exposures £m	Off-balance sheet exposures pre CCF £m	Average CCF	EAD post CRM and post CCF £m	Average PD	Number of obligors	Average LGD	Average maturity	RWAs £m	RWA density(2)	EL £m	Value adjustments and provisions £m
As at 31 Mar 2020
0.00 to <0.15		1,656	522	102.1%	2,228	0.12%	17,282	13.64%	-	72	3.2%	-
0.15 to <0.25		4,073	319	102.2%	4,496	0.20%	36,136	12.25%	-	232	5.2%	1
0.25 to <0.50		10,035	449	102.1%	10,734	0.37%	54,179	15.51%	-	1,110	10.3%	6
0.50 to <0.75		2,241	52	102.2%	2,348	0.62%	10,834	18.13%	-	409	17.4%	3
0.75 to <2.50		4,729	125	102.1%	4,966	1.29%	24,422	17.32%	-	1,304	26.3%	11
2.50 to <10.00		769	11	102.4%	799	4.63%	5,763	16.89%	-	447	55.9%	7
10.00 to <100.00		253	3	102.2%	262	35.23%	1,790	15.79%	-	218	83.3%	15
100.00 (Default)		306	8	100.0%	313	100.00%	2,520	20.20%	-	711	226.8%	9
Subtotal		24,062	1,489	102.1%	26,146	2.19%	152,926	15.47%	-	4,503	17.2%	52	30
As at 30 Sep 2019
0.00 to <0.15		2,425	821	102.1%	3,319	0.11%	26,334	14.89%	-	116	3.5%	-
0.15 to <0.25		4,668	294	102.2%	5,080	0.20%	36,111	12.90%	-	275	5.4%	1
0.25 to <0.50		9,881	208	102.2%	10,331	0.37%	51,816	16.01%	-	1,125	10.9%	6
0.50 to <0.75		1,605	58	102.1%	1,702	0.62%	7,575	19.11%	-	312	18.4%	2
0.75 to <2.50		4,765	87	102.1%	4,963	1.30%	25,051	17.94%	-	1,362	27.4%	11
2.50 to <10.00		801	14	102.4%	833	4.77%	6,544	17.60%	-	494	59.3%	7
10.00 to <100.00		225	4	102.3%	233	36.42%	1,726	15.94%	-	196	83.9%	14
100.00 (Default)		283	7	100.0%	290	100.00%	2,514	21.06%	-	679	224.4%	10
Subtotal		24,653	1,493	102.1%	26,751	2.03%	157,671	15.94%	-	4,559	17.0%	51	29
(1)	Clydesdale Bank PLC retail mortgages excluding the portfolio of heritage Virgin Money mortgages transferred under FSMA Part VII.
(2)	RWA density calculation has been performed on unrounded figures.

Risk management

Financial risk

Capital (continued)

Virgin Money Retail Mortgages⁽¹⁾

(AIRB) Retail Secured by Immovable Property non-SME

PD scale		Original on- balance sheet gross exposures £m	Off-balance sheet exposures pre CCF £m	Average CCF	EAD post CRM and post CCF £m	Average PD	Number of obligors	Average LGD	Average maturity	RWAs £m	RWA density(2)	EL £m	Value adjustments and provisions £m
As at 31 Mar 2020
0.00 to <0.15		4,885	389	100.0%	5,337	0.10%	34,143	10.24%	-	137	2.6%	-
0.15 to <0.25		7,236	247	100.0%	7,570	0.19%	54,842	10.72%	-	342	4.5%	2
0.25 to <0.50		13,817	395	100.0%	14,377	0.36%	84,315	11.89%	-	1,165	8.1%	6
0.50 to <0.75		4,733	97	100.0%	4,891	0.67%	29,339	18.64%	-	937	19.2%	6
0.75 to <2.50		3,045	375	100.0%	3,469	1.42%	25,798	15.59%	-	887	25.6%	8
2.50 to <10.00		1,192	28	100.0%	1,237	4.01%	9,732	17.22%	-	629	50.8%	8
10.00 to <100.00		646	11	100.0%	666	32.87%	5,479	13.33%	-	451	67.8%	26
100.00 (Default)		54	1	100.0%	54	100.00%	478	10.00%	-	53	98.4%	3
Subtotal		35,608	1,543	100.0%	37,601	1.50%	244,126	12.84%	-	4,601	12.2%	59	19  19
As at 30 Sep 2019
0.00 to <0.15		2,598	163	100.0%	2,794	0.12%	18,484	9.35%	-	73	2.6%	-
0.15 to <0.25		8,636	294	100.0%	9,035	0.20%	61,300	8.41%	-	321	3.6%	2
0.25 to <0.50		10,325	245	100.0%	10,690	0.35%	59,179	10.29%	-	706	6.6%	4
0.50 to <0.75		8,267	149	100.0%	8,523	0.63%	55,895	15.77%	-	1,318	15.5%	9
0.75 to <2.50		3,755	294	100.0%	4,104	1.26%	30,016	12.65%	-	798	19.5%	7
2.50 to <10.00		1,453	34	100.0%	1,507	3.77%	11,718	14.43%	-	620	41.1%	8
10.00 to <100.00		589	10	100.0%	608	32.72%	5,034	12.22%	-	373	61.4%	21
100.00 (Default)		55	1	100.0%	55	100.0%	492	12.66%	-	79	141.9%	3
Subtotal		35,678	1,190	100.0%	37,316	1.51%	242,118	11.48%	-	4,288	11.5%	54	15  19
(1)		Retail mortgages written under the Virgin Money brand which were previously held in Virgin Money PLC prior to the FSMA Part VII transfer.
(2)		RWA density calculation has been performed on unrounded figures.

Risk management

Financial risk

Capital (continued)

Clydesdale Bank PLC Corporates - Other

(FIRB) Corporates - Other

PD scale		Original on- balance sheet gross exposures £m	Off-balance sheet exposures pre CCF £m	Average CCF	EAD post CRM and post CCF £m	Average PD	Number of obligors	Average LGD	Average maturity	RWAs £m	RWA density(1)	EL £m	Value adjustments and provisions £m
As at 31 Mar 2020
0.00 to <0.15		17	47	71.8%	67	0.11%	26	34.34%	651	15	22.6%	-
0.15 to <0.25		38	26	73.6%	65	0.20%	9	38.54%	926	28	42.6%	-
0.25 to <0.50		329	162	51.1%	413	0.40%	57	43.70%	1,055	285	69.0%	1
0.50 to <0.75		42	33	71.4%	66	0.62%	18	44.10%	908	52	79.1%	-
0.75 to <2.50		625	449	56.4%	897	1.65%	342	42.14%	1,053	998	111.4%	6
2.50 to <10.00		212	63	71.6%	261	4.03%	105	43.26%	918	372	142.6%	5
10.00 to <100.00		17	6	71.6%	21	22.53%	47	42.84%	959	52	244.9%	2
100.00 (Default)		83	17	73.8%	95	100.00%	92	42.06%	745	-	0.0%	40
Subtotal		1,363	803	59.1%	1,885	6.79%	696	42.31%	995	1,802	95.6%	54	66
As at 30 Sep 2019
0.00 to <0.15		7	72	74.0%	69	0.11%	29	39.27%	597	16	23.6%	-
0.15 to <0.25		39	29	73.6%	67	0.20%	17	40.09%	1,063	32	47.9%	-
0.25 to <0.50		362	199	58.1%	480	0.41%	72	44.03%	982	325	67.7%	1
0.50 to <0.75		22	12	29.9%	26	0.62%	28	43.23%	976	21	79.3%	-
0.75 to <2.50		535	306	65.5%	746	1.60%	352	43.93%	1,060	858	114.9%	5
2.50 to <10.00		96	62	72.6%	145	4.03%	85	42.58%	1,014	208	143.4%	2
10.00 to <100.00		4	3	72.7%	7	23.43%	40	43.47%	805	16	246.6%	1
100.00 (Default)		91	10	73.5%	98	100.0%	87	42.52%	796	-	0.0%	42
Subtotal		1,156	693	64.7%	1,638	7.29%	710	43.49%	996	1,476	90.1%	51	37
(1)	RWA density calculation has been performed on unrounded figures.

Risk management

Financial risk

Capital (continued)

Clydesdale Bank PLC Business Lending

(FIRB) Corporates - Business

PD scale			Original on- balance sheet gross exposures £m	Off-balance sheet exposures pre CCF £m	Average CCF	EAD post CRM and post CCF £m	Average PD	Number of obligors	Average LGD	Average maturity	RWAs £m	RWA density(1)	EL £m	Value adjustments and provisions £m
As at 31 Mar 2020
0.00 to <0.15			102	98	69.6%	172	0.11%	181	41.92%	931	41	24.0%	-
0.15 to <0.25			170	154	70.3%	280	0.19%	646	39.43%	870	74	26.4%	-
0.25 to <0.50			784	388	70.6%	1,068	0.38%	1,646	39.16%	894	426	39.9%	2
0.50 to <0.75			381	149	66.4%	480	0.62%	691	39.28%	905	250	52.0%	1
0.75 to <2.50			3,239	883	67.1%	3,850	1.52%	5,745	39.41%	1,008	2,934	76.2%	23
2.50 to <10.00			822	273	64.4%	999	4.57%	1,823	39.88%	822	948	94.9%	18
10.00 to <100.00			85	14	74.8%	96	20.04%	163	39.05%	679	142	148.2%	8
100.00 (Default)			136	7	69.4%	141	100.00%	151	40.47%	823	-	0.0%	57
Subtotal			5,719	1,966	67.8%	7,086	3.84%	11,046	39.51%	942	4,815	67.9%	109	176
As at 30 Sep 2019
0.00 to <0.15			75	76	68.0%	130	0.11%	176	41.50%	831	28	21.4%	-
0.15 to <0.25			235	187	70.5%	367	0.19%	686	40.73%	939	112	30.4%	-
0.25 to <0.50			752	376	67.7%	1,015	0.39%	1,611	39.42%	891	405	39.9%	2
0.50 to <0.75			356	125	71.1%	447	0.62%	665	39.14%	1,100	250	55.9%	1
0.75 to <2.50			3,108	910	66.6%	3,734	1.50%	5,794	40.34%	995	2,852	76.4%	23
2.50 to <10.00			843	259	67.9%	1,021	4.48%	1,808	41.33%	853	1,008	98.7%	19
10.00 to <100.00			77	12	70.6%	86	18.60%	164	40.55%	710	129	150.5%	6
100.00 (Default)			145	6	75.0%	150	100.0%	179	40.65%	7776	-	0.0%	61
Subtotal			5,591	1,951	67.7%	6,950	3.95%	11,083	40.32%	952	4,784	68.8%	112	99
(1)	RWA density calculation has been performed on unrounded figures.

Leverage

		31 Mar 2020		30 Sep 2019
Leverage ratio (unaudited)		£m		£m
Total Tier 1 capital for the leverage ratio
Total CET1 capital		3,261		3,204
AT1 capital		915		915
Total Tier 1		4,176		4,119
Exposures for the leverage ratio
Total assets as per published financial statements		90,054		90,999
Adjustment for off-balance sheet items		2,811		2,728
Adjustment for derivative financial instruments		(420)		(35)
Adjustment for securities financing transactions		2,884		1,934
Other adjustments		(877)		(882)
Leverage ratio exposure		94,452		94,744
CRD IV leverage ratio(1)		4.4%		4.3%
UK leverage ratio(2)		4.9%		4.9%
Average UK leverage ratio exposure(3)		86,088		n/a
Average UK leverage ratio(3)		4.7%		n/a
(1)	IFRS 9 transitional capital arrangements have been applied to the CRD IV leverage ratio calculation as at 31 March 2020.
(2)	The Group's leverage ratio on a modified basis, excluding qualifying central bank claims from the exposure measure in accordance with the policy statement issued by the PRA in October 2017.
(3)	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. Under the UK leverage ratio framework, the Group was only required to start reporting average balances from December 2019.

 

Risk management

Financial risk

Leverage (continued)

The UK leverage ratio framework, which came into force on 1 January 2016, is relevant to PRA regulated banks and building societies with consolidated retail deposits equal to or greater than £50bn. The first reporting date from which the Group met this threshold was 31 December 2019 and as a result the average UK leverage ratio exposure and average UK leverage ratio are disclosed.

The leverage ratio is monitored against a Board set risk appetite statement with the responsibility for managing the ratio delegated to the Group's Asset and Liabilities Committee (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 CRD IV leverage ratio of 4.4% (30 September 2019: 4.3%) exceeds the Basel Committee's proposed minimum of 3%, applicable from 2018, and the Group's UK leverage ratio of 4.9% (30 September 2019: 4.9%) exceeds the UK minimum ratio of 3.25%.

Following the FPC announcement on 11 March 2020, the Group's CCyB rate reduced to 0% which also moved the leverage ratio buffer to 0%.  

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 controls future balance sheet growth.

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 resource below internal or regulatory stress requirements.

The Group is predominantly funded by personal and business customers. Customer funding is supported by the Group's ongoing wholesale funding programmes, medium-term secured funding issuance (e.g. the Group's securitisation programmes), Regulated Covered Bonds and unsecured medium-term notes. 

Funding risk exposures arise from an unsustainable or undiversified funding base, for example, a reliance on short-term wholesale deposits. The risk may result in deviation from funding strategy, requiring funding to be originated rapidly and at excessive cost, or require a reduction in lending growth, which are outcomes that may adversely affect customers or shareholders.

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

 

Risk management

Financial risk

Sources of funding

The table below provides an overview of the Group's sources of funding as at 31 March 2020:

				31 Mar 2020 (unaudited) £m				30 Sept 2019 (audited) £m
				£m				£m
	Total assets			90,054				90,999
	Less: other liabilities(1)			(3,292)				(3,471)
	Funding requirement			86,762				87,528
	Funded by:
	Customer deposits			64,853				64,000
	Debt securities in issue			9,245				9,591
	Due to other banks			7,590				8,916
of which:
Secured loans			7,122				7,308
Securities sold under agreements to repurchase			401				1,554
Transaction balances with other banks			12				12
Deposits with other banks			55				42
	Equity			5,074				5,021
	Total funding			86,762				87,528
	(1)	Other liabilities includes customer deposits at fair value through profit or loss, derivative financial instruments, deferred tax liabilities, provisions for liabilities and charges, and other liabilities as per the balance sheet line item.

The Group's funding objective is to prudently manage the sources and tenor of funds in order to provide a sound base from which to support sustainable lending growth. At 31 March 2020, the Group had a funding requirement of £86,762m (30 September 2019: £87,528m) 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 £64,853m (30 September 2019: £64,000m). Customer deposits are comprised of interest bearing deposits, term deposits and non-interest bearing demand deposits from a range of sources including personal and business customers. The increase of £853m in the six month period ended 31 March 2020 is primarily due to increased current accounts.

Equity

Equity of £5,074m (30 September 2019: £5,021m) was also used to meet the Group's funding requirement. Equity is comprised of ordinary share capital, retained earnings, other equity investments and a number of other reserves. For full details on equity refer to note 4.1.

Liquid assets

The quantity and quality of the Group's liquid assets are calibrated to the Board's view of liquidity risk appetite and remain at a prudent level above regulatory requirements. The Group was compliant with all internal and regulatory liquidity metrics at 31 March 2020 (30 September 2019: compliant).

The liquid asset portfolio provides a buffer against sudden and potentially sharp outflows of funds. Liquid assets must therefore be of a 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).

Risk management

Financial risk

The volume and quality of the Group's liquid asset portfolio is defined through a series of stress tests across a range of time horizons and stress conditions. The stresses applied ensure the portfolio meets internal and external requirements of stressed outflows, including most recently the Group's view of liquidity risk due to COVID-19 impacts. The liquid asset portfolio is primarily comprised of cash at the Bank of England, UK government securities (Gilts) and listed securities (e.g. bonds issued by supra-nationals and AAA-rated covered bonds).

			31 Mar 2020	30 Sep 2019		Average	Average
			(unaudited)	(audited)	Change	2020	2019
Liquid asset portfolio(1)			£m	£m	%	£m	£m
Level 1
Cash and balances with central banks			5,969	7,469	(20.1)	6,530	7,266
UK government treasury bills and gilts			1,078	1,076	0.2	1,389	870
Other debt securities			3,269	2,867	14.0	3,117	2,604
Total level 1			10,316	11,412	(9.6)	11,036	10,740
Level 2(2)			29	29	-	37	103
Total LCR eligible assets			10,345	11,441	(9.6)	11,073	10,843
(1)	Excludes encumbered assets.
(2)	Includes Level 2A and Level 2B.

Encumbered assets by asset category

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

31 March 2020 (unaudited)	Assets encumbered with non-central bank counterparties					Positioned at the central bank (including encumbered) £m							Total £m
								Assets not positioned at the central bank			Total £m
								Readily  available for encumbrance £m	Other assets capable of being encumbered £m	Cannot be encumbered £m
	Covered bonds £m	Securiti- sations £m	Other £m	Total £m
Loans and advances to customers	2,653	7,923	-	10,576		16,962		24,681	17,956	3,233	62,832		73,408
Cash and balances with central banks	-	-	-	-		2,851		5,799	-	-	8,650		8,650
Due from other banks	207	412	106	725		100		-	109	12	221		946
Derivative financial instruments	-	-	-	-		-		-	-	403	403		403
Financial instruments at fair value through other comprehensive income	-	-	563	563		-		4,072	-	-	4,072		4,635
Other assets	-	-	556	556		-		-	318	1,138	1,456		2,012
Total assets	2,860	8,335	1,225	12,420		19,913		34,552	18,383	4,786	77,634		90,054

Risk management

Financial risk

30 September 2019 (unaudited)	Assets encumbered with non-central bank counterparties					Positioned at the central bank (including encumbered) £m							Total £m
								Assets not positioned at the central bank			Total £m
								Readily  available for encumbrance £m	Other assets capable of being encumbered £m	Cannot be encumbered £m
	Covered bonds £m	Securiti- sations £m	Other £m	Total £m
Loans and advances to customers	2,896	8,571	-	11,467		19,929		19,933	18,589	3,430	61,881		73,348
Cash and balances with central banks	-	-	-	-		3,219		7,077	-	-	10,296		10,296
Due from other banks	156	550	171	877		-		-	131	10	141		1,018
Derivative financial instruments	-	-	-	-		-		-	-	366	366		366
Financial instruments at fair value through other comprehensive income	41	34	555	630		-		3,697	-	1	3,698		4,328
Other assets	-	-	409	409		-		-	173	1,061	1,234		1,643
Total assets	3,093	9,155	1,135	13,383		23,148		30,707	18,893	4,868	77,616		90,999

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

Analysis of debt securities in issue by residual maturity (unaudited)

		3 months or less £m		3 to 12 months £m	1 to 5 years £m	Over 5 years £m		Total at 31 Mar 2020 £m	Total at 30 Sep 2019 £m
Covered bonds		26		-	620	1,271		1,917	1,912
Securitisation		6		1,569	3,113	-		4,688	5,051
Medium term notes		328		-	1,173	408		1,909	1,897
Subordinated debt		9		-	722	-		731	731
Total debt securities in issue		369		1,569	5,628	1,679		9,245	9,591
Of which issued by Virgin Money UK PLC		31		-	1,895	408		2,334	2,257

External credit ratings

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

		Outlook as at	As at
		31 Mar 2020(1)	31 Mar 2020	30 Sep 2019
Virgin Money UK PLC
Moody's		Stable	Baa3	Baa3
Fitch		Stable(3)	BBB+	BBB+
Standard & Poor's		Stable(4)	BBB-	BBB-
Clydesdale Bank PLC
Moody's(2)		Stable	Baa1	Baa1
Fitch		Stable(3)	A-	A-
Standard & Poor's		Positive(4)	BBB+	BBB+
(1)	For detailed background on the latest credit opinions please refer to the respective rating agency websites.
(2)	Long-term deposit rating.
(3)	Moved to "Rating Watch Negative" on 1 April 2020 - see commentary below.
(4)	Moved to "Negative" on 23 April 2020 - see commentary below.

 

Risk management

Financial risk

External credit ratings (continued)

On 21 October 2019, Moody's and Fitch withdrew the long- and short-term ratings of Virgin Money Holdings (UK) PLC and Virgin Money PLC following the completion of the FSMA Part VII transfer.

On 12 November 2019, Moody's changed the outlook on Virgin Money UK PLC and Clydesdale Bank PLC long-term ratings from 'Positive' to 'Stable'. This followed a revision in Moody's outlook for the UK Sovereign from 'Stable' to 'Negative', reflecting their view that UK institutions have weakened, and the UK's economic and fiscal strength is likely to be weaker going forward. Subsequently, Moody's adjusted the ratings outlook for 15 UK banks and building societies, including the Group.

On 17 January 2020, S&P changed the outlook on the Clydesdale Bank PLC long-term rating from 'Stable' to 'Positive', reflecting the progress the Group has made in raising additional loss-absorbing capital buffers.

The following changes have been made to the Group's long-term credit ratings or outlooks since the period end:

- On 1 April 2020, Fitch changed the outlook on Virgin Money UK PLC and Clydesdale Bank PLC long-term ratings from "Stable" to "Rating Watch Negative". This followed Fitch's one notch downgrade to the UK Sovereign rating, reflecting their view of the near-term damage to the UK economy and significant weakening in the UK's public finances caused by the COVID-19 outbreak, in addition to the lingering uncertainty regarding the post-Brexit UK-EU trade relationship. Subsequently, Fitch adjusted the ratings Outlook on 18 UK banks and building societies, including the Group.

- On 23 April 2020, S&P changed the outlook on the Virgin Money UK PLC long-term rating from "Stable" to "Negative" and the outlook on the Clydesdale Bank PLC long-term rating from "Positive" to "Negative", as part of a broader action on the European banking sector. The outlook revisions reflect S&P's view that the economic stress triggered by the COVID-19 outbreak is likely to put pressure the Group's asset quality and earnings, and it may struggle to maintain an additional loss-absorbing capacity ratio sustainably above 8% in 2020.

LIBOR replacement

The Group has a LIBOR replacement programme to manage the impact of the Bank of England's plan to discontinue the use of LIBOR as a reference rate after 2021. The work to decommission LIBOR is focused on reducing the use of LIBOR well in advance of December 2021 and to migrate existing loans onto new reference rates. A similar approach is being taken with new and existing derivatives. The programme will ensure that the risks of being unable to offer products with suitable reference rates will be mitigated and that full consideration is given to the potential for any conduct issues that may arise through the transition.

Financial risks arising from climate change

The Group is contributing to global efforts to limit the global temperature risk to 1.5 degrees Celsius this century, in line with the Paris Agreement.

The Group aims to have 'net zero' carbon emissions by 2030. Progress is being monitored through the Group's annual CO2 disclosures (see page 38 of the 2019 ARA). The Group has a process to apply Environment, Social and Governance (ESG) criteria to lending decisions and has committed to targeting 5% of business banking loans being focused on firms pursuing activity promoting environmental sustainability. Work continues to deepen the Group's understanding of financial risks arising from climate change, in line with its plan to embed consideration of climate change into all business practices. As part of this work, the Group's existing ESG criteria has been reviewed and actions have been identified to reflect the Group's evolving approach to managing climate change risks.

Statement of Directors' responsibilities

The Directors confirm that to the best of their knowledge these interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting' (IAS 34) as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

a)	an indication of important events that have occurred during the six months ended 31 March 2020 and their impact on the condensed consolidated interim financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
b)	material related party transactions in the six months ended 31 March 2020 and any material changes in the related party transactions described in the last Annual Report of Virgin Money UK PLC.

Signed by order of the Board

David Duffy

Chief Executive Officer

5 May 2020

Independent review report to Virgin Money UK PLC

Introduction

We have been engaged by Virgin Money UK PLC to review the condensed set of financial statements in the interim financial report for the six months ended 31 March 2020 which comprises the interim condensed consolidated income statement, interim condensed consolidated statement of comprehensive income, interim condensed consolidated balance sheet, interim condensed consolidated statement of changes in equity, interim condensed consolidated statement of cash flows and the related explanatory notes 1.1 to 5.4. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. 

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The interim financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim financial report in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The condensed set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our Responsibility

Our responsibility is to express to Virgin Money UK PLC a conclusion on the condensed set of financial statements in the interim financial report based on our review. 

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements 2410 (UK and Ireland), "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial report for the six months ended 31 March 2020 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

Leeds

5 May 2020

Financial statements

Interim condensed consolidated income statement

			6 months to		6 months to		12 months to
			31 Mar 2020		31 Mar 2019(1)(2)		30 Sep 2019(1)
			(unaudited)		(unaudited)		(audited)
		Note	£m		£m		£m
Interest income			1,135		1,254		2,420
Other similar interest			5		8		13
Interest expense and similar charges			(469)		(442)		(919)
Net interest income		2.2	671		820		1,514
Gains less losses on financial instruments at fair value			(9)		(9)		(17)
Other operating income			105		115		252
Non-interest income		2.3	96		106		235
Total operating income			767		926		1,749
Operating and administrative expenses before impairment losses		2.4	(537)		(711)		(1,729)
Operating profit before impairment losses			230		215		20
Impairment losses on credit exposures			(237)		(173)		(252)
(Loss)/profit on ordinary activities before tax			(7)		42		(232)
Tax credit/(expense)		2.5	29		(5)		53
Profit/(loss) for the period			22		37		(179)
Attributable to:
Ordinary shareholders			(18)		3		(253)
Other equity holders			40		18		41
Non-controlling interests			-		16		33
Profit/(loss) for the period			22		37		(179)
Basic (loss)/earnings per share (pence)		2.6	(1.2)		0.2		(17.9)
Diluted (loss)/earnings per share (pence)		2.6	(1.2)		0.2		(17.9)
(1)	The comparative has been restated in line with the current period presentation. Refer to note 1.4.
(2)	The presentation of the comparative period has been realigned to the current period's presentation, with financial assets at fair value through profit or loss being reclassified from interest income to other similar interest.

All material items dealt with in arriving at the (loss)/profit before tax for the periods relate to continuing activities.

The notes on pages 55 to 79 form an integral part of these interim condensed consolidated financial statements. 

Financial statements

Interim condensed consolidated statement of comprehensive income

			6 months to		6 months to		12 months to
			31 Mar 2020		31 Mar 2019(1)		30 Sep 2019(1)
			(unaudited)		(unaudited)		(audited)
			£m		£m		£m
Profit/(loss) for the period			22		37		(179)
Items that may be reclassified to the income statement
Change in cash flow hedge reserve
(Losses)/gains during the period			(52)		13		73
Transfers to the income statement			18		6		(57)
Taxation thereon - deferred tax credit/(charge)			8		(9)		(9)
Taxation thereon - current tax credit			1		5		6
			(25)		15		13
Change in fair value through other comprehensive income (FVOCI) reserve
(Losses)/gains during the period			(13)		2		13
Transfers to the income statement			(16)		-		(4)
Taxation thereon - deferred tax credit/(charge)			9		-		(2)
			(20)		2		7
Total items that may be reclassified to the income statement			(45)		17		20
Items that will not be reclassified to the income statement
Change in asset revaluation reserve			-		-		-
Taxation thereon - deferred tax credit/(charge)			-		-		(1)
Change in defined benefit pension plan			197		(37)		110
Taxation thereon - deferred tax (charge)/credit			(77)		13		(56)
Taxation thereon - current tax credit			4		-		7
			124		(24)		61
Total items that will not be reclassified to the income statement			124		(24)		60
Other comprehensive income/(losses), net of tax			79		(7)		80
Total comprehensive income/(losses) for the period, net of tax			101		30		(99)
Attributable to:
Ordinary shareholders			61		(4)		(173)
Other equity holders			40		18		41
Non-controlling interests			-		16		33
Total comprehensive income/(losses) attributable to equity holders			101		30		(99)
(1)	The comparative has been restated in line with the current period presentation. Refer to note 1.4.

The notes on pages 55 to 79 form an integral part of these interim condensed consolidated financial statements. 

Financial statements

Interim condensed consolidated balance sheet  

			31 Mar 2020		30 Sep 2019
			(unaudited)		(audited)
	Note		£m		£m
Assets
Financial assets at amortised cost
Loans and advances to customers	3.1		73,194		73,095
Cash and balances with central banks			8,650		10,296
Due from other banks			946		1,018
Financial assets at fair value through profit or loss
Loans and advances to customers	3.2		214		253
Derivative financial instruments	3.3		403		366
Other financial assets	3.2		9		14
Financial assets at fair value through other comprehensive income			4,635		4,328
Property, plant and equipment			318		145
Intangible assets and goodwill			515		516
Current tax assets			22		13
Deferred tax assets	3.4		340		322
Defined benefit pension assets	3.8		618		396
Other assets			190		237
Total assets			90,054		90,999
Liabilities
Financial liabilities at amortised cost
Customer deposits			64,853		64,000
Debt securities in issue	3.5		9,245		9,591
Due to other banks	3.6		7,590		8,916
Financial liabilities at fair value through profit or loss
Customer deposits	3.2		-		4
Derivative financial instruments	3.3		205		273
Deferred tax liabilities	3.4		246		201
Provisions for liabilities and charges	3.7		258		459
Other liabilities			2,583		2,534
Total liabilities			84,980		85,978
Equity
Share capital and share premium	4.1		147		146
Other equity instruments	4.1		915		915
Capital reorganisation reserve	4.1		(839)		(839)
Merger reserve	4.1		2,128		2,128
Other reserves	4.1		(35)		10
Retained earnings			2,758		2,661
Total equity			5,074		5,021
Total liabilities and equity			90,054		90,999

The notes on pages 55 to 79 form an integral part of these interim condensed consolidated financial statements. 

These interim condensed consolidated financial statements were approved by the Board of Directors on 5 May 2020 and were signed on its behalf by:

David Duffy	Ian Smith
Chief Executive Officer	Chief Financial Officer

Company name:  Virgin Money UK PLC, Company number:  09595911

Financial statements

Interim condensed consolidated statement of changes in equity

						Other reserves
		Share capital and share premium	Capital reorg' reserve	Merger reserve	Other equity instruments	Own shares held	Deferred shares reserve	Equity based comp' reserve	Asset reval reserve	FVOCI reserve	Cash flow hedge reserve	Retained earnings			Non- controlling interest	Total equity
Note		4.1.1	4.1.3	4.1.4	4.1.2	4.1.5	4.1.5	4.1.5	4.1.5	4.1.5	4.1.5				4.1.6
		£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m		£m		£m
As at 1 October 2018(1)		89	(839)	633	450	-	-	10	2	4	(39)	2,855		-		3,165
Profit for the period(2)		-	-	-	-	-	-	-	-	-	-	37		-		37
Other comprehensive income/(losses) net of tax		-	-	-	-	-	-	-	-	2	15	(24)		-		(7)
Total comprehensive income for the period		-	-	-	-	-	-	-	-	2	15	13		-		30
Acquisition of Virgin Money		54	-	1,495	-	(5)	23	-	-	-	-	-		422		1,989
Dividends paid to ordinary shareholders		-	-	-	-	-	-	-	-	-	-	(45)		-		(45)
AT1 distributions paid(2)		-	-	-	-	-	-	-	-	-	-	(18)		-		(18)
Distributions to non-controlling interests(2)		-	-	-	-	-	-	-	-	-	-	(16)		-		(16)
Transfer from equity based compensation reserve		-	-	-	-	-	-	(6)	-	-	-	6		-		-
Equity based compensation expensed		-	-	-	-	-	-	3	-	-	-	-		-		3
Settlement of Virgin Money share awards		3	-	-	-	3	(4)	-	-	-	-	1		-		3
AT1 issuance		-	-	-	247	-	-	-	-	-	-	-		-		247
As at 31 March 2019(1)		146	(839)	2,128	697	(2)	19	7	2	6	(24)	2,796		422		5,358
Loss for the period(2)		-	-	-	-	-	-	-	-	-	-	(216)		-		(216)
Other comprehensive income/(losses) net of tax		-	-	-	-	-	-	-	(1)	5	(2)	85		-		87
Total comprehensive income/(losses) for the period		-	-	-	-	-	-	-	(1)	5	(2)	(131)		-		(129)
AT1 distributions paid(2)		-	-	-	-	-	-	-	-	-	-	(23)		-		(23)
Distributions to non-controlling interests(2)		-	-	-	-	-	-	-	-	-	-	(17)		-		(17)
Transfer from equity-based compensation reserve		-	-	-	-	-	-	(2)	-	-	-	2		-		-
Equity based compensation expensed		-	-	-	-	-	-	1	-	-	-	-		-		1
Settlement of Virgin Money share awards		-	-	-	-	1	-	-	-	-	-	-		-		1
AT1 issuance		-	-	-	218	-	-	-	-	-	-	-		-		218
Capital note redemption		-	-	-	-	-	-	-	-	-	-	34		(422)		(388)
At 30 September 2019(1)		146	(839)	2,128	915	(1)	19	6	1	11	(26)	2,661		-		5,021
Adjustment on adoption of IFRS 16 (net of tax)		-	-	-	-	-	-	-	-	-	-	1		-		1
As at 1 October 2019 (1)		146	(839)	2,128	915	(1)	19	6	1	11	(26)	2,662		-		5,022
Profit for the period		-	-	-	-	-	-	-	-	-	-	22		-		22
Other comprehensive income/(losses) net of tax		-	-	-	-	-	-	-	-	(20)	(25)	124		-		79
Total comprehensive income for the period		-	-	-	-	-	-	-	-	(20)	(25)	146		-		101
AT1 distributions paid		-	-	-	-	-	-	-	-	-	-	(40)		-		(40)
Ordinary shares issued		1	-	-	-	-	-	-	-	-	-	-		-		1
Transfer from equity based compensation reserve		-	-	-	-	-	-	(2)	-	-	-	2		-		-
Equity based compensation expensed		-	-	-	-	-	-	4	-	-	-	-		-		4
Settlement of Virgin Money share awards		-	-	-	-	1	(3)	-	-	-	-	1		-		(1)
FSMA transfer		-	-	-	-	-	-	-	-	-	-	(13)		-		(13)
At 31 March 2020 (1)		147	(839)	2,128	915	-	16	8	1	(9)	(51)	2,758		-		5,074
(1)	The balances as at 1 October 2018 and 30 September 2019 have been audited; the movements in the individual six months periods to 31 March 2019 and 31 March 2020, together with the impact of the adoption of IFRS 16, are unaudited.
(2)	The comparative has been restated in line with the current period presentation. Refer to note 1.4.

The notes on pages 55 to 79 form an integral part of these interim condensed consolidated financial statements.

Financial statements

Interim condensed consolidated statement of cash flows

			6 months to		6 months to		12 months to
			31 Mar 2020		31 Mar 2019		30 Sep 2019
			(unaudited)		(unaudited)(2)		(audited)(2)
		Note	£m		£m		£m
Operating activities
(Loss)/profit on ordinary activities before tax			(7)		42		(232)
Adjustments for:
Non-cash or non-operating items included in profit before tax			(357)		(458)		(1,035)
Changes in operating assets			(422)		(2,081)		(2,543)
Changes in operating liabilities			(676)		1,273		2,630
Payments for short-term and low value leases			(1)		-		-
Interest received			1,151		1,211		2,320
Interest paid			(383)		(328)		(745)
Tax paid			(12)		-		(8)
Net cash (used in)/provided by operating activities			(707)		(341)		387
Cash flows from investing activities
Interest received			22		22		27
Cash acquired on acquisition of Virgin Money Holdings (UK) PLC			-		4,663		4,663
Proceeds from maturity of financial assets at FVOCI			691		287		659
Proceeds from sale of financial assets at FVOCI			551		134		352
Purchase of financial assets at FVOCI			(1,519)		(833)		(1,647)
Proceeds from sale of 50% (less one share) consideration in UTM			-		-		45
Proceeds from sale of property, plant and equipment			-		3		3
Purchase of property, plant and equipment			(3)		(10)		(20)
Purchase and development of intangible assets			(51)		(62)		(130)
Net cash (used in)/provided by investing activities			(309)		4,204		3,952
Cash flows from financing activities
Interest paid			(78)		(79)		(81)
Repayment of principal portion of lease liabilities(1)		5.3	(15)		-		-
Proceeds from issuance of other equity instruments			-		247		247
Repayment of AT1 classified as non-controlling interest			-		-		(160)
Redemption and principal repayment on RMBS and covered bonds		5.3	(876)		(1,288)		(2,003)
Issuance of RMBS and covered bonds		5.3	491		1,104		2,227
Issuance of medium term notes/subordinated debt		5.3	-		247		642
Amounts repaid under the TFS		5.3	(200)		(150)		(1,295)
Ordinary dividends paid			-		(45)		(45)
AT1 distributions		4.1	(40)		(18)		(41)
Distributions to non-controlling interests			-		(16)		(33)
Net cash (used in)/provided by financing activities			(718)		2		(542)
Net (decrease)/increase in cash and cash equivalents			(1,734)		3,865		3,797
Cash and cash equivalents at the beginning of the period			11,131		7,334		7,334
Cash and cash equivalents at the end of the period			9,397		11,199		11,131
(1)	The Company adopted IFRS 16 'Leases' on 1 October 2019. The payment of principal amounts of lease liabilities is now included as a deduction within financing activities whereas previously under IAS 17 'Leases' operating lease charges were included as a deduction within cash flow from operating activities. Interest on lease liabilities is included within 'interest paid' and depreciation on right-of-use assets is included within 'depreciation'.
(2)	Cash and cash equivalents has been restated in the comparative period in line with the current period presentation, as detailed in note 1.2.

The notes on pages 55 to 79 form an integral part of these interim condensed consolidated financial statements.

Financial statements

Notes to the interim condensed consolidated financial statements

Section 1: Basis of preparation and accounting policies

Overview

These interim condensed consolidated financial statements for the six months ended 31 March 2020 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and IAS 34 'Interim Financial Reporting' as adopted by the European Union (EU). They do not include all the information required by International Financial Reporting Standards (IFRS) in full annual financial statements and should therefore be read in conjunction with the Annual Report and Accounts for the year ended 30 September 2019, which were prepared in accordance with IFRS as adopted by the EU. Copies of the 2019 Annual Report and Accounts are available from the Group's website - https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/

The information in these interim condensed consolidated financial statements is unaudited and does not constitute annual accounts within the meaning of Section 434 of the Companies Act 2006 ('the Act'). Statutory accounts for the year ended 30 September 2019 have been delivered to the Registrar of Companies and contained an unqualified audit report under Section 495 of the Act, which did not draw attention to any matters by way of emphasis and did not contain any statements under Section 498 of the Act.

1.1   Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in the business and financial review section of these interim condensed consolidated financial statements. This should be read in conjunction with the strategic report which can be found in the Annual Report and Accounts for the year ended 30 September 2019. In addition, the Risk report contained in the 2019 Annual Report includes the Group's risk management objectives. The Group's objectives, policies and processes for managing capital can be found in the risk management section of this report.

In relation to the recent COVID-19 outbreak, our business continuity plans are working well. At this very early stage of the outbreak however it is difficult to fully assess the magnitude of the impact on the Group. The Directors are mindful of the risks associated with COVID-19 and have a plan in place to ensure the continuation of the Group's operations during COVID-19 and we have no reason to believe, at this stage, it will impact the going concern of the Company.

The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and therefore believe that the Group is well placed to manage its business risks successfully. Accordingly, they continue to adopt the going concern basis in preparing these interim condensed consolidated financial statements.

1.2  Accounting policies

The accounting policies adopted in the preparation of these interim condensed consolidated financial statements are consistent with those policies followed in the preparation of the Virgin Money UK PLC Annual Report and Accounts for the year ended 30 September 2019 except for those policies highlighted below. Comparatives are presented on a basis that conforms to the current presentation except where stated otherwise.

Changes to accounting policies on adoption of IFRS 16 'Leases' with effect from 1 October 2019

The Group adopted IFRS 16: 'Leases' from 1 October 2019, which replaces IAS 17 'Leases,' IFRIC 4 'Determining whether an Arrangement contains a Lease,' SIC-15 'Operating Leases ‑ Incentives' and SIC-27 'Evaluating the Substance of Transactions Involving the Legal Form of a Lease.'

IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. The Group's accounting as a lessor is substantially unchanged from the previous approach under IAS 17; however, it resulted in most leases where the Group is a lessee being brought on to the balance sheet under a single lease model, removing the distinction between finance and operating leases. IFRS 16 requires a lessee to recognise a 'right ‑ of ‑ use' asset and a corresponding lease liability at the date at which the leased asset is available for use. Assets and liabilities arising from a lease are initially measured on a present value basis. On transition and as permitted by IFRS 16, the Group has not restated comparative figures, with the adoption impact adjusted through retained earnings. Adoption of the new standard has had a material impact on the Group's financial statements, with right-of-use assets of £194m recognised on transition together with lease liabilities of £205m. As at 31 March 2020 the right-of-use assets and lease liabilities were £182m and £193m respectively. Further detail on the transitional impact of IFRS 16 can be found in note 5.4. The accounting policies relating to leases have been revised as follows:

Financial statements

Notes to the interim condensed consolidated financial statements

Section 1: Basis of preparation and accounting policies (continued)

1.2  Accounting policies (continued)

Lessee accounting

The Group recognises a right-of-use asset and a lease liability at the commencement date of the lease. The right-of-use asset is initially measured at cost, comprising the initial amount of the lease liability plus any initial direct costs incurred and any lease payments made at or before the lease commencement date, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight line method from the commencement date to the earlier of the end of the useful life of the asset or the end of the lease term. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease. If that rate cannot readily be determined, as is the case in the vast majority of the leasing activities of the Group, the lessee's incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset in a similar economic environment with similar terms and conditions. The liability is remeasured when there is a change in future lease payments arising from a change in an index or a rate or a change in the Group's assessment of whether it will exercise an extension or termination option. When the lease liability is remeasured, a corresponding adjustment is made to the right-of-use asset or is recorded in the income statement if the carrying amount of the right ‑ of ‑ use asset has been reduced to zero.

Termination options are included in a number of leases across the Group with a small number of leases having extension options. These terms are used to maximise operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor.

In determining judgements on the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Periods covered by termination options are only included in the lease term if it is reasonably certain that the lease will not be terminated. The assessment of the lease term is reviewed if a significant event or a significant change in circumstances occurs that is within the control of the Group. 

The Group has elected to apply the recognition exemptions for short ‑ term leases (with a remaining lease term of less than 12 months) and low value leases. Lease payments associated with these leases will be recognised as an expense on a straight line basis over the term of the lease. Low value assets comprise primarily IT and office equipment.

Lessor accounting

As a lessor, the Group classifies leases as either operating or finance leases. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of the underlying asset and classified as an operating lease if it does not.

Other changes

Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)

This amendment was issued by the International Accounting Standards Board (IASB) in September 2019, was effective for financial years beginning on or after 1 January 2020 (with early adoption permitted) and was endorsed for use in the EU in January 2020. The detail of the amendments and related disclosure requirements relating to IAS 39 and IFRS 7 were early adopted by the Group with effect from 1 October 2019 (the Group exercised the accounting policy choice to continue hedge accounting under IAS 39 on adoption of IFRS 9 in October 2018). The amendments provide temporary reliefs which enable hedge accounting to continue during the period of uncertainty before the replacement of an existing interbank offered rates (IBOR) with an alternative nearly risk-free interest rate (an RFR). Further detail on the effect of early adopting the amendment in these interim condensed consolidated financial statements, including the nominal amount of the hedging instruments in hedging relationships directly affected by uncertainties related to LIBOR reform, is disclosed in note 3.3.

Cash and cash equivalents

During the period, the Group has re-assessed the individual elements that comprise 'cash and cash equivalents'. This has resulted in a revision to the definition that more closely aligns the Group's internal use of the cash and cash equivalents definition and cash management practices, with the changes resulting in an increase to the cash and cash equivalents balance primarily as a result of the inclusion of amounts due from other banks. The revised definition can be found on page 81. Comparative periods have been restated to reflect this change in definition, with the balance for the six months to 31 March 2019 increasing by £366m from £10,833m to £11,199m, and the balance for the 12 months to 30 September 2019 increasing by £1,012m from £10,119m to £11,131m.

1.3  Critical accounting estimates and judgements

The preparation of financial statements requires the use of certain critical accounting estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosed amounts of contingent liabilities. Assumptions made at each balance sheet date are based on best estimates at that date. Although the Group has internal control systems in place to ensure that best estimates can be reliably measured, actual amounts may differ from those estimated. The Group's critical accounting estimates and judgements are unchanged compared to those shown in the 2019 Annual Report and Accounts, however the following updates are provided below:

Financial statements

Notes to the interim condensed consolidated financial statements

Section 1: Basis of preparation and accounting policies (continued)

1.3  Critical accounting estimates and judgements (continued)

Allowance for impairment losses on credit exposures

The Group's allowance for ECL's at 31 March 2020 was £542m (31 March 2019: £350m; 30 September 2019: £362m).

The Group's approach to calculating ECL's is to model a number of economic scenarios over a five-year forecast period. The output of the models is then supplemented by a series of Post Model Adjustments (PMA's) where management considers that not all the risks identified in a product segment have been, or are capable of being, accurately reflected within those models.

The COVID-19 pandemic has introduced unprecedented economic uncertainty. Due to the evolving estimates of the severity and duration of the economic impact, coupled with the evolving nature of the mitigating measures being introduced by the UK and Scottish Governments, it has been appropriate to reflect the estimated impact via focused PMA's.

The Group has responded by calculating a model-based PMA for COVID-19 supplemented by further PMA's at a product level to address additional risks. The Group has assessed that it requires to hold a PMA of £164m in relation to the COVID-19 pandemic. £144m has been driven by the Business and credit card portfolios, with a further £20m attributed to the Group's mortgage, personal loan and current account portfolios.

The following sections set out the approach and conclusions in calculating the allowance for ECL's:

· the Group's response in estimating the COVID-19 PMA; and

· the Group's standard approach for the pre COVID-19 modelled output.

COVID-19 PMA

The COVID-19 pandemic has resulted in a significant PMA. In adopting this approach, the Group has reviewed the statements and guidance issued by the PRA, FCA, IASB and other regulators released towards the end of March 2020 to help guide banks in assessing the impact of COVID-19 on IFRS 9 ECL requirements. In addition, the approach reflects the significant mitigating measures that have been introduced by the UK and Scottish Governments and the Group, along with the wider Banking industry, to support individuals and businesses, which have also been considered in estimating the Group's ECLs. The overall impact of COVID-19 over the longer term is subject to a great deal of uncertainty.

In the period since social distancing lockdown measures were introduced in the UK there has been a substantial impact to businesses and individuals. The Group has assessed that the more material impact from an ECL perspective will be on the business and unsecured personal lending portfolios, primarily credit cards. Therefore, while the impact of COVID-19 will be on the whole lending book, particular focus has been applied to the Group's £8.3bn business banking portfolio and £4.2bn credit card portfolio.

The Group's approach has been to determine a separate model-based PMA by applying a 100% weighting to the Group's existing severe downside scenario. This scenario includes the projected significant negative movements in both UK GDP and house prices expected in quarters two and three and a short-term acceleration of unemployment over the planning horizon. The scenario recognised the potential that the recovery in the economy may be more gradual and therefore reflects a slower return to normal economic conditions over the forecast horizon.

The modelling of the severe downside weighted at 100% has been further supplemented by additional PMA's at a product level to address additional risks, primarily in business lending and unsecured personal lending. Finally, the Group undertook further sensitivity analysis through the use of a specific pandemic scenario model applied to the Business and credit card portfolios. The impact of the further work undertaken on these two portfolios is provided below:

Business Lending

In addition to considering the modelled PMA elements of the severe downside scenario as outlined above, the Group has performed:

· A detailed review of the Group's most significant customers by value; and

· An assessment of the impact of a proportion of business customers being impacted by a negative rating migration in the Group's through the cycle IRB probability of default models.   

 

Financial statements

Notes to the interim condensed consolidated financial statements

Section 1: Basis of preparation and accounting policies (continued)

1.3  Critical accounting estimates and judgements (continued)

Allowance for impairment losses on credit exposures (continued)

Credit Cards

The analysis considers the impact of customers requesting payment holidays and the potential, over time, for a proportion of these customers to move into arrears.

There is a risk that the measures introduced could result in the payment holidays masking true deterioration in customer position due to loss of earnings, jobs or other income. There is also a risk that customer financial difficulty could extend beyond the payment holiday period and thus lead to arrears and losses emerging later. The risk is somewhat mitigated due to the UK Government offering to cover 80% of salaries (up to £2,500) and average profits for self-employed customers. The salary promise does not entirely preclude employed customers from being affected as, in addition to the short-term reduction in income, some businesses could fail, driving up unemployment and financial hardship.

Pandemic downside scenario

On 22 April 2020 the Group's external macro-economic scenario provider issued a COVID-19 specific pandemic downside scenario. The Group has applied this to the Business and credit card portfolios by applying a 100% weighting.

The 5-year simple average model inputs are:

		UK GDP	CPI	House	Bank	ILO
		growth	inflation	prices	rate	Unemployment
COVID-19 scenario		1.0%	1.2%	(0.7)%	0.4%	5.6%

While the simple 5-year average illustrates the impact of COVID-19 on the long run economic cycle, this obscures the significant and unprecedented impacts within these figures. Many of these are currently forecast to transpire within the next 12 months. Most significant among these are a startling peak in unemployment at 9.7% in the quarter to March 2021, with GDP anticipated to contract significantly in the quarter to September 2020. The modelled outcomes are fully reflective of these economic consequences.

In applying the approach outlined above the Group has a total COVID-19 overlay of £164m. This comprises £110m for Business, £39m for Personal and £15m for Mortgages. 

Pre COVID-19 modelled output

The Group continues to calculate the pre COVID-19 ECL allowance with reference to three economic scenarios over a five-year forecast period. A number of key economic assumptions such as unemployment rates, base rates and inflation are used which ensures that non-linear relationships between different forward-looking scenarios and their associated credit losses do not materially impact the ECL calculation.

The three chosen scenarios have been updated to reflect the current economic environment. There have been no changes to the related weightings at 31 March 2020 from those used at 30 September 2019:

Base case (60%)

The base case used by the Group for IFRS 9 modelling is also used for the Group's internal planning purposes and reflects the outcome of the December 2019 election result, which delivered a working majority for the Conservative party and the resultant implications for the EU withdrawal agreement. However, the outlook remains weak by historical standards.

Mild upside (20%)

This could be considered an alternative base case scenario, where cyclical momentum in the developed world exceeds current expectations. GDP averages 2.3%, compared to 1.5% in the base case, and unemployment reaches a trough of 3.3% driving an accelerated increase in bankers buying rate (BBR).

Severe downside (20%)

This scenario encompasses the possibility of the UK entering a recession later this year which lasts until mid-2022 and sees GDP fall by 3.1% peak to trough. This is a more severe impact than the median post war fall of 2.5% reflecting the ongoing uncertainty over a future trade deal with the EU.

 

Financial statements

Notes to the interim condensed consolidated financial statements

Section 1: Basis of preparation and accounting policies (continued)

1.3  Critical accounting estimates and judgements (continued)

Allowance for impairment losses on credit exposures (continued)

Considering the nature and quantum of the PMA's allocated across the lending portfolios, the Group's standard sensitivity disclosures on the impact to ECL's from changes in the weightings of individual economic scenarios would not provide meaningful information. As such, they have not been disclosed.

Macro-economic assumptions

A range of future macro-economic conditions is used in the scenarios over a five-year forecast period and reflects the best estimates of future conditions under each scenario. The Group has identified the following key macro-economic conditions as the most significant inputs for IFRS 9 modelling purposes: UK GDP growth, CPI inflation, house prices, bank rates, unemployment rates and CRE capital values. These are assessed and reviewed by an internal panel on a six-monthly basis to ensure appropriateness and relevance to the ECL calculation. Where model inputs are not reflective of the current market conditions at the date of the financial statements, the Group may reflect these through the use of temporary adjustments to the ECL calculation using expert credit judgement.

The simple forward-looking five-year averages for the key model inputs used in the ECL calculations at 31 March 2020 (2020-2024) and 30 September 2019 (2019-2023) are:

		UK GDP	CPI	House	Bank	ILO
		growth	inflation	prices	rate	Unemployment
31 March 2020
Mild upside		2.3%	2.1%	5.2%	1.7%	3.3%
Base		1.5%	1.7%	2.6%	0.7%	3.7%
Severe downside		(0.1%)	0.9%	(5.2%)	0.2%	5.7%
30 September 2019
Mild upside		2.7%	2.3%	5.8%	2.0%	3.4%
Base		1.8%	1.7%	2.9%	0.9%	3.8%
Severe downside		0.2%	0.8%	(4.6%)	0.4%	5.8%

Other PMAs

In addition, there are further non COVID-19 related PMAs which increase the collectively assessed modelled output where the Group considers that not all the risks identified in a product segment have been, or are capable of being, accurately reflected within those models. The Group has reviewed these and considered that £19m of PMAs to cover these areas is appropriate.

Effective interest rate

Effective interest rate is determined at initial recognition based upon management's best estimate of the future cash flows of the financial instrument. In the event these estimates are revised at a later date, a present value adjustment to the carrying value of the effective interest rate asset may be recognised in profit or loss. Such adjustments can introduce income statement volatility and consequently the effective interest rate method introduces a source of estimation uncertainty. Management considers that material risk of adjustments exists in relation to the application of effective interest rate to the Group's mortgage and credit card portfolios.

Mortgages

The main accounting judgement when assessing the cash flows within the Group's secured lending effective interest rate model is the product life (including assumptions based on observed historic customer behaviour when in a standard variable rate (SVR) period) and the early repayment charge income receivable. The Group currently assumes that 83% of customers will have fully repaid or re-mortgaged within two months of reverting to SVR. If this were to increase to 88%, the loans and advances to customers balance would reduce by £8m with the adjustment recognised in net interest income.

Financial statements

Notes to the interim condensed consolidated financial statements

Section 1: Basis of preparation and accounting policies (continued)

1.3  Critical accounting estimates and judgements (continued)

Effective interest rate (continued)

Credit cards

The Group measures credit card effective interest rate by modelling expected cash flows based on assumptions of future customer behaviour, which is supported by observed experience. Key behavioural assumptions include an estimation of utilisation of available credit, transaction and repayment activity and the retention of the customer balance after the end of a promotional period.

The effective interest rate of new business written post-acquisition is 5.47% while that on acquired portfolios nearing the end of their promotional periods is 8.49%. Revisions to the estimates of future cash flows (compared to the original assumptions) that would have resulted in the effective interest rate across all cohorts being reduced by 25bps, would lead to a £35m decrease in the loans and advances to customers balance. This present value adjustment would be recognised in interest income.

The Group holds an appropriate level of model risk reserve across both asset classes to mitigate the risk of estimation uncertainty.

1.4  Accounting developments

In addition to the policy changes highlighted above in note 1.2, the Group has also adopted the following IASB pronouncements in the current financial period which have all been endorsed for use in the EU. Unless stated otherwise, these do not have a material impact on the interim condensed consolidated financial statements:

· IFRIC interpretation 23: 'Uncertainty over Income Tax Treatments', issued June 2017 and effective for financial years beginning on or after 1 January 2019. The new interpretation applies to any situation in which there is uncertainty as to whether an income tax treatment is acceptable under tax law and is not limited to actual ongoing disputes;

· 'Annual Improvements to IFRS Standards 2015-2017 Cycle' issued December 2017 and effective for financial years beginning on or after 1 January 2019. The IASB has made amendments to the following standards: IFRS 3 'Business Combinations'; IFRS 11 'Joint arrangements'; IAS 12 'Income Taxes'; and IAS 23 'Borrowing Costs'. The amendment to IAS 12 clarifies that the income tax consequences of distributions on financial instruments classified as equity should be recognised alongside the past transactions or events that generated the distributable profits. This means that the taxation impacts of distributions relating to AT1 securities and non-controlling interests are now recognised within tax expense in the income statement as opposed to being recognised directly in retained earnings within equity. The amendment impacts only the presentation of the related taxation and not the calculation, with no change to the Group's net assets but an increase in profit attributable to equity owners. Comparatives have been restated. The adoption of this amendment has resulted in a reduction in tax expense and an increase in profit for the period of £9m (six months to March 2019: £8m; 12 months to 30 September 2019: £15m);

· amendment to IAS 19: 'Plan amendment, curtailment or settlement' issued in February 2018 and effective prospectively for financial years beginning on or after 1 January 2019. The amendments clarify that after a plan event companies should use these updated assumptions to measure current service cost and net interest for the remainder of the reporting period; and

· amendment to IAS 28: 'Long-term Interests in Associates and Joint Ventures' issued in October 2017 and effective for financial years beginning on or after 1 January 2019. The amendment clarifies that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests).

During the period, there have been no further pronouncements issued by the IASB that are considered relevant and material to the Group.

1.5   Presentation of risk disclosures

Certain disclosures outlined in IFRS 7 'Financial Instruments: Disclosure' concerning the nature and extent of risks relating to financial instruments have been included within the risk management section of this report.

Financial statements

Notes to the interim condensed consolidated financial statements

Section 2: Results for the period

2.1  Segment information

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

With effect from 1 October 2019, the business has been aligned to a three operating segments model: Business, Personal and Mortgages. However, the business continues to be reported to the Group's Chief Operating Decision Maker as a single segment and decisions made on the performance of the Group on that basis. Segmental information will therefore continue to be presented on this single segment basis until segment reporting has been fully embedded within the Group.

					6 months to		6 months to		12 months to
					31 Mar 2020		31 Mar 2019		30 Sep 2019
					(unaudited)		(unaudited)		(audited)
					£m		£m		£m
Net interest income					671		820		1,514
Non-interest income					96		106		235
Total operating income					767		926		1,749
Operating and administrative expenses					(537)		(711)		(1,729)
Impairment losses on credit exposures					(237)		(173)		(252)
Segment (loss)/profit before tax					(7)		42		(232)
Average interest earning assets					86,847		85,628		86,362

2.2  Net interest income

			6 months to		6 months to		12 months to
			31 Mar 2020		31 Mar 2019(1)		30 Sep 2019
			(unaudited)		(unaudited)		(audited)
			£m		£m		£m
Interest income
Loans and advances to customers			1,083		1,204		2,320
Loans and advances to other banks			30		34		72
Financial assets at fair value through other comprehensive income			22		15		27
Other interest income			-		1		1
Total interest income			1,135		1,254		2,420
Other similar interest
Financial assets at fair value through profit or loss			8		12		21
Derivatives economically hedging interest bearing assets			(3)		(4)		(8)
Total other similar interest			5		8		13
Less: interest expense and similar charges
Customer deposits			(315)		(273)		(580)
Debt securities in issue			(106)		(90)		(185)
Due to other banks			(46)		(70)		(144)
Other interest expense			(2)		(9)		(10)
Total interest expense and similar charges			(469)		(442)		(919)
Net interest income			671		820		1,514
(1)	The presentation of the comparative period has been realigned to the current period's presentation with interest from financial assets at fair value through profit or loss being reclassified from interest income to other similar interest.

Financial statements

Notes to the interim condensed consolidated financial statements

Section 2: Results for the period (continued)

2.3  Non-interest income

				6 months to		6 months to		12 months to
				31 Mar 2020		31 Mar 2019		30 Sep 2019
				(unaudited)		(unaudited)		(audited)
				£m		£m		£m
Gains less losses on financial instruments at fair value
Held for trading derivatives				9		8		16
Financial assets and liabilities at fair value(1)				(2)		(4)		3
Ineffectiveness arising from fair value hedges				(8)		(7)		(22)
Ineffectiveness arising from cash flow hedges				(8)		(6)		(14)
				(9)		(9)		(17)
Other operating income
Net fee and commission income				81		103		195
Margin on foreign exchange derivative brokerage				9		11		19
Gain on sale of financial assets at fair value through other comprehensive income				16		-		3
Gain on sale of Virgin Money Unit Trust Managers Limited				-		-		35
Share of joint venture results				(3)		-		(1)
Other income				2		1		1
				105		115		252
Total non-interest income				96		106		235
(1)	A credit risk gain on loans and advances at fair value of £1m, offset by a fair value loss of £3m, has been recognised in the current period (31 March 2019: £1m gain and £5m fair value loss, 30 September 2019: £2m gain and £1m fair value gain).

Non-interest income includes the following fee and commission income disaggregated by income type:
Current account and debit card fees				55		59		117
Credit cards				22		20		42
Insurance, protection and investments				12		23		37
Non-banking and other fees(1)				14		16		31
Total fee and commission income				103		118		227
Total fee and commission expense				(22)		(15)		(32)
Net fee and commission income				81		103		195
(1)	Non-banking and other fees include mortgages, invoice and asset finance, and ATM fees.

2.4  Operating and administrative expenses

			6 months to		6 months to		12 months to
			31 Mar 2020		31 Mar 2019		30 Sep 2019
			(unaudited)		(unaudited)			(audited)
			£m		£m			£m
Personnel expenses			203		238			421
Depreciation and amortisation expense			76		56			108
Other operating and administrative expenses			258		417			1,200
Total operating and administrative expenses			537		711			1,729
Personnel expenses comprise the following items:
			6 months to	6 months to				12 months to
			31 Mar 2020	31 Mar 2019				30 Sep 2019
			(unaudited)		(unaudited)			(audited)
			£m		£m			£m
Salaries, wages and non-cash benefits and social security costs			121		148			256
Defined contribution pension expense			25		18			47
Defined benefit pension expense			(1)		16			9
Equity based compensation			4		5			4
Other personnel expenses			54		51			105
Personnel expenses			203		238			421

 

Financial statements

Notes to the interim condensed consolidated financial statements

Section 2: Results for the period (continued)

2.5  Taxation

	6 months to		6 months to		12 months to
	31 Mar 2020		31 Mar 2019		30 Sep 2019
	(unaudited)		(unaudited)		(audited)
	£m		£m		£m
Current tax
Current period	7		14		5
Adjustment in respect of prior periods	1		(3)		(5)
	8		11		-
Deferred tax (note 3.4)
Current period	(37)		(8)		(56)
Adjustment in respect of prior periods	-		2		3
	(37)		(6)		(53)
Tax (credit)/expense for the period	(29)		5		(53)

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

	6 months to			6 months to			12 months to
	31 Mar 2020			31 Mar 2019			30 Sep 2019
	(unaudited)			(unaudited)			(audited)
	£m			£m			£m
(Loss)/profit on ordinary activities before tax	(7)			42			(232)
Tax (credit)/expense based on the standard rate of corporation tax in the UK of 19% (March and September 2019: 19%)	(1)			8			(44)
Effects of:
Disallowable expenses	1			3			50
Conduct indemnity adjustment	8			10			10
Deferred tax assets de-recognised/(recognised)	4			(16)			(49)
Non-taxable gain on partial disposal of UTM	-			-			(7)
Banking surcharge	-			6			-
Bank levy	-			-			1
Impact of rate change	(34)			3			3
AT1 distribution	(8)			(8)			(15)
Adjustments in respect of prior periods	1			(1)			(2)
Tax (credit)/expense for the period	(29)			5			(53)

Deferred tax assets recognised represent historic losses, previously derecognised, that are now brought onto the balance sheet in accordance with the Group's established methodology, reflecting their expected utilisation against future taxable profits. 

The rate change arises on the revaluation of the Group's net deferred tax assets to reflect the reversal of the previously enacted 17% mainstream corporation tax rate in the Budget of 11 March 2020 (see note 3.4).

As outlined in note 1.4, and in accordance with IASB improvements for periods commencing on or after 1 January 2019, the tax credit associated with the distribution on AT1 instruments and to non-controlling interests have been presented in the income statement, rather than in equity. This change is presentational only; it has no effect on total shareholder assets.  Prior period comparatives have been restated.
 

Financial statements

Notes to the interim condensed consolidated financial statements

Section 2: Results for the period (continued)

2.6  Earnings per share (EPS)

		6 months to		6 months to		12 months to
		31 Mar 2020		31 Mar 2019		30 Sep 2019
		(unaudited)		(unaudited)		(audited)
		£m		£m		£m
(Loss)/profit attributable to ordinary equity holders for the purposes of basic and diluted earnings/(loss) per share		(18)		3		(253)
		31 Mar 2020 Number of shares		31 Mar 2019 Number of shares		30 Sep 2019 Number of shares
Weighted-average number of ordinary shares in issue (millions)
- Basic		1,440		1,390		1,414
- Diluted		1,440		1,391		1,414
Basic (loss)/earnings per share (pence)		(1.2)		0.2		(17.9)
Diluted (loss)/earnings per share (pence)		(1.2)		0.2		(17.9)

Basic earnings per share has been calculated after deducting 0.5m (2019: 1m) ordinary shares representing the weighted average of the Group's holdings of own shares. The calculation of the diluted earnings per share for the current period and for the 12 months to 30 September 2019 excluded conditional awards of over 1m ordinary shares made under equity based compensation schemes.  These are considered anti-dilutive due to the Group making a loss in these periods.

 

Financial statements

Notes to the interim condensed consolidated financial statements

Section 3: Assets and liabilities

3.1  Loans and advances to customers

			31 Mar 2020		30 Sep 2019
			(unaudited)		(audited)
			£m		£m
Gross loans and advances to customers			73,526		73,246
Impairment provisions on credit exposures			(542)		(362)
Fair value hedge adjustment			210		211
			73,194		73,095

Included within gross loans and advances is £713m (30 September 2019: £685m) relating to finance lease receivables.

The Group has a portfolio of fair valued business loans of £214m (30 September 2019: £253m) which are classified separately as financial assets at fair value through profit or loss on the balance sheet (note 3.2). Combined with the above this is equivalent to total loans and advances of £73,408m (30 September 2019: £73,348m).

The fair value hedge adjustment represents an offset to the fair value movement on derivatives designated in hedge accounting relationships of the mortgage portfolio. Such relationships are established to protect the Group from interest rate risk on fixed rate products.

The Group has transferred a proportion of mortgages to the securitisation and covered bond programmes (note 3.3).

3.2  Financial assets and liabilities at fair value through profit or loss

		31 Mar 2020		30 Sep 2019
		(unaudited)		(audited)
		£m		£m
Financial assets at fair value through profit or loss
Loans and advances		214		253
Other financial assets		9		14
		223		267
Financial liabilities at fair value through profit or loss
Customer deposits - term deposits		-		4

Loans and advances

Included in financial assets at fair value through profit or loss is a historical portfolio of loans (sales ceased in 2012). Interest rate risk associated with these loans is managed using interest rate derivative contracts and the loans are recorded at fair value to avoid an accounting mismatch. The maximum credit exposure of the loans is £214m (30 September 2019: £253m) including accrued interest receivable of £1m (30 September 2019: £1m). The cumulative loss in the fair value of the loans attributable to changes in credit risk amounts to £3m (30 September 2019: £4m); the change for the current period is a decrease of £1m (30 September 2019: decrease of £4m) of which £1m (30 September 2019: £2m) has been recognised in the income statement. 

Other financial assets

Included in other financial assets are £8m (30 September 2019: £8m) of unlisted securities and £1m (30 September 2019: £6m) of debt instruments.

Refer to note 3.9 for further information on the valuation methodology applied to financial assets held at fair value through profit and loss and their classification within the fair value hierarchy. Details of the credit quality of financial assets is provided in the Risk report.

Customer deposits - term deposits

Included in other financial liabilities at fair value through profit or loss are fixed rate deposits, the interest rate risk on which is hedged using interest rate derivative contracts. The deposits are recorded at fair value to avoid an accounting mismatch.

The change in fair value attributable to changes in the Group's credit risk is £Nil (30 September 2019: £Nil). The Group is contractually obligated to pay £Nil (30 September 2019: £Nil) less than the carrying amount at maturity to the deposit holder.

Financial statements

Notes to the interim condensed consolidated financial statements

Section 3: Assets and liabilities (continued)

3.3  Derivative financial instruments

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

			31 Mar 2020		30 Sep 2019
			(unaudited)		(audited)
			£m		£m
Fair value of derivative financial assets
Designated as hedging instruments			256		315
Designated as held for trading			147		51
			403		366
Fair value of derivative financial liabilities
Designated as hedging instruments			99		191
Designated as held for trading			106		82
			205		273

Cash collateral on derivatives placed with banks totalled £51m (30 September 2019: £55m). Cash collateral received on derivatives totalled £102m (30 September 2019: £149m). These amounts are included within due from and due to other banks respectively. Collateral placed with clearing houses, which did not meet offsetting criteria set out in IAS 32, totalled £37m (30 September 2019: £55m) and is included within other assets.

The derivative financial instruments held by the Group are further analysed below. The notional contract amount is the amount from which the cash flows are derived and does not represent the principal amounts at risk relating to these contracts.

	31 March 2020 (unaudited)						30 September 2019 (audited)
Total derivative contracts	Notional contract amount		Fair value of assets		Fair value of liabilities		Notional contract amount		Fair value of assets		Fair value of liabilities
	£m		£m		£m		£m		£m		£m
Derivatives designated as hedging instruments
Cash flow hedges
Interest rate swaps (gross)	31,327		100		165		25,023		105		121
Less: Net settled interest rate swaps(1)	(20,776)		(44)		(126)		(14,513)		(47)		(75)
Interest rate swaps (net) (2)	10,551		56		39		10,510		58		46
Cross currency swaps(2)	641		68		-		1,446		162		-
	11,192		124		39		11,956		220		46
Fair value hedges
Interest rate swaps (gross)	20,783		186		565		25,492		146		526
Less: Net settled interest rate swaps(1)	(19,348)		(80)		(520)		(23,872)		(60)		(389)
Interest rate swaps (net) (2)	1,435		106		45		1,620		86		137
Cross currency swaps(2)	1,000		26		15		808		9		8
	2,435		132		60		2,428		95		145
Total derivatives designated as hedging instruments	13,627		256		99		14,384		315		191
Derivatives designated as held for trading
Foreign exchange rate related contracts
Spot and forward foreign exchange(2)	1,211		30		23		728		16		15
Cross currency swaps(2)	1,460		69		9		1,123		11		9
Options(2)	1		-		-		2		-		-
	2,672		99		32		1,853		27		24
Interest rate related contracts
Swaps (gross)	721		23		48		1,159		24		53
Less: Net settled interest rate swaps(1)	-		-		-		(363)		(5)		(2)
Swaps (net) (2)	721		23		48		796		19		51
Swaptions(2)	11		-		1		11		-		2
Options(2)	482		2		3		465		2		3
	1,214		25		52		1,272		21		56
Commodity related contracts	133		23		22		55		2		2
Equity related contracts	-		-		-		3		1		-
Total derivatives designated as held for trading	4,019		147		106		3,183		51		82

(1) Presented within other assets

(2) Presented within derivative financial instruments

Financial statements

Notes to the interim condensed consolidated financial statements

Section 3: Assets and liabilities (continued)

3.3  Derivative financial instruments (continued)

Derivatives transacted to manage the Group's interest rate exposure on a net portfolio basis are accounted for as either cash flow hedges or fair value hedges as appropriate. Cash flow hedged derivatives include vanilla interest rate swaps and cross currency swaps. Derivatives traded to manage interest rate risk on certain fixed rate assets, such as UK Government Gilts, are accounted for as fair value hedges.

The Group hedging positions also include those designated as foreign currency and interest rate hedges of debt issued from the Group's securitisation and covered bond programmes. As such, certain derivative financial assets and liabilities have been booked in structured entities and consolidated within these financial statements.

Interest Rate Benchmark Reform

As highlighted in note 1.2, the Group has early adopted and applied the Amendments to IAS 39 and IFRS 7 on Interest Rate Benchmark Reform. The amendments provide temporary exceptions from applying specific hedge accounting requirements during the period of uncertainty resulting from interest rate benchmark reform. However, any hedge ineffectiveness continues to be recorded in the income statement.

In summary, the reliefs provided by the amendments that apply to the Group are:

· When considering the 'highly probable' requirement, the Group has assumed that the IBOR interest rates upon which the hedged items are based do not change as a result of IBOR reform.

· In assessing whether the hedge is expected to be highly effective on a prospective basis the Group has assumed that the IBOR interest rates upon which the cash flows of the hedged items and the hedging instruments that hedge them are based are not altered by IBOR reform.

· The Group will not discontinue hedge accounting should the retrospective assessment of hedge effectiveness fall outside the 80‑125 per cent range and the hedging relationship is subject to interest rate benchmark reforms. For those hedging relationships that are not subject to the interest rate benchmark reforms the Group will continue to cease hedge accounting if retrospective effectiveness is outside the 80‑125 per cent range.

· The Group has retained the cumulative gain or loss in the cash flow hedge reserve for designated cash flow hedges that are subject to interest rate benchmark reforms even though there is uncertainty arising from the interest rate benchmark reform with respect to the timing and amount of the cash flows of the hedged items. Should the Group consider the hedged future cash flows are no longer expected to occur due to reasons other than interest rate benchmark reform, the cumulative gain or loss will be immediately reclassified to profit or loss.

· The Group has assessed whether the hedged IBOR risk component is a separately identifiable risk only when it first designates a hedged item in a fair value hedge and not on an ongoing basis.

The Group has cash flow and fair value hedge accounting relationships that are exposed to different IBORs, predominantly GBP LIBOR, but also Euro Interbank Offer Rate (EURIBOR) and USD LIBOR, which are subject to the interest rate benchmark reform.

As at 31 March 2020, the notional of the hedged items that the Group has designated into cash flow hedge relationships that is directly affected by the interest rate benchmark reform is £28,817m, of which £28,176m relates to GBP LIBOR. These are principally debt securities in issue, both current and highly probable forecast issuances. The notional of the hedged items that the Group has designated in fair value hedge relationships that is directly affected by the interest rate benchmark reform is £15,818m. These fair value hedges principally relate to fixed rate mortgages.

At 31 March 2020, the notional amount of the hedging instruments in hedge relationships to which these amendments apply was £44,706m, of which £15,889m relates to fair value hedges and £28,817m relates to cash flow hedges.

Page 47 of the Risk report describes how the Group is managing the transition to new benchmark interest rates.

The Group will continue to apply the amendments to IAS 39 until the uncertainty arising from the interest rate benchmark reforms with respect to the timing and the amount of the underlying cash flows that the Group is exposed ends. The Group has assumed that this uncertainty will not end until the Group's contracts that reference IBORs are amended to specify the date on which the interest rate benchmark will be replaced, the cash flows of the alternative benchmark rate and the relevant spread adjustment.

Financial statements

Notes to the interim condensed consolidated financial statements

Section 3: Assets and liabilities (continued)

3.4  Deferred tax

The Group has recognised deferred tax in relation to the following items:

	31 Mar 2020		30 Sep 2019
	(unaudited)		(audited)
	£m		£m
Deferred tax assets
Tax losses carried forward	156		146
Capital allowances	107		91
Cash flow hedge reserve	11		3
Acquisition accounting adjustments	22		44
Transitional adjustment - IFRS 9	16		16
Transitional adjustment - available for sale reserve	1		1
Employee equity based compensation	4		5
Unamortised issue costs	3		4
Loss on financial instruments at fair value through other comprehensive income	3		-
Pension spreading	11		11
Other	6		1
	340		322
Deferred tax liabilities
Defined benefit pension scheme surplus	(216)		(139)
Acquisition accounting adjustments	(23)		(51)
Gains on financial instruments at fair value through other comprehensive income	-		(6)
Intangible assets	(3)		(4)
Other	(4)		(1)
	(246)		(201)
Net deferred tax asset	94		121

Since 1 April 2017, the statutory rate of UK corporation tax has been 19%.  The previously enacted corporation tax reduction to 17% on 1 April 2020 was cancelled in the Budget of 11 March 2020, and a resolution effecting this passed by Parliament on 17 March 2020. This new rate is used to measure the values at which assets are expected to be realised and liabilities settled. The result is a significant credit to the income statement as set out in note 2.5.

At 31 March 2020, the Group had an unrecognised deferred tax asset of £131m, valued at 19% (30 September 2019: £114m, valued at the previously enacted rate of 17%) representing trading losses with a gross value of £689m (30 September 2019: £668m). Although there is no prescribed period after which losses expire, a deferred tax asset has not been recognised in respect of these losses as the Directors have insufficient certainty over their recoverability in the foreseeable future.

Financial statements

Notes to the interim condensed consolidated financial statements

Section 3: Assets and liabilities (continued)

3.5	Debt securities in issue

The breakdown of debt securities in issue is shown below:

31 March 2020 (unaudited)	Medium-term notes	Subordinated debt	Securitisation	Covered bonds	Total
	£m	£m	£m	£m	£m
Carrying value	1,838	722	4,667	1,826	9,053
Fair value hedge adjustments	49	-	13	65	127
Total debt securities	1,887	722	4,680	1,891	9,180
Accrued interest payable	22	9	8	26	65
	1,909	731	4,688	1,917	9,245
30 September 2019 (audited)	Medium-term notes	Subordinated debt	Securitisation	Covered bonds	Total
	£m	£m	£m	£m	£m
Carrying value	1,838	722	5,040	1,828	9,428
Fair value hedge adjustments	47	-	2	74	123
Total debt securities	1,885	722	5,042	1,902	9,551
Accrued interest payable	12	9	9	10	40
	1,897	731	5,051	1,912	9,591

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

Medium-term notes (excluding accrued interest)

	31 Mar 2020 (unaudited) £m	30 Sep 2019 (audited) £m
VM UK 3.125% fixed-to-floating rate callable senior notes due 2025	298	298
VM UK 4% fixed rate reset callable senior notes due 2026	524	523
VM UK 3.375% fixed rate reset callable senior notes due 2025	365	366
VM UK 4% fixed rate reset callable senior notes due 2027	400	397
CB PLC 2.25% fixed rate senior notes due 2020	300	301
	1,887	1,885

Subordinated debt (excluding accrued interest)

	31 Mar 2020 (unaudited) £m	30 Sep 2019 (audited) £m
VM UK 5% fixed rate reset callable subordinated notes due 2026	475	476
VM UK 7.875% fixed rate reset callable subordinated notes due 2028	247	246
	722	722

The Group has not issued any medium-term notes, subordinated debt or covered bonds during the period. The Group issued £491m in Sterling and US Dollar denominations from the securitisation programmes (30 September 2019: £1,102m).

3.6  Due to other banks

		31 Mar 2020		30 Sep 2019
		(unaudited)		(audited)
		£m		£m
Secured loans		7,122		7,308
Securities sold under agreements to repurchase(1)		401		1,554
Transaction balances with other banks		12		12
Deposits from other banks		55		42
		7,590		8,916
(1)	The underlying securities sold under agreements to repurchase have a carrying value of £550m (30 September 2019: £2,324m).

Secured loans comprise amounts drawn under the Term Funding Schemes (including accrued interest).

Financial statements

Notes to the interim condensed consolidated financial statements

Section 3: Assets and liabilities (continued)

3.7  Provisions for liabilities and charges

	6 months to		12 months to
	31 Mar 2020		30 Sep 2019
	(unaudited)		(audited)
	£m		£m
PPI redress provision
Opening balance	379		275
Charge to the income statement	-		415
Utilised	(161)		(311)
Closing balance	218		379
Customer redress and other provisions
Opening balance	25		41
Adoption of IFRS 16 (note 5.4)	8		-
Opening balance (restated)	33		41
Virgin Money provision on acquisition	-		11
(Credit)/charge to the income statement	(1)		18
Utilised	(18)		(45)
Closing balance	14		25
Restructuring provision
Opening balance	55		15
Adoption of IFRS 16 (note 5.4)	(10)		-
Opening balance (restated)	45		15
Virgin Money provision on acquisition	-		2
Charge to the income statement	-		64
Utilised	(19)		(26)
Closing balance	26		55
Total provisions for liabilities and charges	258		459

PPI redress

In common with the wider UK retail banking sector, the Group continues to deal with complaints received in the period up to the time bar in August 2019. The Group has made good progress in reviewing and closing the remaining IRs and related complaints and considers the remaining provision to be enough to meet current and future expectations in relation to the mis-selling of PPI policies and therefore no additional charge was required in the period. The total provision raised to date in respect of PPI is £3,055m (30 September 2019: £3,055m), with £218m of this remaining (30 September 2019: £379m).

At 30 September 2019 the Group had received 629,000 complaints and allowed for a further 86,000 complaints to be converted from c.325,000 IRs that remained unprocessed at that time.

In the last six months the Group has processed the majority of the unprocessed IRs, with c.8,000 IRs now left to review. Based on the IR-to-complaint conversion rate experience over the past six months it is now estimated that the actual final number of complaints, from the stock of IRs which existed as at 30 September 2019, will be c.100,000.

In the last six months the Group has closed c.75,000 complaints representing the 52,000 complaints which were outstanding at the end of September 2019 and c.25,000 which have been converted from IRs outstanding at the end of September 2019. Subject to estimating the valid complaints in the final c8,000 IRs the Group has c.75,000 complaints left to review.

The overall provision continues to be based on several assumptions derived from a combination of past experience, estimated future experience, industry comparison and the exercise of judgement in the key areas identified. Our experience since the time bar has been positive relative to expectations, particularly around the validity of complaints requiring redress (uphold rate), and this more than offsets the costs associated with the additional complaints. As the operation moves into the final months the main area of variability is the uphold rate on the remaining complaints. Using current experience and extrapolating on the remaining cases indicates a potential provision surplus, but this will not be validated until the outstanding complaints have been closed. In terms of the Group's sensitivity to this variable, the actual complaint uphold rate would have to increase by c.70% relative to the 25% experienced in the six months to 31 March 2020 in order to utilise the remaining provision. Therefore there does of course remain a residual risk that existing provisions for PPI customer redress may not cover all potential costs, but given the experience over the past six months this risk has reduced significantly.

 

Financial statements

Notes to the interim condensed consolidated financial statements

Section 3: Assets and liabilities (continued) 

3.7  Provisions for liabilities and charges (continued)

Customer redress and other provisions

Other provisions include amounts in respect of a number of non-PPI conduct related matters, legal proceedings, claims arising in the ordinary course of the Group's business and property related provisions. The Group has not raised further provisions in relation to non-PPI conduct matters in the period. The ultimate cost to the Group of these customer redress matters is driven by a number of factors relating to offers of redress, compensation, offers of alternative products, consequential loss claims and administrative costs. The matters are at varying stages of their life cycle and in certain circumstances, usually early in the life of a potential issue, elements of the potential exposure are contingent. These factors could result in the total cost of review and redress varying materially from the Group's estimate. The final amount required to settle the Group's potential liabilities in these matters is therefore uncertain and further provision could be required. 

Restructuring provision

Restructuring of the business continues with a provision held to cover redundancy payments, property vacation costs and associated enablement costs.

3.8  Retirement benefit obligations

The Group funds a defined benefit pension scheme, the Yorkshire and Clydesdale Bank Pension Scheme ('the Scheme'). The Group's trading subsidiary, Clydesdale Bank PLC, is the sponsoring employer in the Scheme, which was closed to future benefit accrual for the majority of current employees on 1 August 2017. The assets of the Scheme are held in a trustee administered fund, with the Trustee responsible for the operation and governance of the Scheme, including making decisions regarding the Scheme's funding and investment strategy.

The following table provides a summary of the fair value of plan assets and present value of the defined benefit obligation for the Scheme:

	31 Mar 2020		30 Sep 2019
	(unaudited)		(audited)
	£m		£m
Fair value of Scheme assets	4,437		4,707
Total defined benefit obligation	(3,819)		(4,311)
Net defined benefit pension asset	618		396

The Group also provides post-retirement health care under a defined benefit scheme for pensioners and their dependant relatives for which provision of £2m (30 September 2019: £3m) has been made on a basis consistent with the methodology applied to the defined benefit pension scheme. This is a closed scheme and the provision will be utilised over the life of the remaining scheme members.

Financial statements

Notes to the interim condensed consolidated financial statements

Section 3: Assets and liabilities (continued)

3.9  Fair value of financial instruments

This section should be read in conjunction with note 3.18, Fair value of financial instruments, of the 2019 Virgin Money UK PLC Annual Report and Accounts, which provides more detail about accounting policies adopted and valuation methodologies used in calculating fair value. There have been no changes in the accounting policies adopted or the valuation methodologies used.

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

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

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

				31 Mar 2019				30 Sep 2019
				(unaudited)				(audited)
				Carrying value		Fair value		Carrying value		Fair value
				£m		£m		£m		£m
Financial assets
Loans and advances to customers(1)				73,194		73,117		73,095		73,119
Financial liabilities
Due to other banks(2)				7,590		7,590		8,916		8,874
Customer deposits(2)				64,853		65,055		64,000		64,166
Debt securities in issue(3)				9,245		9,194		9,591		9,667

(1)  Loans and advances to customers are categorised as Level 3 in the fair value hierarchy with the exception of £1,415m (30 September 2019: £1,513m) of overdrafts

which are categorised as Level 2.

(2)  Categorised as Level 2 in the Fair Value Hierarchy.

(3)  Categorised as Level 2 in the Fair Value Hierarchy with the exception of £2,492m of listed debt (30 September 2019: £2,606m) which is categorised as level 1.

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

The following tables provide an analysis of financial instruments that are measured at fair value, using the fair value hierarchy described above.

		Fair value measurement as at							Fair value measurement as at
		31 Mar 2020 (unaudited)							30 Sep 2019 (audited)
		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
		£m		£m		£m		£m		£m		£m		£m		£m
Financial assets
Financial assets at fair value
through other comprehensive   income		4,635		-		-		4,635		4,328		-		-		4,328
Financial assets at fair value
through profit or loss		-		214		-		214		-		253		-		253
Other financial assets		-		-		9		9		-		-		14		14
Derivative financial assets		-		403		-		403		-		366		-		366
Total financial assets at fair value		4,635		617		9		5,261		4,328		619		14		4,961
Financial liabilities
Customer deposits		-		-		-		-		-		4		-		4
Derivative financial liabilities		-		205		-		205		-		273		-		273
Total financial liabilities at fair value		-		205		-		205		-		277		-		277

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

Financial statements

Notes to the interim condensed consolidated financial statements

Section 3: Assets and liabilities (continued)

3.9  Fair value of financial instruments (continued)

Additional analysis on assets and liabilities measured at fair value based on valuation techniques for which any significant input is not based on observable market data (Level 3):

Level 3 movement analysis:
		6 months to 31 Mar 2020 (unaudited)			12 months to 30 Sep 2019 (audited)
		Financial assets available for sale £m		Financial assets at fair value through profit or loss £m		Financial assets available for sale £m	Financial assets at fair value through profit or loss £m
Balance at the beginning of the period		-		14		11	-
Reclassification on adoption of IFRS 9(1)		-		-		(11)	11
Fair value gains/(losses) recognised(2)
In profit or loss - unrealised		-		-		-	1
In profit or loss - realised		-		5		-	3
Purchases		-		-		-	3
Sales		-		(10)
Settlements		-		-		-	(4)
Balance at the end of the period		-		9		-	14
(1)	Changes required as a result of the adoption of IFRS 9 from 1 October 2018.
(2)	Net gains or losses were recorded in non-interest income, FVOCI reserve or available for sale reserve as appropriate.

Quantitative information about significant unobservable inputs in Level 3 valuations

The table below lists key unobservable inputs to Level 3 financial instruments, and provides the range of those inputs as at 31 March 2020.

Fair value

Valuation

Unobservable

Low

High

£m

technique

inputs

range

range

Other financial assets at fair value through profit or loss (FVTPL)

Equity investments

8

Discounted cash flow

Contingent litigation risk

0%

100%

Debt investments

1

Discounted cash flow

Recoverable amount

0%

100%

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

Where valuation techniques use non-observable inputs that are significant to a fair value measurement in its entirety, changing these inputs will change the resultant fair value measurement. The most significant input into the FVTPL equity investment is the contingent litigation risk.  Were this to crystallise in its entirety, the carrying value of the equity investments would reduce by £6m.

Other than this significant Level 3 measurement, the Group has a limited remaining exposure to Level 3 fair value measurements and changing one or more of the inputs for fair value measurements in Level 3 to reasonable alternative assumptions would not change the fair value significantly with respect to profit or loss, total assets, total liabilities or equity on these remaining Level 3 measurements.
 

Financial statements

Notes to the interim condensed consolidated financial statements

Section 4: Capital

4.1  Equity

4.1.1  Share capital and share premium

					31 Mar 2020		30 Sep 2019
					(unaudited)		(audited)
					£m		£m
Share capital					144		143
Share premium					3		3
Share capital and share premium					147		146

	31 Mar 2020		30 Sep 2019
	(unaudited)		(audited)		31 Mar 2020		30 Sep 2019
	Number of		Number of		(unaudited)		(audited)
	shares		shares		£m		£m
Ordinary shares of £0.10 each - allotted, called up, and fully paid
Opening ordinary share capital	1,434,485,689		886,079,959		143		89
Share for share exchange	-		540,856,644		-		54
Issued under employee share schemes	3,444,676		7,549,086		1		-
Closing ordinary share capital	1,437,930,365		1,434,485,689		144		143

The holders of ordinary shares are entitled to dividends as declared from time to time and are entitled to one vote per share at meetings of the shareholders of the Company. All shares in issue at 31 March 2020 rank equally with regard to the Company's residual assets.

During the period 3,444,676 (30 September 2019: 7,549,086) ordinary shares were issued under employee share schemes with a nominal value of £0.3m (30 September 2019: £0.7m).

The Directors recommended that no interim dividend would be paid in respect of the half year ended 31 March 2020.  This reflects the current uncertainty as to the overall impact of the COVID-19 virus and is consistent with the PRA's statement welcoming the decision of large UK banks to suspend dividends until the end of 2020.

Share premium represents the aggregate of all amounts that have ever been paid above par value to the Company when it has issued ordinary shares.

4.1.2  Other equity instruments

Other equity instruments consist of the following Perpetual Contingent Convertible Notes.

· Perpetual securities (fixed 8% up to the first reset date) issued on 8 February 2016 with a nominal value of £450m and optional redemption on 8 December 2022.

· Perpetual securities (fixed 8.75% up to the first reset date) issued on 10 November 2016 with a nominal value of £230m and optional redemption on 10 November 2021. This was originally held by Virgin Money Holdings (UK) PLC and recognised as a non-controlling interest (note 4.1.6). Following a change in obligor from Virgin Money Holdings (UK) PLC to the Company on 20 August 2019, this has been recognised within other equity.

· Perpetual securities (fixed 9.25% up to the first reset date) issued on 13 March 2019 with a nominal value of £250m and optional redemption on 8 June 2024.

The issues are treated as equity instruments in accordance with IAS 32 'Financial Instruments: Presentation' with the proceeds included in equity, net of transaction costs of £15m (30 September 2019: £15m). AT1 distributions of £40m were paid in the period (30 September 2019: £41m; 31 March 2019: £18m). Following revisions to the tax rules on hybrid capital which took effect from 1 January 2019, Hybrid Capital Instruments elections covering the Group's AT1s that existed at 1 January 2019 were made to HMRC on 27 September 2019. Accordingly, in line with the revised standard, the tax credits for these payments have been recognised in the income statement.

4.1.3  Capital reorganisation reserve

The capital reorganisation reserve of £839m was recognised on the issuance of the Company's ordinary shares in February 2016 in exchange for the acquisition of the entire share capital of the Group's previous parent company, CYB Investments Limited (CYBI). The reserve reflects the difference between the consideration for the issuance of the Company's shares and CYBI's share capital and share premium.

Financial statements

Notes to the interim condensed consolidated financial statements

Section 4: Capital (continued)

4.1.4  Merger reserve

A merger reserve of £633m was recognised on the issuance of the Company's ordinary shares in February 2016 in exchange for the acquisition of the entire share capital of CYBI. An additional £1,495m was recognised on the issuance of the Company's ordinary shares in October 2018 in exchange for the acquisition of the entire share capital of Virgin Money Holdings (UK) PLC. The merger reserve reflects the difference between the consideration for the issuance of the Company's shares and the nominal value of the shares issued.

4.1.5  Other reserves

Own shares held

Virgin Money Holdings (UK) PLC established an Employee Benefit Trust (EBT) in 2011 in connection with the operation of its share plans. On the date of acquisition by the Company, the shares held in the EBT were converted to the Company's shares at a ratio of 1.2125 Company shares for each Virgin Money Holdings (UK) PLC share. The investment in own shares as at 31 March 2020 is £Nil (30 September 2019: £1m). The market value of the shares held in the EBT at 31 March 2020 was £0.1m (30 September 2019: £1m).

Deferred shares reserve

The deferred share reserve comprises shares to be issued in the future relating to employee share plans in regard to the settlement of outstanding Virgin Money Holdings (UK) PLC share awards, which will be settled through the issuance of Virgin Money UK PLC shares at a future date in line with the vesting profile of the underlying plans.

Equity based compensation reserve

The Group's equity based compensation reserve records the value of equity settled share based payment benefits provided to the Group's employees as part of their remuneration that has been charged through the income statement and adjusted for deferred tax.

Asset revaluation reserve

The asset revaluation reserve includes the gross revaluation increments and decrements arising from the revaluation of land and buildings.

FVOCI reserve

The FVOCI reserve records the unrealised gains and losses arising from changes in the fair value of financial assets at fair value through other comprehensive income. The movements in this reserve are detailed in the consolidated statement of comprehensive income.

Cash flow hedge reserve

The cash flow hedge reserve represents the effective portion of cumulative post-tax gains and losses on derivatives designated as cash flow hedging instruments that will be recycled to the income statement when the hedged items affect profit or loss.

	6 months to 31 Mar 2020 (unaudited) £m		12 months to 30 Sep 2019 (audited) £m
Opening cash flow hedge reserve	(26)		(39)
Amounts recognised in other comprehensive income:
Cash flow hedge - interest rate risk
Effective portion of changes in fair value of interest rate swaps	(32)		14
Amounts transferred to the income statement	(2)		-
Taxation	9		(3)
Cash flow hedge - Foreign exchange risk
Effective portion of changes in fair value of cross currency swaps	(20)		59
Amounts transferred to the income statement	20		(57)
Taxation	-		-
Closing cash flow hedge reserve	(51)		(26)

4.1.6  Non-controlling interests

On 15 October 2018, the date on which it was acquired by the Company, Virgin Money Holdings (UK) PLC (now an intermediate holding company within the Group) had in issue Fixed Rate Resettable AT1 securities issued on the Luxembourg Stock Exchange. In accordance with IAS 32 these are classified as equity instruments. The Group did not acquire the AT1 securities at that time, consequently these represented a non-controlling interest. As the AT1 instruments are actively traded, the fair value on acquisition of £422m was calculated based on the market price on the Luxembourg Stock Exchange at its close of business on 12 October 2018. Subsequently on 20 August 2019, there was a change in obligor from Virgin Money Holdings (UK) PLC to the Company, following which these instruments have been recognised within other equity (note 4.1.2).

There were no distributions to non-controlling interests in the current period (30 September 2019: £33m paid, £26m net of tax, 31 March 2019: £16m paid, £13m net of tax).

 

Financial statements

Notes to the interim condensed consolidated financial statements

Section 5: Other notes

5.1  Contingent liabilities and commitments

The table below sets out the amounts of financial guarantees and commitments which are not recorded on the balance sheet. Financial guarantees and commitments are credit-related instruments which include acceptances, letters of credit, guarantees and commitments to extend credit. The amounts do not represent the amounts at risk at the balance sheet date but the amounts that would be at risk should the contracts be fully drawn upon and the customer defaults. Since a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the contract amounts is not representative of future liquidity requirements.

	31 Mar 2020		30 Sep 2019
	(unaudited)		(audited)
	£m		£m
Guarantees and assets pledged as collateral security:
Due in less than 3 months	20		24
Due between 3 months and 1 year	22		24
Due between 1 year and 3 years	9		6
Due between 3 years and 5 years	11		11
Due after 5 years	49		48
	111		113
Other credit commitments
Undrawn formal standby facilities, credit lines and other commitments to lend at call	16,463		15,158

Other contingent liabilities

Conduct risk related matters

There continues to be uncertainty and thus judgement is required in determining the quantum of conduct risk related liabilities, with note 3.7 reflecting the Group's current position in relation to redress provisions including those for PPI. Following the August 2019 time bar for PPI complaints the Group has made good progress in reviewing and closing the IRs and related complaints.  Until all matters are closed the final amount required to settle the Group's potential liabilities for these, and other conduct related matters, remains uncertain. Contingent liabilities include those matters where redress is likely to be paid and costs incurred but the amounts cannot currently be estimated.

The Group will continue to reassess the adequacy of provisions for these matters and the assumptions underlying the calculations at each reporting date based upon experience and other relevant factors at that time.

Legal claims

The Group is named in and is defending a number of legal claims arising in the ordinary course of business. No material adverse impact on the financial position of the Group is expected to arise from the ultimate resolution of these legal actions.

 

Financial statements

Notes to the interim condensed consolidated financial statements

Section 5: Other notes (continued)

5.2  Related party transactions

The tables below reflect transactions and balances with related entities in the current and prior periods:

		31 Mar 2020		30 Sep 2019
		(unaudited)		(audited)
		£m		£m
Assets with related entities:
Investments in joint ventures and associates
Virgin Money Unit Trust Managers Limited(1)		5		8
Other assets
Amounts due from Virgin Money Unit Trust Managers Limited(1)		3		2
Total assets with related entities		8		10
Liabilities with related entities:
Customer deposits
The Virgin Money Foundation		1		1
Other liabilities
Group pension deposits(2)		25		17
Commissions and charges due to Virgin Atlantic Airways Limited(3)		4		6
Trademark licence fees to Virgin Enterprises Limited(4)		4		4
Total liabilities with related entities		34		28
Transactions with related entities:
Non-interest income
Net fees and commissions to Virgin Atlantic Airways Limited		(8)		(15)
Share of post-tax result of Virgin Money Unit Trust Managers Limited(1)		(3)		(1)
Gain on sale of 50% (less one share) consideration in Virgin Money Unit Trust Managers Limited		-		35
Operating and administrative expenses
Trademark licence fees to Virgin Enterprises Limited(4)		(6)		(11)
Costs recharged to Virgin Money Unit Trust Managers Limited(1)		3		2
Donations net of costs recharged to the Virgin Money Foundation(5)		(1)		(2)
Total income statement		(15)		8
(1)	The Group has a joint venture with ASI, named Virgin Money Unit Trust Managers Limited (UTM).
(2)	The Group and the Trustee to the pension scheme have entered into a contingent Security Arrangement which provides additional support to the Scheme by underpinning recovery plan contributions and some additional investment risk. The security is in the form of a pre-agreed maximum level of assets that are set aside for the benefit of the Pension Scheme in certain trigger events. These assets are held by Red Grey Square Funding LLP, an insolvency remote consolidated structured entity. The Group incurred costs in relation to pension scheme administration. These costs, which amounted to £Nil (31 March 2019: £0.2m, 30 September 2019: £0.1m), were charged to the Group sponsored scheme. Information on the pension schemes operated by the Group is provided in note 3.8. Pension contributions of £25m (31 March 2019: £55m, 30 September 2019: £83m) were made to the Scheme (note 2.4).
(3)	The Group incurs credit card commissions and air mile charges with Virgin Atlantic Airways Limited (VAA) in respect of an agreement between the two parties. Cash costs payable to VAA totalling £1m (31 March 2019: £3m, 30 September 2019: £2m) have been deferred on the balance sheet.
(4)	Licence fees of £6m were payable to Virgin Enterprises Limited for the use of the Virgin Money brand trademark.
(5)	The Group has made donations to the Virgin Money Foundation to enable it to pursue its charitable objectives. The Group has also provided a number of support services to the Virgin Money Foundation on a pro bono basis, including use of facilities and employee time. The estimated gift in kind for support services provided during the year was £0.1m (31 March 2019: £0.3m, 30 September 2019: £0.3m) and is included in the total value disclosed above.

During the period to 31 March 2020 the Group did not pay any ordinary dividends to Virgin Group Holdings Limited.
 

Financial statements

Notes to the interim condensed consolidated financial statements

Section 5: Other notes (continued)

5.3  Notes to the statement of cash flows

		Term Funding Scheme	Debt securities in issue	Lease liabilities(1)	Total
		£m	£m	£m	£m
At 1 October 2018		2,254	4,973	-	7,227
Cash flows:
Issuances		-	2,869	-	2,869
Redemptions		-	(2,003)	-	(2,003)
Repayment		(1,295)	-	-	(1,295)
Non-cash flows
Acquisition of TFS and debt securities in issue		6,389	3,548	-	9,937
Fair value adjustments and associated unwind on acquired TFS and debt securities in issue		(48)	8	-	(40)
Movement in accrued interest		8	7	-	15
Unrealised foreign exchange movements		-	45	-	45
Unamortised costs		-	6	-	6
Other movements		-	138	-	138
At 30 September 2019		7,308	9,591	-	16,899
Adjustment on transition to IFRS 16		-	-	205	205
Revised 1 October 2019		7,308	9,591	205	17,104
Cash flows:
Issuances		-	491	-	491
Redemptions		-	(876)	-	(876)
Repayment		(200)	-	(15)	(215)
Non-cash flows
Fair value adjustments and associated unwind on acquired TFS and debt securities in issue		17	3	-	20
Movement in accrued interest		(3)	25	2	24
Unrealised foreign exchange movements		-	11	-	11
Other movements		-	-	1	1
At 31 March 2020		7,122	9,245	193	16,560

(1) The Group adopted IFRS 16 'Leases' on 1 October 2019. The payment of principal amounts of lease liabilities is now included as a deduction within financing activities whereas previously under IAS 17 'Leases' operating lease charges were included as a deduction within cash flow from operating activities. Interest on lease liabilities is included within 'interest paid'.

5.4  Transition to IFRS 16 'Leases'

The Group's lease portfolio consists principally of leases for offices and stores.  The Group also leases equipment, but this is generally of low value. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions, although most are industry standard in nature.

The Group has adopted IFRS 16 Leases from 1 October 2019 and elected to apply the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings as at 1 October 2019 and comparatives are not restated. Under the modified retrospective approach, at transition, lease liabilities have been measured at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 October 2019. The weighted-average borrowing rate applied to these lease liabilities on transition was 1.7%.

For the purposes of applying the modified retrospective approach, the Group has elected to:

· measure the right‑of‑use asset at an amount equal to the lease liability at the date of initial application adjusted by the amount of any prepaid or accrued lease payments;

· apply the exemption not to recognise right‑of‑use assets and liabilities for leases with less than 12 months of lease term;

· apply the practical expedient to rely on its assessment as to whether the lease was onerous under IAS 37 and therefore adjust the right‑of‑use asset at the date of initial application by the onerous lease provision rather than conduct an impairment test; and

· apply the practical expedient to grandfather the assessment of which transactions are leases. It will apply IFRS 16 only to contracts that were previously identified as leases by IAS 17. Contracts that were not identified as leases under IAS 17 and IFRIC 4 will not be reassessed. Therefore, the definition of a lease under IFRS 16 will only be applied to contracts entered into or changed on or after 1 October 2019.

Financial statements

Notes to the interim condensed consolidated financial statements

Section 5: Other notes (continued)

5.4  Transition to IFRS 16 'Leases' (continued)

The impact of the adoption of IFRS 16 on the opening balance sheet as at 1 October 2019 is shown in the table below:

	As at 30 September 2019	Impact of IFRS 16	Restated as at 1 October 2019
	£m	£m	£m
Property, plant and equipment	145	194	339
Loans and advances to customers	73,095	6	73,101
Other assets	237	(6)	231
Provisions	459	(3)	456
Other liabilities	2,534	196	2,730
Equity	5,021	1	5,022

The adoption of IFRS 16 has absorbed 10bps of the Group's CET1 capital, principally through the risk weighting of assets now recognised on balance sheet.

Lease liabilities amounting to £205 million in respect of leased properties previously accounted for as operating leases were recognised at 1 October 2019. Offsetting this in the £196 million movement in other liabilities on adoption is a £9 million transfer of rent-free period accruals out of other liabilities on transition.

The following is a reconciliation of operating lease commitments disclosed at 30 September 2019 to the lease liability recognised at 1 October 2019:

	£m
Undiscounted future minimum lease payments under operating leases at 30 September 2019	414
Leases not yet commenced at 1 October 2019	(129)
Irrecoverable VAT included in future minimum lease payments	(49)
Short-term leases recognised on a straight line basis as an expense	(2)
Lease prepayments	(6)
Discounted at the incremental borrowing rate	(24)
Other	1
Total lease liability recognised as at 1 October 2019	205

IFRS 16 amends the criteria applied to assess whether a sub-lease is an operating lease or a finance lease. Changes to the classification of sub-leases where the Group is lessor under IFRS 16 has resulted in certain sub-leases of surplus estate previously classified as operating leases being reclassified as finance leases. In those cases, any difference between the value of the impaired right-of-use asset on transition and the sub-lease receivable recognised on transition is recognised as a gain or loss directly within equity.

Under IFRS 16, the operating lease expense previously recorded in operating and administrative costs has been replaced by a depreciation charge (also included within operating and administrative costs), which is lower than the operating lease expense recognised under IAS 17, and a separate interest expense, recorded in 'interest expense'.  While the decision to transition using the modified retrospective approach impacts comparability with prior periods within the Group's consolidated income statement, the line item impact is not material.

There is no net cash flow impact arising from the adoption of the new standard.

The Group's revised accounting policy is disclosed in Note 1.2.

Additional information

Measuring financial performance - glossary

Underlying adjustments

In arriving at an underlying basis, the effects of certain items that do not promote an understanding of historical or future trends of earnings or cash flows are removed, as management consider that this presents more comparable results period on period. These items are all significant,  and are typically one-off in nature. Additional detail is provided below where considered necessary to further explain the rationale for their exclusion from underlying performance, in particular for new items in the current period or recurring non-underlying items:

Item	6 months to 31 Mar 2020 £m	6 months to 31 Mar 2019 £m	6 months to 30 Sep 2019 £m	Reason for exclusion from the Group's current underlying performance
Integration and transformation costs	(61)	(45)	(111)	These are part of the Group's publicised three-year integration plan following the acquisition of Virgin Money Holdings (UK) PLC and comprise a number of one-off expenses that are required to realise the anticipated cost synergies. Also included are one-off costs to support transformation. This programme will improve our digital capability and consequently enable super straightforward efficiency.  Costs are expected to be restructuring in nature.
Acquisition accounting unwinds	(57)	(67)	(20)	This consists principally of the unwind of the IFRS 3 fair value adjustments created on the acquisition of Virgin Money Holdings (UK) PLC in October 2018 (6 months to 31 Mar 2020: £46m charge, 6 months to 31 Mar 2019: £33m gain, 6 months to 30 Sep 2019: £10m charge) and the IFRS 9 impairment impact on acquired assets (6 months to 31 Mar 2020: £5m charge, 6 months to 31 Mar 2019: £100m charge, 6 months to 30 Sep 2019: £3m charge) with other items amounting to £6m (6 months to 31 Mar 2019: £Nil, 6 months to 30 Sep 2019: £7m charge).  These represent either one-off adjustments or are the scheduled reversals of the accounting adjustments that arose following the fair value exercise required by IFRS 3. These will continue to be treated as non-underlying adjustments over the expected three to five-year period until they have been fully reversed.
Legacy conduct	-	(33)	(400)	These costs are historical in nature and are not indicative of the Group's current practices.
Other:
SME transformation	(5)	(17)	(13)	These costs are significant due to the unique growth opportunities currently available to the Group in respect of its Business lending in relation to the RBS proposition.
UTM transition costs	(4)	-	(1)	These costs relate to UTM's transformation costs principally for the build of a new platform for administration and servicing. The costs are one-off in nature as part of the transition to the new JV proposition.
Intangible asset write-off	-	(127)	-	The charge for the software write-off in the prior period was significant and arose in respect of software assets which are no longer considered to be of value relative to the Group's strategy following the acquisition of Virgin Money Holdings (UK) PLC.
Mortgage EIR adjustments	-	80	-	The alignment of accounting practices was a one-off exercise arising from the acquisition.
Virgin Money Holdings (UK) PLC transaction costs	-	(55)	-	These costs related directly to the transaction and comprised legal, advisory and other associated costs required to complete the transaction.
Consent solicitation	-	-	(18)	One-off costs relating to the change in obligor of senior debt from Virgin Money Holdings (UK) PLC to CYBG PLC on 20 August 2019.
Gain on sale of UTM	-	-	35	A one-off gain recognised on the disposal of 50% (less one share) of Virgin Money Unit Trust Managers Limited.
GMP equalisation cost	-	(11)	-	A one-off charge for GMP equalisation in the Group's defined benefit scheme.
Legacy restructuring and separation	-	(2)	(3)	These legacy costs were significant in prior periods and related to the Sustain programme, and demerger from NAB, both of which are now complete.
Gain on disposal of VocaLink	-	-	4
Total other	(9)	(132)	4

 

Additional information

Glossary

For a glossary of terms and abbreviations used within this report refer to pages 281 to 285 of the Group Annual Report and Accounts for the year ended 30 September 2019. 

For terms not previously included within the Glossary, or where terms have been redefined or amounts have been quantified, refer below:

Cash and cash equivalents		For the purposes of the statement of cash flows, cash and cash equivalents comprise cash and non-mandatory deposits with central banks and amounts due from other banks with a maturity of less than three months.
Internal probability of default (PD) ratings		The rating applied as a result of mapping all internal models that predict the probability of default onto a common scale.
Net interest margin (NIM)		Underlying net interest income as a percentage of average interest earning assets for a given period. Underlying net interest income of £702m (30 September 2019: £1,433m) is annualised and divided by average interest earning assets for a given period of £86,847m (30 September 2019: £86,362m) (which is then adjusted to exclude short-term repos used for liquidity management purposes). As a result of the exclusions noted above, average interest earning assets used as the denominator have reduced by £24m (30 September 2019: £Nil).
Statutory return on tangible equity (RoTE)		Statutory loss after tax attributable to ordinary equity holders of £18m (30 September 2019: loss of £253m), annualised, as a percentage of average tangible equity of £3,593m (30 September 2019: £3,727m) (average total equity less intangible assets, AT1 and non-controlling interests) for a given period.
Statutory basic earnings per share (EPS)		Statutory loss after tax attributable to ordinary equity shareholders of £18m (30 September 2019: loss of £253m), divided by the weighted average number of ordinary shares in issue for a given period of 1,440m shares (30 September 2019: 1,414m) (which includes deferred shares and excludes own shares held or contingently returnable shares).
Underlying profit after tax attributable to ordinary equity holders		Underlying profit before tax of £120m (30 September 2019: £539m) add underlying tax credit of £2m (30 September 2019: less tax charge of £62m), less AT1 distributions of £40m (30 September 2019: £41m), less distributions to non-controlling interests of £Nil (30 September 2019: £33m) and was equal to £82m (30 September 2019: £403m). The underlying tax charge is calculated by applying the statutory tax rate for the relevant period to the taxable items adjusted on the underlying basis.
Underlying RoTE		Underlying profit after tax attributable to ordinary equity holders of £82m, (30 September 2019: £403m), annualised, as a percentage of average tangible equity of £3,593m (30 September 2019: £3,727m) (average total equity less intangible assets, AT1 and non-controlling interests) for a given period.
Underlying basic EPS		Underlying profit after tax attributable to ordinary equity holders of £82m, (30 September 2019: £403m), divided by the weighted average number of ordinary shares in issue for a given period of 1,440m shares (30 September 2019: 1,414m) (which includes deferred shares and excludes own shares held or contingently returnable shares).
Tangible net asset value (TNAV) per share		Tangible equity (total equity less intangible assets, AT1 and non-controlling interests) as at the period end of £3,645m (30 September 2019: £3,590m) divided by the number of ordinary shares in issue at the period end of 1,443m (30 September 2019: 1,441m) (which includes deferred shares of 6m (30 September 2019: 7m) and excludes own shares held of 0.2m (30 September 2019: 0.5m)).

 

Additional information

Abbreviations

ACS	Annual cyclical scenario
AIRB	Advanced internal ratings-based
ASI	Aberdeen Standard Investments
BBLS	Bounce back loan scheme
CBILS	Coronavirus business interruption loan scheme
CET1	Common equity tier 1
CIR	Cost to income ratio
CLBILS	Coronavirus large business interruption loan scheme
COVID-19	Corona Virus Disease 2019
CRE	Commercial real estate
EBT	Employee benefit trust
EEL	Excess expected loss
EIR	Effective interest rate
FIRB	Foundation internal ratings-based
FV	Fair value
ICAAP	Internal capital adequacy assessment process
IR	Information request
JV	Joint venture
LGD	Loss given default
LIBOR	London Inter-bank Offered Rate
LTI	Loan to income
LTV	Loan to value
MMR	Mortgage market review
MREL	Minimum requirement for own funds and eligible liabilities
NSFR	Net stable funding ratio
PD	Probability of default
PMA	Post model adjustment
PPI	Payment protection insurance
RWA	Risk weighted assets
SVR	Standard variable rate
TFSME	Term funding scheme with additional incentives for SMEs
YoY	Year-on-year

Additional information

Officers and professional advisers

Non-Executive Directors
Chairman	Jim Pettigrew (1) (4)
Deputy Chairman and Senior Independent
Non-Executive Director	David Bennett (1) (2) (3) (4)
Independent Non-Executive Directors	Paul Coby (3)
	Geeta Gopalan (2)(3)
	Adrian Grace (1)
	Fiona MacLeod (1) (3) (4)
	Darren Pope (1)(2)
	Dr Teresa Robson-Capps (2)
	Tim Wade (2) (3) (4)
Non-Executive Director	Amy Stirling
Executive Directors	David Duffy
	Ian Smith
Company Secretary	Lorna McMillan
Group General Counsel	James Peirson
Independent auditors	Ernst & Young LLP
	1 Bridgewater Place
	Water Lane
	Leeds
	LS11 5QR

(1) Member of the Remuneration Committee

(2) Member of the Audit Committee

(3) Member of the Risk Committee

(4) Member of the Governance and Nomination Committee

VIRGIN MONEY UK PLC

Registered number 09595911 (England and Wales)

ARBN 609 948 281 (Australia)

Head Office:	London Office:	Registered Office:
30 St. Vincent Place	Floor 15, The Leadenhall Building	Jubilee House
Glasgow	122 Leadenhall Street	Gosforth
G1 2HL	London	Newcastle Upon Tyne
	EC3V 4AB	NE3 4PL

https://www.virginmoneyukplc.com/

 

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IR SSSESIESSESI